I’m a Prosper.com lender. One of the problems I’ve noticed is the low maximum interest rates for borrowers in some states. Prosper has now fixed this problem for most states. Previously max rates had been as low as 6%. Now most states in the US have a maximum interest rate of 36%.
Some states have usury laws. These laws cap the interest rate a lender can charge a borrower. There is no nation wide rate limit. Each state has its own usury laws. For instance in New Jersey the rate is 16%. In California it is 10%. In New York it’s 9%.
Now the interesting part: this rate doesn’t apply to banks with a national charter. A bank with N.A. in the name is a nationally chartered bank. Due to hyperinflation in 1980 congress exempted national banks from state usury laws. So usury laws only apply to personal loans or loans between companies, not loans made by banks.
According to usury page at lectlaw.com:
The usury limit which is stated as the general usury limit is the rate that can be charged by one person or corporation to another, in other words, if you lend your next door neighbor $ 100.00, the rate stated is the limit. To charge more you must get a banking, pawnbroking, or whatever license. This also means that special kinds of loans, like those from pawnbrokers or small loan companies are not stated.
Prosper.com had to follow these archaic usury laws because Prosper is not a bank. However, that’s changed now. Prosper.com has partnered with WebBank, a Utah-chartered industrial bank. Using WebBank’s charter and national licensing, Prosper.com can now charge a 36% interest rate in almost every state in the US.
According to Prosper.com’s states and licenses page, only 2 states currently still have restrictions. Texas borrowers have a 10% cap for personal loans. South Dakota residents cannot borrow at all at this time. That is extremely bizarre. Why?
South Dakota has extremely lax usury laws. In fact some major banks like Citibank and Wells Fargo are chartered in the South Dakota. Back in the late 70’s our governor “paid” some of the large banks (with tax incentives) to come to South Dakota. Citibank was the first major bank invited to South Dakota. Also our usury laws were relaxed to allow these large banks to operate in the state. Add to that fact that we have no corporate or personal income tax and you have a pretty nice business environment. That’s why Sioux Falls is such a financial hub. Citi, Wells Fargo, HSBC and others have large operations in the Sioux Falls.
What Does This mean for You?
It depends. Are you a resident of a low interest state who can’t get a loan? Prosper.com might be a viable alternative. If you’re a lender, you may find more borrowers that fit your criteria.
This is a good thing for prosper in the long run. I’m not making new loans at the moment because of some other concerns about Prosper. However, I may take another look at Prosper in the future, especially if they continue to make innovations like this.
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Comments
1 Comment so far
I don't understand your explanation on Prosper's denial of service to South Dakota residents. If the law are structured in such a beneficial way, then why wouldn't Prosper offer service, or even charter there?
and in regards to your other article:
http://wealthyreader.com/articles/personal-loans-lending-money-on-prosper-my-results/
I didn't find to much work, I actually thought it was easy. I'm with lending club now which is not as good as prosper, but as a South Dakota resident I don't have much choice. My ROI on Prosper is slightly higher(I had some investments in there before they cut me off) than lending club and I found the site interface to be more intuitive. I always bid the minimum to get diversification that way.