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94–651 2015

BRIDGING THE SMALL BUSINESS CAPITAL GAP: 

PEER-TO-PEER LENDING 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MAY 13, 2015 

Small Business Committee Document Number 114–010 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

TOM RICE, South Carolina 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

MIKE BOST, Illinois 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

STEPHEN DENNIS, Deputy Staff Director for Policy 

JAN OLIVER, Deputy Staff Director for Operation 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Professor Rajkamal Iyer, Associate Professor of Finance, MIT Sloan School 

of Management, Cambridge, MA ........................................................................ 4 

Mr. Sam Hodges, Co-Founder and Managing Director, Funding Circle, San 

Francisco, CA ........................................................................................................ 5 

Mr. Zachary L. Green, CEO/Founder, MN8 FoxFire, Cincinnati, OH ................ 8 

Mr. Peter Renton, Publisher, Lend Academy, Denver, CO .................................. 10 

APPENDIX 

Prepared Statements: 

Professor Rajkamal Iyer, Associate Professor of Finance, MIT Sloan 

School of Management, Cambridge, MA ..................................................... 27 

Mr. Sam Hodges, Co-Founder and Managing Director, Funding Circle, 

San Francisco, CA ......................................................................................... 30 

Mr. Zachary L. Green, CEO/Founder, MN8 Foxfire, Cincinnati, OH .......... 42 

Mr. Peter Renton, Publisher, Lend Academy, Denver, CO ........................... 46 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

ETA - Electronic Transactions Association .................................................... 49 

SBREP-219 with DISTILLER

SBREP-219 with DISTILLER

(1) 

BRIDGING THE SMALL BUSINESS CAPITAL 

GAP: PEER-TO-PEER LENDING 

WEDNESDAY, MAY 13, 2015 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Committee met, pursuant to call, at 11:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Steve Chabot [chairman of the Committee] presiding. 

Present: Representatives Chabot, Luetkemeyer, Hanna, 

Huelskamp, Gibson, Hardy, Vela ́zquez, Clarke, Payne, and Adams. 

Chairman CHABOT. Good morning. The Committee will come to 

order, and I want to thank everyone for being here today. 

When an entrepreneur starts a business, one of the first challenges faced is getting the money needed to produce their new 

product or patent a new idea. Often, an entrepreneur will reach out 

to friends and family for early support, and sometimes a small 

monetary investment. 

This common phenomenon of family and friends’ investment is 

far more common than is commonly realized. After all, we all want 

to see our friends and family succeed, particularly in a new business venture. 

While access to capital has always been a concern for small 

firms, the Great Recession and some legislation, some would argue, 

I would, Dodd-Frank, for example, have made access to capital 

even more difficult. 

Fortunately, there are alternative lending options to assist small 

businesses in getting the financing they so desperately need. Today’s hearing will examine a growing trend across America, the 

rise of peer-to-peer or P2P lending, and what it means for small 

businesses. 

A recent survey by the New York Federal Reserve found that 

while small businesses primarily still look to large conventional 

lenders for financing, during the first half of 2014 nearly 20 percent of entrepreneurs looked to an online lender for credit. In the 

United States, the P2P lender with the largest market share, Lending Club, has seen the value of its total loans funded for small 

businesses explode from around $850,000 in 2007 to over $22 million in 2012. 

This increase in P2P lending for small businesses, if it continues, 

could have a tremendously positive impact on small businesses and 

their growth and on the American economy overall. 

Today, we are fortunate to be joined by a distinguished group of 

witnesses who all have insight into this fast growing phenomenon. 

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I want to thank our panel for taking time away from their jobs and 

making the trip to Washington for this important hearing. We look 

forward to your testimony. 

It is often said that what keeps a great idea from becoming a 

great business is execution. Well, access to the funds needed to 

start a business plays a huge role in that success. There are people 

all around our country with great ideas. Hopefully today, we can 

examine how innovative funding models can help more Americans 

turn their great ideas into a reality. 

I would now like to yield to the Ranking Member, Ms. Vela ́zquez, 

for her opening remarks. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. Following the 

2008 financial crisis, the small business credit market tightened 

dramatically, contracting at twice the rate of broader financial 

markets. 

After banks pulled back $116 billion in capital, many entrepreneurs were forced to turn to non-traditional sources to stay 

afloat. One alternative to emerge was peer-to-peer lending. Peer-topeer lending allows small businesses to directly solicit funding from 

a pool of interested lenders and investors over the Internet. Webbased technologies reduce costs and interest rates making peer-topeer business loans an attractive alternative to credit cards. 

Peer-to-peer offers a number of benefits to both small businesses 

and investors. For small business borrowers, the biggest advantage 

is being able to access capital when traditional lenders are not willing to make loans. P2P platforms also provide loans that are often 

too small to be profitable for most banks, typically under $35,000. 

On the investor side, the communal and open nature of P2P 

lending reduces fraud while technology based risk assessment 

helps inform investors about each individual loan. 

Although peer-to-peer lending provides significant advantages, 

there are drawbacks. Peer-to-peer lending platforms reserve the 

right to reject small business applications just like banks. The Federal Reserve found only eight percent of business loan applications 

are accepted by the largest platform. The study also found that 

peer-to-peer loans had an average interest rate of over 13 percent, 

double that of traditional sources. Similarly, peer-to-peer loans 

have higher default rates, increasing investor risks. 

As more people learned of the advantages of peer-to-peer lending, 

the industry grew rapidly through the mid-2000s. In 2008, the SEC 

took notice in citing investor protection and classified peer-to-peer 

lending loans as securities. This move subjected lending platforms 

to a host of registration requirements. 

As a result, many industry participants have raised concerns 

that the current environment is limiting the market’s growth potential. Very few platforms have taken the costly steps of registering with the SEC, preventing many retail investors from participating in peer-to-peer lending. 

At the same time, large institutional investors have been attracted to peer-to-peer lending by high yield, less oversight, and 

lower costs. 

While increasing access to capital is a laudable goal, the peer-topeer market is now dominated by the same institutions it was 

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meant to circumvent, raising concerns about the direction of this 

nascent industry. 

Today’s hearing will provide members an opportunity to learn 

about the peer-to-peer lending market and how it has facilitated 

small business’ access to capital. With more firms turning to Internet based lenders, including crowdfunding sites, and peer-to-peer 

lending, it is important the committee examine how we can ensure 

these platforms increase small business access to capital while protecting both, borrowers and investors. 

I just want to take this opportunity to thank all the witnesses 

for being here today. 

Chairman CHABOT. Thank you very much. We ask that Committee members, if they have opening statements, submit them for 

the record. 

I would like to take just a moment to explain our lighting system 

here. You will each be given five minutes to testify. The green light 

will be on for four minutes, the yellow light will come on to let you 

know you have a minute to wrap up, and then the red light will 

come on. We would ask you try to adhere to those five minutes, if 

at all possible, we will give you a little leeway, but not a lot. We 

appreciate it. 

I would now like to introduce our panel, and I will introduce each 

of you before you testify. Our first witness is Rajkamal Iyer, who 

is an Associate Professor of Finance at the MIT Sloan School of 

Management. 

Professor Iyer’s research focuses on the area of banking and contract theory, with a particular interest in understanding the role 

of inter-bank markets and the provision of liquidity. We appreciate 

you being here and we will get to your testimony in just a minute. 

Our next witness is Sam Hodges, who is the Co-Founder and 

Managing Director of Funding Circle, a peer-to-peer lending platform focused exclusively on small businesses. 

Mr. Hodges is responsible for overseeing the overall strategic direction and day-to-day operation of Funding Circle in the U.S., and 

we welcome you here as well. 

Our third witness will be Zachary Green. I am very pleased to 

introduce Mr. Green because he happens to be from my District. 

He is the CEO and Founder of MN8 Foxfire in Cincinnati. 

Mr. Green previously served in the United States Marines Corps 

and was working as a volunteer firefighter when he developed the 

idea for his small business, which as he will tell you in a minute, 

is meant to keep firefighters safe. We thank you for your service 

to our country and also for making the trip from the First District 

to be with us today. 

I would now like to yield to the Ranking Member, Ms. Vela ́zquez, 

for introducing her witness. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. It is my pleasure 

to introduce Mr. Peter Renton. He is the Founder of Lend Academy, the leading educational resource for the peer-to-peer lending 

industry. 

His blog is the most widely read website about peer-to-peer lending, and through his writing and video courses, he has helped tens 

of thousands of people understand this new asset class. He is conSBREP-219 with DISTILLER

4 

sidered the world’s leading expert on peer-to-lending and often 

consults with companies looking to enter the space. 

He is also Co-Founder of the LendIt Conference, the world’s first 

conference dedicated to the peer-to-peer lending online lending industry, and he is the author of ‘‘The Lending Club Story,’’ the definitive guide to the world’s largest peer-to-peer lender. 

Thank you and welcome. 

Chairman CHABOT. Thank you very much. Professor Iyer, you 

are recognized for five minutes. 

STATEMENTS OF RAJKAMAL IYER, ASSOCIATE PROFESSOR OF 

FINANCE, MIT SLOAN SCHOOL OF MANAGEMENT; SAM 

HODGES, CO-FOUNDER AND MANAGING DIRECTOR, FUNDING CIRCLE; ZACHARY L. GREEN, CEO/FOUNDER, MN8 

FOXFIRE; PETER RENTON, PUBLISHER, LEND ACADEMY 

STATEMENT OF RAJKAMAL IYER 

Mr. IYER. Thank you for giving me the opportunity to be here 

this morning. As you have read, I was interested in banking and 

financial intimidation, and that led me naturally to look at peerto-peer markets when I learned that these new online markets had 

been put up to provide access to credit for small businesses and individuals. 

What was interesting about these markets was that loans were 

funded by a group of small investors as compared to sophisticated 

lenders and loan officers and other intermediaries. 

One of the big problems in credit markets in general has been 

screening of investors, in a sense how do you really understand the 

creditworthiness of people who are borrowing. What was fascinating about these markets is to think about whether small individuals who are lenders can actually screen effectively the borrower’s creditworthiness, because at the end of the day, if you cannot figure out the risk of whom you are lending to, then these markets cannot be sustainable and survive in the long run. 

What we did with our co-authors at the University of Chicago 

and Harvard is at that time one of the biggest lenders in this market was Prosper, so we got data from Prosper, all the loan applications, and the loans which were funded by this website. 

In this website what you have is individual lenders can basically 

decide whether they want to fund a loan and they rely on hard information and they also rely on soft information, which is all the 

postings which borrowers say about themselves. 

What was very interesting was we found these small lenders do 

remarkably well. In fact, when you look at the default rates, the 

predictability of default rates for these borrowers, if you look at the 

credit score, like Experian or something, we found these lenders actually have 45 percent higher predictability than just using the 

credit score. They do much better in terms of effectively predicting 

default than just a credit score which banks and many other lenders use. 

Having said that, what we basically kind of say is the people who 

are lending in these markets are not stupid. They are not losing 

money in general. 

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What was also interesting is these markets just beyond looking 

at hard information were using stuff which was non-standard, like 

they were using soft information to effectively screen borrowers. 

What we found was for the low credit score borrowers, these 

markets were relying much more on soft information to basically 

judge the effectiveness of lending. In a sense, given that these markets could screen borrowers and also the non-collateralized nature 

of lending, because these markets do not require collateral, this 

could be a viable and sustainable source of funding for small borrowers who might be limited to other costly sources of finance to 

actually meet their requirements. 

One could ask what are the risks of these markets. In finance, 

without risk, there is no return. There is always some risk. What 

we basically thought in a sense was at this point investors have 

risks because there is going to be some default, but they can effectively judge the risk. It is not like they are not able to price this 

risk correctly. 

In terms of the platforms, the platforms themselves are not 

leveraging up. They are just acting like an intermediary which 

matches lenders to borrowers. At that point, they are not like a 

bank which basically takes on leverage and lends on its own behalf. 

In a sense, these platforms are just matching platforms. They bring 

together lenders and borrowers and the lenders decide what is the 

rate to lend to, so at some level, that is something that does not 

pose a big risk at this point to the system. 

One could ask are borrowers better off borrowing from these platforms as compared to banks, do they offer better rates. That is a 

very tricky question because at some level, with all the studies, 

there is a selection of people who go on these platforms, so the 

ideal counterfactual would be to look at the same person when he 

applies for a loan at a lending platform, which is a bank, and see 

what the rate is. 

We do not have that counterfactual at this point because we do 

not see that clearly. In a sense, at this point from the study we 

have done, generally the rates on this platform range from six percent to 21 percent, on the average, 14 percent, which is pretty 

much very similar to the lending rates which banks offer to small 

borrowers who are at a certain level of credit risk. 

Even if the rates offered by these platforms are very similar to 

banks, they provide an alternative because there is no competition 

at some level, which is always beneficial for people to basically 

have another option to lend. 

Effectively, at this point, given the nascent nature of this industry, our take is that regulating this industry would inhibit its 

growth, but having said that, one does need to watch the fact of 

how these industries evolve, to make sure that is not a constraint. 

Thank you. 

Chairman CHABOT. Thank you very much. Mr. Hodges, you are 

recognized for five minutes. 

STATEMENT OF SAM HODGES 

Mr. HODGES. Mr. Chairman, Ranking Member Vela ́zquez, and 

members of the Committee, thank you very much for having me 

here today. 

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I am Sam Hodges, Co-Founder of Funding Circle, and also a 

small business owner. Before starting Funding Circle, my partners 

and I were very much like the hard working entrepreneurs, aspiring small business owners in each of your districts. We built up a 

chain of fitness centers all across the country, and as we pushed 

to open new locations, we found even with strong traction, it was 

very hard to get access to credit. 

That experience really aspired us to start Funding Circle as a 

better way for small businesses to get access to loans. Founded in 

2010, Funding Circle is now the world’s leading marketplace lender 

dedicated to small business. 

Since then, we have lent out over $1 billion to over 8,000 small 

businesses across the United States and also the U.K., and we are 

currently lending out about $75 million per month, ranging from 

a logistics business in the Midwest to a health care services business in suburban Atlanta, to a multi-unit salad company in San 

Francisco. 

What we are focused on is helping the 28 million small businesses in the United States get access to the capital they need to 

grow and to expand. 

Our loans address the core of the small business credit gap, term loans of $25,000 up to $500,000. These are loans that a small business owner can use to expand her store front, open a new location, 

hire more staff, or potentially launch new products. 

Not only are loans delivered very quickly, inside of a few days, 

but they are also delivered in a highly transparent fashion. They 

are also fairly priced with interest rates ranging from about six 

percent up to 21 percent, with payments spread over an one to five 

year term. 

Today, if you ask the average small business owner whether they 

have access to the credit they need to grow and expand, I think 

what you would find is in many cases, the answer is a resounding 

‘‘no.’’ 

Even as our economy recovers and despite attempts such as the 

JOBS Act to facilitate the flow of capital to smaller companies in 

the United States, many small businesses remain unable to access 

the credit they need. 

We think that Funding Circle and other marketplace platforms 

like ours can be a meaningful part of the solution to this problem. 

To give you a sense of how this works, we and other marketplace 

lenders function by matching supply of capital with demand. On 

the one side of the market are small businesses and on the other 

are a mix of individuals and institutions who lend through us. We 

provide a transparent marketplace that is information rich that allows those investors to make good decisions as to where to direct 

their capital. 

This year we anticipate lending over $1 billion through the 

model. Without access to term capital, what we are seeing is small 

businesses are actually commonly entering into short term credit 

arrangements with lenders that often times charge APRs between 

50 and 100 percent. 

For example, a small business may take a cash advance in exchange for allowing the lender to deduct a portion of credit card 

sales in what is generally known as a ‘‘merchant cash advance.’’ 

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These are appropriate in some circumstances. For example, funding of working capital, purchasing inventory, for example. Such 

short term and high rate products can be misused and often times 

leads small businesses to use these short term financings to actually cover longer term funding needs. 

The two attributes, short durations and very high rates, drive 

many small businesses into downward cycles of re-borrowing, in 

which they take out more and more debt to roll over their obligations. 

We frequently see the damage these arrangements can inflict on 

small business. Otherwise healthy companies are throttled by overwhelming and unexpected debt service. If this issue sounds familiar, that is because it is. 

Regulators, I think, rightfully saw the same connection with payday lending, where very high rates of default and re-borrowing actually led consumers into debt traps. 

In response to this trend, Funding Circle is committed to working with other marketplace lenders, other responsible credit providers, and small business advocates to promulgate effective self 

regulatory standards for non-bank small business financing. 

Although we would expect these standards to cover a broad spectrum of practices, transparency around pricing stands out as a particularly important focal point. At Funding Circle, we prominently 

disclose total and periodic costs of the loans we offer in an easy to 

understand format, including our interest rate, as well as our fees. 

With this information, a small business owner can evaluate the 

true cost of credit and make a really good informed purchasing decision for that loan. 

In contrast, many other lenders quote financing costs as a buy 

rate and refuse to provide actually an annualized interest rate or 

any disclosure around fees. In addition, they often times charge 

hidden fees, and sometimes they will advertise no prepayment penalties despite the fact that if a borrower were to repay all future 

payments due including interest. 

In contrast, the very transparency of the marketplace lending or 

peer-to-peer model actually helps ensures that only the borrowers 

who should be able to pay back a loan actually take one out. We 

believe supporting marketplace lenders represents a critical opportunity for policy makers to help improve small business owners’ access to credit, while also giving them a reasonable path to growth. 

At Funding Circle, we are striving to build a better financial 

world. We are trying to craft a transparent market driven approach 

that delivers much needed capital to great small businesses all 

across the country. It is our strong believe that marketplace lending will be beneficial for these small businesses, for the investors 

who are putting capital behind them, and for our country as a 

whole. 

Thank you again for the time and for everything you are doing 

on behalf of American small business. 

Chairman CHABOT. Thank you very much. Mr. Green, you are 

recognized for five minutes. 

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STATEMENT OF ZACHARY L. GREEN 

Mr. GREEN. Good morning. My name is Zachary Green, and I 

am the CEO and Founder of MN8 Foxfire. I would like to personally thank Chairman Chabot and the members of the Small Business Committee for inviting me here today. 

As a young man growing up in Cincinnati, Ohio, I had three distinct dreams. I wanted to become a Marine, a firefighter, and an 

entrepreneur. Dedication, honor, team work, and most of all mission accomplishment were some of the life long values I garnered 

from my time in the Corps. 

I recognized that having the opportunity to pursue the American 

dream is because of those who have gone before us, and we must 

never forget we are the land of the free only because of the brave. 

Several years later and about 50 additional pounds, I fulfilled my 

second dream of becoming a volunteer firefighter, a rich American 

tradition started by one of our founding fathers, Benjamin Franklin. Being a firefighter, much like being a Marine, taught me that 

no obstacle is too large, no hill is too steep, and all challenges can 

be solved through leadership, team work, and perseverance. 

After all, in the fire service we have to solve the problem at 

hand. We do not have the option of calling 912 after the homeowner calls 911. 

The summers in Parrish Island and TwentyNine Palms were unbearable. Marine Corps officer training in Quantico was extremely 

challenging, as is being a firefighter running into a burning building when everybody is running out. 

All these pale in comparison to the challenges I have recently encountered fulfilling my third dream, becoming an entrepreneur. I 

came up with the idea of MN8 Foxfire while I was sitting on the 

tailboard of my fire engine. As a firefighter, some of our biggest 

risks are accountability and disorientation, all of which are compounded exponentially in the dark. 

I remember seeing a special about September 11 and how the 

911 Commission report noted several times how photoluminescence 

materials helped people evacuate the Twin Towers before they collapsed. I thought of ways I could apply the same technology to firefighter accessories, and over the next several months I drove from 

fire station to fire station selling accessories out of the trunk of my 

car. 

Sales steadily increased and my former Fire Chief, Robert 

Rielage, sat me down and said he believed in me and this product. 

He said I should not just treat this as a hobby but rather look at 

a way to really grow a company. 

As I walked out of his office, I remembered the words of one of 

my favorite leaders, Teddy Roosevelt, ‘‘At any moment of decision, 

the best thing you can do is the right thing, the next best thing 

is the wrong thing, and the worse thing you can do is nothing.’’ 

I refinanced my home, maxed out my credit cards, took nearly all 

my family savings to efficiently start my journey to entrepreneurship. I am proud to say that now we have more than 60,000 firefighters using our products. 

Additionally, we have grown our safety line of products such as 

ecofriendly exit signs that never need maintenance, batteries or 

electricity, unlike this one behind me up here on the wall, and we 

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have a patented product that goes on the edges of stairs to illuminate the stairwells of sports arenas, high rises, universities, all 

over the U.S. and abroad. 

Thanks to the help of the U.S. Department of Commerce’s Commercial Services Division, we have also exported this technology to 

more than 25 countries throughout the world, including the Civil 

Defense Headquarters of the United Arab Emirates. 

In 2013, MN8 Foxfire was awarded the Excellence in Entrepreneurship Award, and I was named Entrepreneur of the Year by the 

Ohio Chamber of Commerce. I could not have been more proud but 

every day is a significant struggle. 

One of Foxfire’s biggest challenges, one many business owners 

share, is the access to working capital. I love my mother very 

much, but the words of one of my mentors could not ring more 

true, cash is more important than your mother. 

I always thought the more Foxfire grew and the more we sold, 

the less I would have to worry about capital. I could not have been 

more wrong. When I realized that my personal investments would 

not be enough to finance our rapid growth, I raised capital from 

friends and family. With that capital, I hired more staff, I bought 

more inventory, but it still was not enough to keep up with our 

supply chain and overhead costs. 

I next worked with a local venture capital advisory firm and 

raised additional equity funds, and those funds coupled with lines 

of credit from our regional lender, the Bank of Kentucky, allowed 

us to continue to grow. 

Almost every entrepreneur I know has the same reoccurring 

nightmare, running out of money. Several months ago due to several unforeseen circumstances, this almost happened. We were fortunate to find a new stream of revenue through StreetShares, a 

peer-to-peer lender described by the press as ‘‘Shark Tank meets 

eBay.’’ 

We presented our business case with historical financials, tax returns, and a pitch describing how we would use the new funds. 

StreetShares is a peer-to-peer Internet based marketplace that 

matches borrowers and lenders by shared social affinity, such in 

this case, veterans lending to veterans, to drive down rates and the 

risk of going through a reverse auction model. 

Under 36 hours, Foxfire received the money we needed, and the 

interest rate was in the teens. If we had gone through the same 

process with traditional financial institutions, it could have taken 

months. If we had gone to one of the small business payday type 

lenders, they could have charged us an outrageous APR. 

The StreetShares’ loan had a reasonable APR but was just as 

fast. If it was not for the quick access to an online peer-to-peer 

loan, I fear the worse could have happened to Foxfire. 

This is a perfect example of how the free market can act faster 

than a larger traditional institution and keep that American dream 

alive. 

I became an U.S. Marine, I became a firefighter, and thanks to 

new ways to fund start-ups like peer-to-peer micro loans, I am on 

my way to becoming a successful entrepreneur. 

Thank you again for your time today. 

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Chairman CHABOT. Thank you very much, I appreciate it. Having spent last Sunday with my wife of 41 years and my mom who 

is 90 and my mother-in-law who is 95, I am not going to tell them 

what you just said. 

Mr. GREEN. I did not let my mom proofread this. 

Chairman CHABOT. Good. We do remember it. Thank you. Mr. 

Renton, you are recognized for five minutes. 

STATEMENT OF PETER RENTON 

Mr. RENTON. Thank you. Mr. Chairman, Ranking Member 

Vela ́zquez, members of the Committee, I really appreciate you inviting me here today. 

My name is Peter Renton, and I help run three businesses that 

are all focused on the peer-to-peer lending industry. I am the 

Founder and CEO of Lend Academy, which operates the leading 

peer-to-peer lending blog, podcast, and community forum. I am also 

the Co-Founder and CEO of the LendIt Conference, which is the 

first and largest conference series dedicated to the broader online 

lending community. 

I am also a Co-Founder of NSR Invest, which is an investment 

and analytics platform that provides access to peer-to-peer marketplaces for financial advisors, institutional investors, and individuals. 

As you can tell, I am not from this country. I grew up in Sydney, 

Australia, where my father was an entrepreneur, and I joined the 

family printing business one year after graduating college. 

Like most entrepreneurs in Australia, I dreamed of one day 

starting a business in this country, and I was able to do that in 

1991 when I moved to Denver, Colorado to expand our family 

printing business. Since then, I have started several other businesses, and in 2003, I proudly became a United States citizen. 

I have been investing in peer-to-peer lending platforms, now 

often referred to as ‘‘marketplace lending platforms,’’ since 2009. I 

have been covering this industry full time as a blogger and analyst 

since 2010. 

What I would like to do in this testimony is give you a little history and overview of the peer-to-peer lending industry, particularly 

as it pertains to small business. 

In this country, peer-to-peer lending began in 2006 with the 

launch of Prosper. Industry leader Lending Club followed just a 

year later. The SEC decided in 2008 that the loans issued by these 

companies were in fact securities and should be registered with the 

SEC. So, both companies went through a long and expensive registration process to allow themselves to remain open to non-accredited investors and to comply with this decision. 

To this day, these companies are the only peer-to-peer lending 

platforms to have undertaken this registration process, while there 

are dozens of platforms today, every other company is only open to 

accredited or institutional investors. 

It should be noted that Lending Club and Prosper are primarily 

consumer lending platforms, that they have been doing quasi-small 

business loans since inception. Many small business owners use 

their personal credit to fund their businesses. I have done that myself in the past. 

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Since inception, Lending Club and Prosper have originated around $200 million in personal loans that were actually used for 

small business purposes. 

In addition to these personal business loans, Lending Club has 

had their own small business lending operation for over a year offering term loans of between one and five years. Lending Club does 

not share their loan volume here but my understanding is this initiative is still relatively small but is growing quickly. 

Prosper has a referral program with OnDeck Capital, the largest 

online small business lender. 

I should explain the variety of products offered by the broader 

online lending industry. There are term loans such as what Sam 

from Funding Circle just described. Lending Club also does those. 

These are one to five year amortizing loans with relatively low interest rates. 

There are lines of credit that can be drawn against as the need 

arises. This has a very wide range of interest rates. Merchant cash 

advance is the most high interest option. These are short term advances with repayments tied to credit card charges. 

There is invoice finance, also known as ‘‘factoring,’’ where small 

businesses can get immediate cash for their receivables. There is 

also crowdfunding which is often confused with peer-to-peer lending. It is not lending at all. It can be an equity based investment 

or it can be a rewards based donation. 

What can government do? I appreciate the fact that you are having this hearing and you are interested in learning more about this 

industry. The continued growth of this industry will provide many 

benefits to small business owners and the economy as a whole. 

As to what government can do, here I would like to describe 

some of the actions the U.K. government has taken. They provide 

a blueprint for supportive actions that a government can take to 

impact this industry. Number one, since 2012, the British Business 

Bank, which is wholly owned by the U.K. government, has been investing in small business loans issued by online platforms like 

Funding Circle in the U.K. 

While the total investment is relatively small, this action has 

given the industry there a tremendous boost in credibility and trust 

among investors and borrowers. 

They have also created a new regulatory framework specifically 

for the peer-to-peer lending industry. Last year, the U.K. government announced the creation of a bank mandatory referral scheme, 

where banks that reject small businesses for a loan must refer 

these businesses to alternative lenders. 

I am not saying the U.S. Government should copy these actions, 

but rather they provide some ideas of how governments can support this burgeoning sector. 

I firmly believe that small business lending is going through a 

transformation that will have a dramatic impact on the growth of 

small business in this country. I hope and trust that you will see 

the benefits we bring and will be supportive of this transformation. 

Thank you. 

Chairman CHABOT. Thank you very much. Each member will 

have five minutes to ask questions should they choose to do so. I 

will begin. 

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Mr. Hodges and Mr. Iyer, I will begin with you two. What are 

the common legal and regulatory challenges associated with peerto-peer lending? 

Mr. HODGES. Sir, I can go first. I think the biggest regulatory 

and legal challenge is frankly the complexity of having to deal with 

the overlapping set of Federal as well as state level rules, both on 

the lending or borrowing side, vis-a ́-vis how you provide capital to 

the small business owner, and then also on the security side, which 

is really around how you take those loans and then turn them into 

a product that allows an institution or an individual to put money 

to work. 

We have invested literally hundreds of thousands of dollars, probably over $1 million, just in kind of figuring out the right 

framework for doing all that. I think some effort of simplification 

could be very beneficial. 

Chairman CHABOT. Thank you. Professor? 

Mr. IYER. When you really think about it, at some level, peerto-peer markets when they originate loans and sell it to investors, 

you can think of them as junk bonds. They are basically issuing 

bad notes to investors. The problem is one has to be very careful 

of understanding what is the quality of the notes they are issuing, 

which is where the Securities Act really comes in to protect investors. 

That is where the whole regulatory regime comes into play. 

Chairman CHABOT. Thank you. Mr. Green, let me turn to you 

next. Could you elaborate on the P2P lender that you worked with 

and what made you confident that was the right option. 

You have a sample of your product here. I know you do because 

I saw it before the hearing. If you wanted to show it, I certainly 

would not have any objection to that. 

Mr. GREEN. Never miss an opportunity; right? 

Chairman CHABOT. So we can see what you are talking about. 

Mr. GREEN. Basically, through a series—we had a very generous line of credit through Bank of Kentucky, and one thing the 

Bank of Kentucky has been wonderful about, like Professor Iyer 

mentioned, they did not just look at our financials. They looked holistically at our whole entire business plan and what we had. 

The problem with working with a much larger traditional financial institution, they wanted to see five consecutive years of profitability. I had only been in business three years, and very few startups are profitable in those early couple of years. 

We were in a situation where we had to get access to capital 

within the next couple of weeks, and I had been seeing all this information on radio ad’s and direct mailing pieces, and of course, 

never paying any attention to it until all of a sudden it came up 

as something I needed. 

The reason we went with StreetShares was because they are a 

veteran owned company, and I think it comes down to trust. We 

both as borrowers have to trust the lenders and the lenders have 

to trust the borrowers. By having a marketplace that has veterans 

helping other veterans bidding on those loans, I feel it made me 

more comfortable to accept that loan. It has been a great access. 

This is the sign that I want to see all those replaced with because you never need any batteries. 

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Chairman CHABOT. How is that different from the one we have 

in the hearing room here? 

Mr. GREEN. This uses photoluminescent technology. Traditional 

exit signs use light bulbs and electricity and batteries. Those are 

all bad for the environment, they all cost a lot of money to maintain. 

This uses a patented type of photoluminescent material, very 

similar to what was used in the World Trade Towers to help people 

find their way out, and as a result, we can save businesses hundreds of millions of dollars in ongoing maintenance costs and you 

never have to replace these. 

They have literally a lifetime guarantee on them. Once you put 

them up, they work all the time, and in an emergency, when the 

power is out, that is the time you really need the exit sign with 

this, the photoluminescent, the glow in the dark is going to light 

up the whole entire area and show people how to get out safely. 

Chairman CHABOT. Thank you. Mr. Hodges, let me go back to 

you for a moment. Funding Circle originated in the U.K., I believe, 

which is seen globally as the country leading the way for peer-topeer lending, I believe. 

Could you discuss some of the differences between the two countries, if you are aware of them, as it relates to P2P lending, and 

where we might be able to learn from the U.K.’s approach? 

Mr. HODGES. Sure thing. I think the biggest difference between 

the U.K. and the U.S. from a regulatory perspective is in the U.K., 

we have a simplified regulatory framework that is specific to peerto-peer or marketplace lenders, whereas in the United States, what 

you are really dealing with is a whole set of kind of archaic lending 

as well as securities rules. 

On the security side particularly, the main laws that dictate how 

these businesses work are the 1933 Act, the 1934 Act, the Investment Company Act, and the 1940 Act. These are laws that did not 

really anticipate the Internet, and even subsequent measures to 

modify those really have not made it easier for businesses like 

Funding Circle to operate. 

I think that is the biggest difference, specific regulation as opposed to kind of a mix of different older regulations. 

I think the second big piece, as Peter mentioned before, is the 

U.K. government has decided that as a proactive measure for funneling capital to small businesses, this is a very effective thing to 

do. 

The British Business Bank actually invests in a fractional piece 

of every single fractional loan that we do currently, which we are 

really excited about and it serves as a point of credibility. 

In the United States, it would literally take an act of Congress 

to get the SBA to do something similar. There is just not necessarily the same kind of level of support. 

Chairman CHABOT. Well, you have come to the right place for 

that. My time has expired. The gentlelady from New York, Ranking 

Member Vela ́zquez, is recognized. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. Mr. Renton, as the 

CEO of both Lend Academy and LendIt Conference, what are the 

most asked questions you receive from prospective small business 

borrowers looking to use peer-to-peer lending? 

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Mr. RENTON. The most asked question I receive is can you 

please fund my loan. That is what most people want. Seriously, 

what small business borrowers want to know is are they getting 

ripped off. They want to basically know that the options that are 

available to them are appropriate, and they also want to know 

what is the quickest, as Zach just talked about, he needed funds 

quickly. That speed is one of the themes. They know a bank is 

going to take one or two or three months. They need something 

quicker than that. They want to know what their options are. 

Ms. VELA ́ ZQUEZ. Mr. Hodges, how do we balance that? Small 

businesses, they need money, they need it now, and how do they 

know what they have been offered is transparent, that there are 

not hidden fees? How do we balance that? 

Mr. HODGES. For us, it really comes down to transparency. 

From the very moment that a small business comes to our site and 

uses our effective rate calculator to figure out how much the cost 

of financing would be, we are completely transparent about the interest rate, our origination fee, and any other potential fees that 

a borrower might pay over the lifetime of the loan. 

I think it is ultimately kind of around transparent practices, that 

is what in many ways sets this segment apart from other lenders. 

Ms. VELA ́ ZQUEZ. Mr. Renton, so many times, right after the financial crisis in 2008, where credit was tightened by financial institutions, we held so many hearings here about the inability of 

small businesses to access capital, but most importantly, smaller 

loans. 

When we questioned traditional financial institutions, they said 

smaller loans were too costly. Now, we hear that according to one 

industry expert, institutional investors now account for 80 to 90 

percent of the lending taking place on peer-to-peer platforms. Are 

you seeing this trend? 

Mr. RENTON. Yes. 

Ms. VELA ́ ZQUEZ. How can we explain that? On the one hand, 

they do not lend through traditional markets; right? Now, they are 

taking advantage of this. Is that because of traditional banking 

regulations that they are trying to circumvent? 

Mr. RENTON. I do not think so. First, let’s address the first part 

of that question. There is no doubt that institutional investors are 

looking at this as a class and devoting a lot of capital to it. 

I want to defend the retail investor. I am a retail investor myself, 

have been for many years. I have found that there was a time a 

couple of years ago where they had to make some tweaks to their 

systems but today, retail investors get a good deal. Retail investors 

can invest on Lending Club, on Prosper, on Funding Circle. They 

can invest in loans, and the playing field is level. They have made 

it that way. 

As to institutional investors, why they are doing it, obviously, 

they are doing it for yield. These are often people or institutions 

that were not involved in the lending business at all. There are 

some hedge funds, there are some insurance companies. 

These are companies that for the most part are new to the lending industry. They were deploying capital that might have gone 

into the equities market or the bond market and they are deploying 

it into this industry. 

SBREP-219 with DISTILLER

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Ms. VELA ́ ZQUEZ. Thank you. You do not see any type of impact 

on the retail investors? 

Mr. RENTON. I do not see a negative impact. 

Ms. VELA ́ ZQUEZ. Good. Thank you. Mr. Green, the SBA, Small 

Business Administration, has a nascent presence in the peer-topeer lending market. If the Small Business Administration were to 

get more involved, what would you like to see them do for small 

business owners like yourself? 

Mr. GREEN. We actually did start working with the SBA for one 

of the loans that we ended up walking away from, and the reason 

was strictly it took too much time. There was just too much paperwork, there was too much red tape, there was just too many hoops 

to run through. 

In a small business, one week in my business is like a year in 

a Fortune 500 business. We do not have the time to go through all 

that type of—for lack of a better word—red tape to get through 

that. If they do get involved, we would like to see them speed the 

process up. 

Ms. VELA ́ ZQUEZ. Thank you. My time is up. I had a question 

for you, sir, but—— 

Chairman CHABOT. We will give the gentlelady an additional 

minute if she would like to go ahead. 

Ms. VELA ́ ZQUEZ. You made a statement before while you were 

giving your testimony where you said that you could effectively 

judge risk over the Internet. Can you explain that a little further? 

Mr. IYER. At some level the measure of risk is basically how you 

can predict the likelihood of default based on something you are 

lending on, so credit score, 700, 750, 600. If you look at where the 

credit score predicts default, and the interest rate which lenders 

bid in predicting default, you find that the interest rate where 

these platform lenders come together and bid has a much better 

predictive power in terms of default as compared to just using the 

credit score. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman CHABOT. The gentlelady’s time has expired. The gentleman from Missouri, Mr. Luetkemeyer, who is also the Vice 

Chairman of this Committee, is recognized for five minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chair, and thank all of 

you for being here today. It is a great subject to discuss here. I 

have lots of questions. 

Just a minute ago, Mr. Iyer, you made the comment about bidding by the investors. Do these investors say we have to have X 

amount of percent return on our investments or do they take what 

you give? How does this work? 

Mr. IYER. What happens is you post a loan, you say I want to 

borrow $10,000 at 10 percent or whatever. The investor decides 

how much they want to fund. They could say I am willing to put 

in $1,000 for X percent, so there is like an auction which happens. 

As soon as the whole amount gets bid on, the lowest interest rate 

goes to the borrower, exactly what happened to Zachary. 

Mr. LUETKEMEYER. Mr. Hodges, you are in the business. Do 

your investors bid? 

Mr. HODGES. In our case, we actually set the price. What we 

found historically is actually the pricing that an auction mechaSBREP-219 with DISTILLER

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nism would dictate is driven more by liquidity than the actual underlying credit risk. 

Mr. LUETKEMEYER. What is the actual return your investor 

gets for investing money with you? 

Mr. HODGES. It really depends on how much risk appetite they 

have. If they want to invest in safer loans, then you are talking 

about an effective yield to the investor in the mid to high single 

digits. If they are willing to go out the credit spectrum a little bit 

and take more risk and more volatility, then we have investors who 

are earning in the low teens. Mr. LUETKEMEYER. I think you said you have $1 billion you 

are trying to put out or you have had out, this last year. What is 

the percentage of loss you have on that? 

Mr. HODGES. Our global annualized loss level is about two percent. It varies a lot by credit tier. Our safest credits are A+ credits. 

It is well under one percent. For riskier credits, as you move out, 

it can be as high as five or six percent annualized. 

What we are really trying to do is just provide a fair price, a fair 

and transparent price that gives investors sufficient return while 

at the same time making sure that the money the borrower is getting is priced inside their own return. 

Mr. LUETKEMEYER. How easy is it for the investor to divest 

themselves of this loan or security that they purchase through you? 

In other words, let’s say I invest $100,000 with you, but two years 

from now I want my money back or I think the company that I 

have invested with is going south and I want to get out, how easy 

is it for me to divest myself of that investment? 

Mr. HODGES. This works quite differently in the U.K. where we 

have a good chunk of our business versus the U.S., given the actual 

securities regulations. 

In the U.K., we actually have the world’s most active secondary 

market of any peer-to-peer lender, so a meaningful share of our 

fractional notes, the actual investments of loans, are actually traded on a secondary basis, which we are really excited about. 

Unfortunately, in the U.S., the way the securities rules are written, it is actually much harder to do that. There are both state 

level Blue Sky laws as well as Federal laws that make it difficult 

to craft a secondary market. 

Mr. LUETKEMEYER. Once I invest with you, I am locked in 

pretty well? 

Mr. HODGES. Correct. People are taking illiquidity and we are 

very transparent about that. 

Mr. LUETKEMEYER. Do you have a particular industry that 

you specialize in and provide funds for or do you do across all industries? 

Mr. HODGES. We are very diversified. No one industry accounts 

for more than about eight percent of the bucket. 

Mr. LUETKEMEYER. Mr. Iyer, you talked about soft information. Can you explain what soft information is? 

Mr. IYER. Now there are two models in the peer-to-peer market 

which are competing. One is the model that the intermediary platform decides to rate, the other is investors like Zachary was saying 

who decide what is the rate and how much they bid. Soft information could be anything which is non-verifiable. Credit score is hard 

SBREP-219 with DISTILLER

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information, which is based on your past credit history, past payments, and other things. 

Soft information could be somebody says I am a veteran fighter, 

I basically did this, X, Y, Z, you have a picture, anything that is 

non-verifiable, subjective, we put it in the bucket of non-standard 

soft information. 

You actually find that for people with low credit scores, investors 

use a lot of soft information as a screening mechanism. 

Mr. LUETKEMEYER. They have an algorithm put together that 

they can figure this out. 

Mr. IYER. Yes. 

Mr. LUETKEMEYER. I have seen this before. This is very interesting stuff. Mr. Renton, a quick question for you. There have been 

a couple of comments about needing some government intervention 

here, and I always kind of cringe, it is like be careful what you 

wish for here. 

Have there been any abuses that you have seen in the marketplace with the different peer-to-peer lending groups or people who 

accumulate money, the crowdfunding? Is there something there we 

need to be watchful for, that we really need to take a look at, the 

rules we have in place, are they sufficient right now? 

Mr. RENTON. As far as abuses go, there have really been no 

cases of abuses on the platform level. Of course, there are always 

going to be borrowers who are looking to commit fraud, and for the 

most part, the platforms do a very good job of really isolating those 

and rejecting them. 

As far as on the investor side and the platform side, there has 

been no cases of abuses whatsoever. 

Mr. LUETKEMEYER. At this point, you really do not need to 

have a lot of government intervention, the system is actually policing itself well enough? 

Mr. RENTON. Yes, I think it would be nice if there was some 

specific guidelines for this industry, but I think the system as it is 

today is working. 

Mr. LUETKEMEYER. I see my time is up. Thank you, Mr. 

Chairman, and thank all of you for being here today. 

Chairman CHABOT. The gentleman’s time has expired. The gentleman from New Jersey, Mr. Payne, is recognized for five minutes. 

Mr. PAYNE. Thank you, Mr. Chair, and to the Ranking Member. 

Kind of along that line, Mr. Iyer, this question really goes to customer service and the possibility of hidden fees and what have you. 

What recourse does a person have with peer-to-peer lending sites 

when something goes wrong? 

Mr. IYER. You mean the borrower or the lender? 

Mr. PAYNE. The borrower. 

Mr. IYER. I guess when you say something goes wrong, he has 

the money, right? Once the bidding is done and you get the money, 

you have the funds, so you are the one who can basically make 

things go wrong. You can default. From that side, the intermediary 

is the one who is held hostile by the borrower. 

The risk is there are hidden fees and things which are—— 

Mr. PAYNE. That is what I was getting at. 

SBREP-219 with DISTILLER

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Mr. IYER. I guess these markets are quite transparent in the 

sense that they charge hardly any fees which are opaque, they are 

actually very transparent in that sense. 

I guess the risk of borrowers is pretty low because you can see 

exactly what you are getting into. 

Mr. PAYNE. Has there been any research done in economic demographics of most lenders, the types of businesses they fund, and 

in what geographic areas? 

Mr. IYER. That is a very interesting question. Unfortunately, the 

lenders are anonymous. In all these peer-to-peer platforms, you 

only see the borrowers. You do not know who is funding what kind 

of loans and whether they have expertise in funding. That is a 

question which I do not think I would be able to answer. 

Mr. PAYNE. Mr. Renton, we heard earlier on the average, eight 

percent of business loan applications are accepted in the peer-topeer platform. Can you elaborate on why you think that may be the 

case, and what can we do to increase that number, if you think it 

should be increased. 

Mr. RENTON. I think the eight percent number refers to the 

consumer side of P2P lending. On the small business side, Sam 

could obviously give you the exact number for his platform. I believe it is much higher than eight percent. 

Having said that, there are still rules and guidelines these platforms put in place. 

If you are a start-up with no history, it is going to be hard for 

you to find a loan. If you have never made money in the history 

of your business, you are going to find it hard to get a loan through 

the major online lending players. 

Mr. PAYNE. That is sort of the interesting aspect of this, how 

does someone get started. Your point was you needed five years but 

you only had three. How do you overcome that obstacle, Mr. Green? 

Mr. GREEN. This is the entrepreneur’s dilemma, you need 

money to buy product and to start marketing, but yet without any 

revenue stream, how do you get that started, what comes first, the 

chicken or the egg type thing. It is tough, and it is not only tough 

to get started, it is even tougher—someone said success is the hard 

part, failure is easy. It is the success to continue on and to grow. 

I got nervous when I got these large deals coming in, do I have 

enough capital to be able to put the materials together in the early 

days. Now, I am confident we can do that, but early on, it is a constant challenge. 

At the end of the day, you have to have—you can look at all the 

financials in the world, it comes down to do you believe in the entrepreneur, do you believe they have a pure heart and a good idea 

and they are solving a problem in an unique way, and if they are, 

put the risk in there and invest. 

Mr. PAYNE. I was going to mention that, in your case, you are 

fortunate that you came up with a great idea, and something that 

is necessary and useful in society. Has that made it a bit easier for 

you to have people kind of go along with investing? 

Mr. GREEN. It does. I think somebody had a really good point, 

they said when you are a successful entrepreneur, you need to 

solve a complicated problem in a very unique and eloquent way, 

you have to have an unfair competitive business advantage, and 

SBREP-219 with DISTILLER

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you also have to have really incredible marketing sales and distribution. 

When you can put all three of those together, it makes it a lot 

easier to get not only equity based financing but also debt based 

financing. The challenge with debt based financing, most of the 

time the larger banks just only want to look at the spreadsheet and 

they do not look at it holistically. 

Again, what Dr. Iyer shared is so true, and we saw that with our 

small regional lender, they looked at the why rather than just 

strictly the numbers we had in the past. 

Mr. PAYNE. Thank you. I yield back. 

Chairman CHABOT. Thank you. The gentleman’s time has expired. The gentleman from New York, Mr. Gibson, is recognized for 

five minutes. 

Mr. GIBSON. I thank the Chairman, another informative hearing. I thank both the Chairman and the Ranking Member. Thanks 

to the panelists as well. 

Help me better understand this piece here. I can imagine a number of factors why individuals would be turned down for a conventional loan. Help me understand a little bit better maybe with 

some finer resolution how someone sort of misses that but gets into 

your window, your eight percent, why that would be unattractive 

to a conventional loan yet attractive to the industry. 

Mr. HODGES. I guess I can take a first crack at the question. 

I think it is a very good one. I guess my own perspective on this 

is most banks use a check list based underwriting approach where 

a small business needs to meet all of a variety of different criteria, 

number of years in business, amount of revenue, type of industry, 

particularly if it is a cyclical industry, they may not lend at all to, 

amount of tax return profitability, particularly in the early days 

when small businesses do not run with tax return profitability, and 

so forth. 

Whereas, in our case at Funding Circle, we are really looking to 

develop a comprehensive perspective on the business. We understand on a forward looking basis what is going to be the cash flow 

of the business and can that business support a loan. If so, we are 

happy to lend to them. 

It is really the flexibility of our underwriting model and also the 

flexibility of our pricing that allows us to offer credit to many small 

businesses who otherwise do not have access. 

Mr. GIBSON. Thanks. Just to follow up on that, have you ever 

had for Funding Circle an independent audit of some kind, and are 

there any industry ratings in this field? 

Mr. HODGES. To my knowledge, there are no industry ratings, 

per se. There are certainly consumer ratings. For example, we use 

Trustpilot to gather feedback from our customers. We also track 

very carefully our net promoter score. Our net promoter score in 

the U.S. is about 70 percent, which we are really excited about, and 

in the U.K., it is 89 percent. It is actually a pretty high level. 

Beyond that, I guess in terms of how we are evaluated, it is more 

around auditing specific operational practices that we use, and particularly now that we are partnering with banks, actually on a referral basis. We have actually gone through pretty extensive audits 

just to make sure every piece of the business is really clean. 

SBREP-219 with DISTILLER

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Mr. GIBSON. Any other comments from the panel? 

Mr. IYER. I would just make one comment which is where this 

industry is heading. In a sense initially you used to see stuff that 

people used to post and other people used to bid. Now, what is happening is a lot of platforms are doing the screening themselves. 

The platform Zachary was talking about allows people to bid. 

The platform Sam was talking about bid inside the screening. I 

think there are merits to both, but I think it is something that if 

somebody gets turned down, they should have the option to go on 

to a reverse auction site, just in case they got it wrong and investors have a choice to get funding because they might want to lend. 

That is something the market has to decide, but that would be 

a viable alternative. 

Mr. RENTON. I think that is happening. I know people that are 

going to multiple sites at the same time because they want to see 

the different rates. I do not see anything wrong with that. I think 

there are different models out there, as Raj was saying. The predominant model today is the fixed price model where the platform 

sets the risk. Whether that wins out in the end remains to be seen, 

but that is certainly the most predominant one today. 

Mr. GIBSON. I thank you, gentlemen. Your testimony has been 

helpful to me. I yield back, Mr. Chairman. 

Chairman CHABOT. Thank you. The gentleman yields back. The 

gentlelady from North Carolina, Ms. Adams, is recognized for five 

minutes. 

Ms. ADAMS. Thank you, Mr. Chairman, Ranking Member 

Vela ́zquez, and thank you, gentlemen, for your testimony. 

I agree that small businesses are the engines that drive our economy. Over the past several years, we have seen a severe credit 

crunch within our financial markets, banks have not given loans at 

the same rate as previous years. 

With that in mind, Mr. Hodges, let me ask you about Funding 

Circle, which was founded based on your experiences as a business 

owner who had difficulty getting access to credit. With Funding 

Circle being one of the largest peer-to-peer lending sources, can you 

share potential market threats, both financially and technologically, that peer-to-peer lenders currently face or that you foresee may deter lending? 

Mr. HODGES. At this point, what I would say is even though 

some of us are getting to scale, we are still very much in the early 

days of developing the business. Small business lending, term lending, is a $270 billion market in the United States. If you put in 

kind of shorter term lending, it is probably closer to 600 or $700 

billion. None of us are really meaningful yet. 

I guess what I would say is cutting through the noise, small business is a very fragmented market, cutting through the noise and 

making sure that a small business owner really understands what 

your product does and how it is differentiated from what else is out 

there is one of the major things that we focus on. 

In terms of kind of competitive threats or big looming hazards, 

there is nothing that is really keeping us up at night. It is really 

just around operating the business in a very reliable way and making sure we are scaling in a responsible fashion. 

SBREP-219 with DISTILLER

21 

Ms. ADAMS. Thanks. Can you tell us a little bit about the demographics of the businesses your company services? 

Mr. HODGES. Sure. Our borrowers are all across the country, 

and they also range very widely in terms of their ethnic, education 

background, certainly gender as well, and we are very proud of the 

lots of different stories of small business owners who have had very 

bad experiences with the banking system but who subsequently 

have taken loans from us. 

In terms of the type of business, it can range all the way from 

kind of retailers, service businesses to consumers, through light 

manufacturing and logistics, to B to B businesses, businesses that 

are serving other companies. 

What we have developed is an underwriting framework and an 

origination approach that allows us to serve a very broad base. 

Ms. ADAMS. Peer-to-peer lending is a very good model for some 

communities, but many minority owned firms with the capacity to 

move to the next level need different types of access to affordable 

capital, and still many of these firms jump higher for less. 

What models or policy recommendations can you offer to the 

Committee that we might explore that would be beneficial to minority owned firms on both traditional and non-traditional platforms? 

Mr. HODGES. I think the place that we start is around self regulation of non-bank lenders. We are working currently with a number of other players in the space to make sure that we all have 

very responsible standards around disclosure, around the effective 

rates that we are charging through, and also our collections and 

servicing practices. 

Historically, if you look at what has gone bad in small business 

lending, those are certainly areas where problems have occurred. 

In terms of policy recommendations, I guess what I would say is 

for now many of us are really focused again on self regulation. That 

being said, to the extent that disclosure particularly came up as 

something folks could take a closer look at, I do think disclosure 

around rate and kind of effective financing charges might be a good 

place to start. 

Ms. ADAMS. Thank you. Would any of the other gentlemen like 

to respond to that question? 

Mr. GREEN. I think a great idea knows no color, no religion, no 

background. If you have a great idea and you are able to put it out 

there and the market supports that and they see that, hopefully 

the funding will come along with that. 

Ms. ADAMS. Mr. Renton? 

Mr. RENTON. I would just say one of the great things about 

these online marketplaces is they operate online, so geographically, 

they are completely open to everybody. It is not like there are certain banks that do not operate in certain areas or you have to travel two hours to go to your local bank. The great thing about online 

is it is convenient to the entire country and there is no discrimination whatsoever when it comes to access. 

I think having that be a central tenant, and the other thing I 

would say is there has been talk about partnerships with CDFIs, 

which I think is still in its infancy, but CDFIs and community 

banks could very well use some of the technological know-how 

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these online platforms have. I know there has been some talks in 

this area. I think that is somewhere organizations that serve these 

underserved areas can really benefit. 

Ms. ADAMS. Thank you. I yield back, Mr. Chairman. 

Chairman CHABOT. Thank you. The gentlelady yields back. The 

gentleman from New York, Mr. Hanna, who is the Chairman of the 

Small Business Subcommittee on Contracting and Workforce, is 

now recognized for five minutes. 

Mr. HANNA. Clearly, you are not in the Heifer projects. I am 

thinking back to Michael Milken, he was way ahead of his time, 

and I give him credit for that. I do not think he would be in the 

same jam today if he was doing what you are doing. 

The information that you provide your investors with—I love 

what you do, I think it serves a great purpose, and I think in the 

marketplace it fits as long as there is transparency. 

Mr. Hodges, to be frank, you may have a small loss ratio but loss 

ratio’s are measured over time. That might be last year’s, next 

year’s could be much worse. 

I am curious about the due diligence that you provide other than 

the obvious quality of diversity that you have, which is a big piece 

of it, how do you say to people what are your lower limits? Maybe 

this was asked, I apologize for being late. How do you inform people who are giving you large amounts of money what their true 

risk is? 

To revisit Mr. Milken, over history, his was extremely low, not 

that much more than any other bond. 

Mr. HODGES. Similar to how we think about the borrower side 

of our business, also on the investor side, it is really around transparency and disclosure. What I mean by that is when an investor 

comes to us, be it an individual or institution who wants to buy 

loans or pieces of loans through us, what we provide is really detailed information about historically how a business credit has performed at different points in the cycle. 

We also provide full disclosure on our current loan book, and 

lastly, on a loan by loan basis, we provide very detailed financial 

information on a go forward as well as historical basis that allows 

them to understand what is the debt service coverage ratio, which 

is really the business’ cash flow ability to pay back the loan, the 

level of asset coverage, and also some of the characteristics of the 

business itself. 

Mr. HANNA. What do you look for in a net worth of a guy or 

woman who is going to send you a check to invest? 

Mr. HODGES. In the United States, we limit our marketplace to 

accredited investors only, so they have to meet the SEC accredited 

investor—— 

Mr. HANNA. Which is what, $1 million? 

Mr. HODGES. It is $1 million net worth outside of your home. 

Mr. HANNA. When you are speaking to minority groups and 

their ability to access what you do, not just minorities but anybody 

who might want to borrow money, there are lower limits to the borrower, too. You have lower limits for the investor. What are the 

lower limits for the borrower? How far down the food chain do you 

go? 

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Mr. HODGES. Currently, our limits on the borrowing side are 

the business needs to have been around for at least two years, so 

two years’ worth of tax return information, so we can really assess 

how that business has performed and make some prediction around 

how we think it will perform in the future. 

Secondly, the individual behind the business needs to have a 

FICO score of 620 or higher. We use that as a qualification criteria. 

It is actually a minority of the signal we use to eventually approve 

the loan. 

The business needs to have been profitable in at least one of the 

last two years. Obviously, if the business has been around longer 

than that, and most of our businesses have, our average business 

has been around for about eight years, then it is easier to get a 

gauge of profitability. 

Those are really the fundamental qualification criteria just to be 

eligible for a Funding Circle loan at this point. 

Mr. HANNA. You feel pretty good about the future. With all this 

due diligence on your part and informing people and setting those 

standards for borrowers, you must have done projections on your 

own expectations of loss, and if your returns are X, do you subtract 

that? 

Mr. HODGES. We have done extensive kind of testing and analysis around how our current book would perform either in an economic downturn or in an environment with meaningfully higher interest rates. What we see is certainly the loss rates, default and 

loss rates would go up meaningfully, but still, an investor who is 

sufficiently diversified, meaning they hold pieces of at least 100 

loans, actually would not lose any principal based on the stress 

testing we have done. 

Mr. HANNA. Do you feel you are at least 100 percent covered 

on the bottom side? 

Mr. HODGES. Never would say 100 percent covered. There is always idiosyncratic risk. 

Mr. HANNA. That is sort of what you just said, but I appreciate 

where you are going. Thank you. My time has expired. 

Chairman CHABOT. Thank you. The gentleman yields back. The 

gentlelady from New York, Ms. Clarke, is recognized for five minutes. 

Ms. CLARKE. I thank you, Mr. Chairman, and I thank our 

Ranking Member, Ms. Vela ́zquez. Let me thank our witnesses. This 

is a very intriguing and important subject we are discussing today 

because access to capital, we know, is a fundamental building block 

for small businesses in the United States. 

During the financial crisis of 2008, it led banks pulling out $116 

billion in the lending market. This has compelled small businesses 

to seek the necessary loans from non-traditional lending sources, 

such as peer-to-peer lending. 

We have seen that these peer-to-peer lending marketplaces are 

subject to high risk and potentially fraudulent services or activities. 

What suggestions might you have to improve the regulatory climate and oversight environment for peer-to-peer marketplaces to 

counteract practices of fraud or other elicit investing practices? 

Have you thought that through? 

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Mr. RENTON. As I said earlier, there has actually been no cases 

of fraud in this country on the platform side. The borrower side is 

a different story, on the consumer side. Sam can probably talk 

about his experiences with fraud. 

Fraud on the platform side, which is a problem in some countries, it simply has not been a problem in this country, and I think 

even though there is a myriad of rules and regulations that these 

platforms have to adhere to, for the most part that works when it 

comes to deterring fraud. 

Ms. CLARKE. Are you saying there is no necessity for that in the 

United States? Is that what you are saying? 

Mr. RENTON. Yes. 

Ms. CLARKE. Yes, you are saying there is no necessity to put 

any safeguards or regulations in place because fraud is non-existent? 

Mr. RENTON. The safeguards that are in place today are sufficient to deter fraud. That is what I am saying. 

Ms. CLARKE. Very well. Sam? Excuse me, Mr. Hodges. 

Mr. HODGES. If I can speak on that directly, I guess on the platform fraud side, what I would say is we are already heavily regulated. We are regulated as a securities business. We own a brokerdealer. All the information we provide to our investors who are 

buying pieces of loans through us have to comply with the disclosure standards the SEC has set up and other securities law for any 

private offering. 

Certainly, making sure that what we send to investors to make 

sure they are making good decisions is a really important piece of 

the business, but I think those rules are already fully in place. 

On the borrower side, fraud is an expensive problem. We and 

other platforms have been hit extensively by fraud rings in the 

United States, and that is one of the things we are working together on, just to make sure we can identify fraud and weed it out. 

Ms. CLARKE. You also believe that you have set standards sufficient enough to address risk and how the risk is distributed among 

the investors? 

Mr. HODGES. I guess what I would say is yes, particularly on 

the fractional side. On the institutional side, for us and many of 

the platforms is a whole owned business, those are very large institutions who are investing millions of dollars, and we work with 

them to structure arrangements where they are getting sufficient 

information as well as sufficient diversification to make sure they 

know what they are getting. 

On the fractional side, as I said, there are already extensive 

rules in place which we follow insidiously just to make sure our investors are protected fully. 

Ms. CLARKE. They do know what they get? 

Mr. HODGES. We believe so. 

Ms. CLARKE. Okay. Very well. My second question quickly is 

with the increased popularity of the peer-to-peer lending platforms, 

we are seeing an increased rate of rejection for small business applicants through these platforms. This can lead to a gap in access 

to capital for our small businesses which can result in small businesses closing their doors. 

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What suggestions might you have for Congress to implement 

that would be conducive for small businesses to continue to be able 

to access the capital they need through the peer-to-peer lending 

platforms? 

Mr. HODGES. One idea borrowing from what we have seen in 

the U.K. where we also operate is also having turn down requirements, where if a bank is going to go and turn down a small business for credit, they actually have the responsibility to send that 

small business somewhere else, so the small business owner knows 

there are other options. If there was one policy measure, I think 

that would be it. 

Ms. CLARKE. Very well. I thank you, gentlemen, very much for 

your testimony here today. I yield back, Mr. Chairman. 

Chairman CHABOT. Thank you. The gentlelady yields back. I 

want to apologize for the mike. I think the gentlelady was correct, 

I do not think it was working properly. We will definitely look into 

it and take care of it. 

I would now like to yield to the Ranking Member who has one 

final question. 

Ms. VELA ́ ZQUEZ. Just one final question. I represent New York, 

my congressional district is in New York. Part of my district was 

devastated by Sandy. A lot of small businesses suffered because the 

financial assistance they needed in terms of disaster loans took too 

long for SBA and FEMA to process. 

We all know that when natural disasters strike, if small businesses do not get the financial assistance they need, a lot of those 

businesses might have to shut down. Forty percent of small businesses do not reopen after a disaster. 

My question to you is in the aftermath of Hurricane Sandy, small 

business recovery was hampered by the slow disaster loan process. 

Did your platform fund any businesses in Sandy impacted areas, 

and do you think peer-to-peer lending is a viable option for disaster 

recovery? 

Mr. HODGES. We certainly have made loans to small businesses 

in the Sandy disaster area. As a matter of fact I remember 

anecdotally a number of businesses who had interruptions in their 

operations and were really looking to get back on track and coming 

in and applying for credit. Yes, that is something that we have 

seen. 

In terms of whether this is an effective measure for disaster recovery, to be honest, it is not something we have taken a really 

close look at, but certainly what I would say is when we see an opportunity in the market where there are going to be a concentration of small businesses who kind of need to expand, need to grow, 

need to invest in their store front and equipment, those are opportunities where we just frankly go and market more. There is kind 

of a factor that already makes it happen. 

Mr. IYER. There has been some studies done on disasters in 

other places, and they have looked at these markets when they 

were serviced by payday lenders after the disaster strikes as compared to when peer-to-peer platforms came up, and they do find recovery from these shocks are much better because of these people 

that go to peer-to-peer platforms and post a listing for a loan and 

they get it. 

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In a sense, the information of whether people can access these 

platforms, maybe people do not know so they do not post it, but if 

that is available, these platforms are useful. 

Mr. RENTON. I really think it is a great idea. One of the things 

these platforms have an advantage over is speed. They can move 

very quickly. This is still a pretty nascent industry, and there is 

not a whole lot of infrastructure in place compared to the traditional banking system. 

I think Sam can probably talk about this, I think if there was 

some sort of arrangement in place that encouraged the platforms 

to really focus on the hard hit areas, they could move very quickly, 

I think. 

Ms. VELA ́ ZQUEZ. All these businesses have insurance, but they 

need that immediate financial assistance, such as a bridge loan 

through SBA, until the insurance money come through. 

Mr. RENTON. There are also other online platforms that are not 

really peer-to-peer but that operate in a similar way from the borrower side that are even faster. There are companies like Cabbage 

and OnDeck that provide cash to businesses literally within minutes. Those are the sort of platforms that would also be able to 

work much quicker than the traditional bank. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman CHABOT. Thank you very much. The gentlelady’s 

time has expired. 

I want to thank the entire panel. You all did really a great job 

in testifying here. We really appreciate your time. We know you 

have other commitments, and you came here to help members of 

the Committee to better understand the entire peer-to-peer lending 

process, your perspective on it, and as we all know, it certainly is 

an alternative. 

It is one of the important ways that small businesses nowadays 

can have access to capital, and that is a critical element in a business being successful, and as we grow small businesses, we are 

growing jobs in this country. 

I think we all agree we need to do a better job doing that, so we 

can have the unemployment rate come down and have every American who wants a job have access to one. We want to thank you 

for your contributing to that cause. 

Members have five days to submit statements and supporting 

materials for the record. 

If there is no further business to come before the Committee, we 

are adjourned. Thank you. 

[Whereupon, at 12:20 p.m., the Committee was adjourned.] 

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A P P E N D I X 

CONGRESSIONAL TESTIMONY 

‘‘Bridging the Small Business Capital Gap: Peer-to-Peer 

Lending’’ 

Testimony before 

The Committee on Small Business 

United States House of Representatives 

May 13, 2015 

Rajkamal Iyer, 

Associate Professor of Finance, 

MIT Sloan School of Management 

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My name is Rajkamal Iyer. I am an Associate Professor in Finance at MIT, Sloan School of Management. I would like to express 

my thanks to Chairman Chabot, Ranking Member Vela ́zquez, and 

members of the committee for the opportunity to be here this morning. 

I became interested in the peer-to-peer credit markets when I 

learned how these new online markets have been developed to improve access to credit for small businesses and individuals. What 

was interesting about these markets were that the loans were 

funded by a group of small individual investors as compared to sophisticated lenders. Given that one of the big problems of credit 

markets in general, is screening for the underlying creditworthiness of borrowers, I was interested in understanding whether small 

individual lenders can judge creditworthiness effectively. 

Therefore, with my coauthors Asim Khwaja at Harvard University, Erzo Luttmer at Dartmouth, and Kelly Shue at the University 

of Chicago, we set out to understand the functioning of these markets. The context we studied was an online lending platform, Prosper.com, where individuals can lend to their peers. Individual lenders decide which peers to lend money to by using both hard and 

(mostly self-reported and non-verified) soft information on borrowers to determine their creditworthiness. Our paper shows that 

non-expert individuals do remarkably well—they are not only substantially better at predicting borrower default compared to predictions based on exact credit scores, but also do well relative to 

an econometrician’s best predictions given the data available. In 

particular, the interest rate set by lenders predicts default 45% 

more accurately than the borrower’s credit score. 

Our results show that lenders in peer-to-peer markets are able 

to effectively infer borrowers’ creditworthiness using the rich information set that these markets provide. We further find that lenders rely on nonstandard or soft sources of information in their 

screening process and that such information is relatively more important when screening borrowers of lower quality. Our results 

highlight that even markets with non-expert individuals can effectively screen for borrower creditworthiness. Given peer-to-peer 

markets’ ability to effectively screen borrowers, and given their 

non-collateral-based lending structure, such markets can offer a potential capital source for small borrowers who may otherwise be 

limited to more costly sources of finance. 

So one could ask what are the risks in these markets? One could 

be worried that investors are making bad loans and as they cannot 

judge borrower quality. Given the findings, this does not seem to 

be the case. What are the benefits to small businesses? Even if the 

interest rates offered by these online markets are similar to the 

those offered by banks, the growth of these markets could benefit 

small businesses as it could provide them with more funding options. At this point, given the nascent nature of these markets, regulating them could create impediments for their growth. Having 

said that one needs to keep track of how these markets evolve before designing regulatory frameworks to mitigate any possible 

externalities that might arise. 

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Thank you again for the opportunity to address the Committee. 

I will be happy to answer any questions. 

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Good morning. My name is Zachary Green and I’m the CEO and 

founder of MN8 Foxfire. I would like to personally thank Chairman 

Chabot and the members of the Small Business Committee for inviting me here today. 

As a young man growing up in Cincinnati, Ohio, I had three distinct dreams: 

1. To be a US Marine, 

2. To be a firefighter, and 

3. To be an entrepreneur. 

Dedication, honor, teamwork, and most of all mission accomplishment were some of the life long values I garnered from my time 

in the Corps. I recognize that having the opportunity to pursue the 

American Dream is because of those that have gone before us. We 

must never forget that we are the land of the free ONLY because 

of the brave. 

Several years later (and about 50 additional pounds), I fulfilled 

my second dream of becoming a volunteer firefighter, a rich American tradition started by one of our founding fathers, Benjamin 

Franklin. Being a firefighter, much like being a US Marine, taught 

me that no obstacle is too large, no hill is too steep and all challenges can be solved through leadership, teamwork and perseverance. After all, in the fire service we have to solve the problem at 

hand; we don’t have the option of calling 912 after the homeowner 

calls 911. 

The summers in Parris Island and Twentynine Palms were unbearable. Marine Corps Officer training in Quantico, VA was extremely challenging, as is being a firefighter running into a burning building while everyone else is running out. 

But all of these pale in comparison to the challenges I 

have encountered fulfilling my third dream: becoming an 

entrepreneur. 

I came up with the idea of MN8 Foxfire while sitting on the tailboard of my fire engine. As a firefighter, some of our biggest risks 

are accountability and disorientation, all of which are compounded 

exponentially in the dark. I remembered seeing a special about 

September 11th and how the 9/11 commission report noted several 

times how photoluminescence materials helped people evacuate the 

twin towers before they collapsed. I thought of ways in which I 

could apply this same technology to firefighter accessories. During 

the next several months, I drove from fire station to fire station 

selling MN8 Foxfire accessories out of the trunk of my car. Sales 

steadily increased, and my former Fire Chief, Robert Rielage, sat 

me down and told me how much he believed in me and this product. He said I shouldn’t just treat this as a hobby, but rather look 

at how to really grow the company. As I walked out of his office, 

I remembered the words of one of my favorite leaders, Theodore 

Roosevelt: ‘‘In any moment of decision, the best thing you can do 

is the right thing, the next best thing is the wrong thing, and the 

worst thing you can do is nothing.’’ 

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I refinanced my home, maxed out my credit cards, and took nearly all of my family’s savings to officially start my journey to entrepreneurship. I’m proud to say that we now have more than 60,000 

firefighters using Foxfire products. Additionally, we have grown 

our safety line of products such as eco-friendly EXIT signs (that 

never need maintenance, batteries or electricity), and a patented 

product that goes on stair edges that today illuminate the stairwells of sports arenas, high-rises, and universities all over the US 

and abroad. Thanks to the help of the US Dept. of Commerce’s 

Commercial Services division, we have also exported this technology to more than 25 countries throughout the world, including 

the Civil Defense headquarters of the United Arab Emirates. 

In 2013, MN8 Foxfire was awarded the ‘‘Excellence in Entrepreneurship’’ award; and I was named ‘‘Entrepreneur of the Year’’ by 

the Ohio Chamber of Commerce. I could not have been more proud, 

but every day is a struggle. 

One of Foxfire’s biggest challenges—one many small business 

owners share—is the access to working capital. I love my mother 

very much, but the words of one of my mentors could not ring more 

true: Cash Is More Important Than Your Mother. I always thought 

the more Foxfire grew and the more we sold, the less I would have 

to worry about capital. I could not have been more wrong. When 

I realized that my personal investments would not be enough to finance our rapid growth, I raised capital from friends and family. 

With that capital, I hired more staff and bought more inventory, 

but it was still not enough to keep up with our supply chain and 

overhead costs. I next worked with a local venture capital advisory 

firm and raised additional funds. Those funds coupled with lines of 

credits from our regional lender, Bank of Kentucky allowed us to 

continue to grow. 

Almost every entrepreneur I know has the same reoccurring 

nightmare: running out of money. Several months ago, due to several unforeseen circumstances, this almost happened. We were fortunate to find a new stream of access to capital online through 

StreetShares, a peer-to-peer lender described by the press as 

‘‘Shark Tank meets eBay’’. We presented our business case with 

historical financials, tax returns, and a pitch describing how we 

would use the new funds. 

StreetShares is a peer to peer internet-based marketplace that 

matches borrowers and lenders by shared social affinity—such as 

in this case, veterans lending to veterans—to drive down the rates 

and risks of a loan through a reverse auction model. Our loan was 

funded from a pool of investors who competed to take a portion of 

our loan, each setting their own rate of return. These investors reviewed Foxfire’s pitch and bid to fund a part of our loan. 

StreetShares combined all the lowest bids into a single loan for us. 

They bid down our rate because they knew we were a veteranowned business, and many of the investors were veterans themselves. In under 36 hours, Foxfire received the money we needed. 

The interest rate was in the teens. 

If we had gone through this same process with a traditional financial institution, it would have taken months. If we had gone to 

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one of the many small business ‘‘payday’’ type lenders online, they 

would have charged us an outrageous APR. The StreetShares loan 

had a reasonable APR, but was just as fast. If it were not for the 

quick access to an online peer-to-peer loan, I fear the worst could 

have happened. This is the perfect example of how the free market 

can act faster than larger, traditional institutions, and keep the 

American Dream alive. 

I became a US Marine, a firefighter, and thanks to new ways to 

fund startups like peer to peer micro loans, I am on my way to becoming a successful entrepreneur. 

Thank you again for your time today. 

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Testimony of 

Peter Renton 

Founder & CEO 

Lend Academy 

before the 

Committee on Small Business 

United States House of Representatives 

May 13th, 2015 

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My name is Peter Renton and I help run three businesses that 

are all focused on the peer to peer (P2P) lending industry. I am the 

founder and CEO of Lend Academy, which operates the leading 

P2P lending blog, podcast and community forum. I am the cofounder and CEO of the LendIt Conference, the first and largest 

conference series dedicated to the broader online lending industry. 

I am also a co-founder of NSR Invest, which is an investment and 

analytics platform that provides access to P2P marketplaces for financial advisors, institutional investors, and individuals. 

As you can tell, I was not born in this country. I grew up in Sydney, Australia where my father was an entrepreneur and I joined 

the family printing business one year after graduating college. Like 

most entrepreneurs in Australia I dreamed of one day starting a 

business in this country and I was able to do that in 1991 when 

I moved to Denver, Colorado to expand our family printing business. Since then I have started several other businesses ad in 2003 

I proudly became a United States citizen. 

I have been investing in P2P lending platforms (now often referred to as marketplace lending platforms) since 2009 and I have 

been covering this industry full time as a blogger and analyst since 

2010. What I would like to do in this testimony is give you all a 

little history and overview of the P2P lending industry, particularly 

as it pertains to small business. 

Short History of P2P Lending 

In this country P2P lending began in 2006 with the launch of 

Prosper, industry leader Lending Club followed just a year later. 

The SEC decided in 2008 that the loans issued by these companies 

are securities and should be registered with the SEC. So both companies went through a long and expensive registration process to 

remain open to non-accredited investors and comply with this decision. To this day these companies are the only peer-to-peer lending 

platforms to have undertaken this registration process. While there 

are dozens of platforms today every other company is only open to 

accredited or institutional investors. 

It should be noted that Lending Club and Prosper are primarily 

consumer-lending platforms but they have been doing quasi-small 

business loans since inception. Many small business owners use 

their personal credit to fund their businesses; I have done that myself in the past. Since inception Lending Club and Prosper have 

originated around $200 million in personal loans that were used for 

business purposes. 

In addition to these personal business loans Lending Club has 

had their own small business lending program for over a year offering term loans of between 1 and 5 years. Lending Club does not 

share their loan volume here but my understanding is that this initiative is still relatively small although it is growing quickly. Prosper has a referral program with OnDeck Capital the largest online 

small business lender. 

Brief Explanation of Products Offered 

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I should explain the variety of products offered by the broader 

online lending industry: 

1. Term loans - typically 1-5 year amortizing loans with relatively low interest rates. 

2. Lines of credit - to be drawn against as the need arises, 

has a wide range of interest rates. 

3. Merchant Cash Advance - high interest, short term advances with repayments tied to credit card receipts. 

4. Invoice Finance - also known as factoring where small 

business can get immediate cash for their receivables. 

5. Crowdfunding - is not lending at all. Can be an equity 

based investment or a rewards-based ‘‘donation’’. 

What Can Government Do? 

I appreciate the fact that you are having this hearing and that 

you are interested in learning more about this industry. The continued growth of this industry will provide many benefits to small 

business owners and the economy as a whole. 

As to what government can do here I would like to describe some 

of the actions the UK government has done. They provide a blueprint for supportive actions that a government can take to impact 

this industry. 

1. Since 2012 the British Business Bank, wholly owned by 

the UK government, has been investing in small business 

loans issued by online platforms like Funding Circle. While the 

total investment is relatively small this action has given the 

industry there a tremendous boost in credibility and trust 

among investors and borrowers. 

2. They have created a new regulatory framework specifically for the P2P lending industry. 

3. Last year the UK government announced the creation of 

a bank ‘‘mandatory referral scheme’’ where banks that reject 

small businesses for a loan will have to refer these businesses 

to alternative lenders. 

Now, I am not saying that the US government should copy these 

actions but rather they provide some ideas of how governments can 

support this burgeoning sector. 

I firmly believe that small business lending is going through a 

transformation that will have a dramatic impact on the growth of 

small business in this country. I hope and trust that you will see 

the benefits we bring and will be supportive of this transformation. 

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1OnDeck, How Delivering Our First $1 Billion to Small Businesses Has Helped Drive the US 

Economy, Analysis Group (May 2014). 

The Electronic Transactions Association (ETA) applauds the 

Committee for its hearing on ‘‘Bridging the Small Business Capital 

Gap: Peer-to-Peer Lending.’’ 

ETA represents over 500 companies from around the world, 

many of which are small businesses. Small business are the backbone of our economy and jobs. ETA member companies are vital to 

the success of small business by facilitating not only the payment 

needs of existing merchants, but in bringing new businesses into 

the payments system. Additionally, many of ETA’s small business 

members are helping to develop new technology to make payments 

more flexible, faster, and safer. 

ETA believes that small businesses should have multiple financing options available to them, which is why we commend Chairman 

Chabot and Ranking Member Velazquez for holding this hearing on 

the important topic of peer-to-peer (or ‘‘marketplace’’) lending for 

small businesses. 

Marketplace lending is serving an important need, particularly 

as traditional lenders and regulators have tightened available credit for small businesses. These new, technology-enabled lenders have 

stepped in to fill the need for small business in all 50 states. And 

while traditional financial institutions provide valuable service to 

millions of businesses, marketplace lending increases available options for small businesses. 

A recent industry report 1 calculated that the first $1 billion lent 

by one of the largest marketplace small business lenders generated 

22,00 jobs and boosted the U.S. economic activity by $3.42 billion. 

In addition to filling the funding needs for small businesses, 

many marketplace lenders, have utilized technology to develop 

more accurate underwriting tools thereby reducing the time it 

takes to move from application to approval to disbursement of 

funds to the small business. And, as you know, for small businesses, time is critical, the ability to deliver funding quickly, means 

opportunities will not be missed. The same study indicates that one 

of the main reasons half of all businesses did not apply for financing from a traditional bank is that the process would take too long. 

ETA applauds the House Committee on Small Business for holding the hearing on this important topic, and we look forward to 

working with Committee members to strengthen the marketplace 

lending market to allow small businesses access to the financing 

they need. 

The Electronic Transactions Association (ETA) is the global trade 

association representing more than 500 payments and technology 

companies. ETA members make commerce possible by processing 

more than $5 trillion in purchases in the U.S. and deploying payments innovations to merchants and consumers. 

For more information go to: www.electran.org 

Æ 

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