Secured Loans Are Coming to P2P Lending

ClickChoice secured peer to peer loans

Jeff Fortin has an idea that may turn peer to peer lending on its head. He is focusing on a huge market niche that hasn’t been very popular so far on Lending Club and Prosper: car loans.

What is even more interesting from an investor perspective is that this company will offer secured p2p loans. They will be the first company to offer secured loans in the peer to peer lending industry. So if a car loan goes bad the car gets repossessed and the investor gets their money back.

The name of this new company is ClickChoice.com and it is expected to launch in beta later this year in Idaho and Washington state. They have developed patent pending technology for their platform that brings together three parties: borrowers, car dealers and investors.

Company founder and CEO, Jeff Fortin, has about 30 years experience in the car financing business. He has also been following the rise of peer to peer lending and decided this was the best model for his new business. And because he is offering secured loans he can provide protection for investors money.

Investors Earn a Minimum of 8%

You may be wondering how on earth something like this will work. You have probably guessed this already but it is going to be a bit different to the Prosper and Lending Club model. Here are some key points that will help explain how it works.

  • ClickChoice will register lender pools with the SEC.
  • The minimum investment for lenders will be $5,000. Initially the maximum investment will be set at $25,000.
  • Investors will fund $5,000 per loan, so an investor can fund a maximum of five loans.
  • Lenders are guaranteed a minimum return of 8% with returns of up to 11% possible.
  • In case of default lenders will always receive their outstanding principal back 91 days after the loan payment due date.
  • Loans will be to low-prime and sub-prime borrowers with FICO scores of 450-650 range.
  • Borrowers will pay 13% – 22% interest rates on a 60, 72 or 84 month term.

So, if you are looking for a $25 minimum investment this model is not for you. Also, if you want to diversify among hundreds or thousands of loans you will be disappointed. But if you want a way to protect your principal then ClickChoice.com has a compelling model. They will actually be insuring every loan so if a default happens an investor will always be made whole whether or not ClickChoice repossesses and sells the vehicle or not.

Unlike peer to peer lenders, ClickChoice will have regional offices throughout the country. Because they are dealing with hard assets they will need people on the ground in many states. Fortin is predicting that by 2015 ClickChoice will be in 42 states serviced by 21 regional offices.

Since peer to peer lending began in this country just 2.4% of loans on Prosper and 5.1% of loans on Lending Club have been used to purchase cars (according to the borrowers stated loan purpose on their application). But every one of these loans was unsecured so if the borrower failed to pay back the loan the lender had no recourse and typically lost their principal. ClickChoice provides protection for the investor.

Over 40 Million Used Car Loans

The auto loan market is huge with 40 million used cars financed every year. The average loan size is $12,000 and these will be the kind of loans that ClickChoice will help finance. No Ferraris or Aston Martins here, the maximum loan size will be $25,000. They will be financing some new cars but the vast majority of their loans will be for used cars sold through auto dealers.

This is going to be a highly complex and expensive operation to setup. Around $500,000 has been invested so far and they are looking to close their first major funding round ($5.5 million) very soon. The biggest challenge as I see it will be getting investor dollars in the door. The demand is obviously there for car loans but the $5,000 minimum investment will certainly limit the number of investors. Fortin is fully aware of that and so he is focusing on several avenues including investment advisors to help drive new lenders.

The last six months has seen a great deal of innovation with several new p2p lending startups getting ready to launch. But ClickChoice may be the most ambitious of all. It has massive potential and I will be following their progress very closely.

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Dan B
Dan B
Jun. 6, 2011 7:56 pm

So the notes aren’t really secured by the car loans themselves, but rather secured by ClickChoice’s promise to pay, correct?

Jeff Fortin
Jeff Fortin
Jun. 6, 2011 8:04 pm

In a sense, you are correct, ClickChoice holds the title with cash reserves to protect the investors, since the titles and cash have liquid value, added to various insurance programs, we protect the lender in case of default. The risk of default is on the company not the P2P lender. The subscriptions are promissory notes, but are secured by assets of the company, thereby a protection to the P2P lender. The P2P funds are loaned to ClickChoice by the P2P lender though registered securities, under SEC rules for Asset-back securities, since ClickChoice is the lender, and holder of title, we can offer protections to the P2P lender, if the loan defaults, we pay off the investor the principal, and then we repossess the car (collateral) and settle any loss internally and with insurance, the P2P lender is protected with the value of the asset, and cash reserves within the ClickChoice program. The company takes the risk, and collections, the P2P lender garners 8% to 11% ROI, and is paid principal and interest monthly on their account.

Dan B
Dan B
Jun. 6, 2011 10:17 pm

Well, it’s more than “in a sense”. It’s in actuality, is it not?
If ClickChoice were to go out of business one day, we the “lenders” could potentially be out of luck EVEN if the actual borrower makes every single car payment on the loan that we indirectly funded……………or am I wrong?

If the above is accurate then the “lenders’ return” is secured by your “promise” or if you prefer, your “guarantee”………….. & not by the loans themselves.

Jeff Fortin
Jeff Fortin
Jun. 7, 2011 10:56 am

Let’s start with the basics, there are no absolute guarantees, but process, procedure and good business operations can minimize losses. With that being said, our credit policy, underwriting process, how we distribute and issue loans all are in place for the protection of the P2P lender. In the real world, even secured loans can go bad, all we can do is manage the process, and flow, and put in-place procedures that offer the best protection of P2P funds, while making sure the Loan to value, and adequate reserves are in-place. We state this by staging three P2P investments to a auto loan, although ClickChoice owns the loan, and holds the title it is tied and connected to the P2P funds.

We first protect the P2P investor with registered investment products (with the SEC), We secure loans using auto titles as collateral for such loans, based on risk, loan to value, and reserve requirements the P2P investor is protected. The subscription purchased by the P2P investor is a fixed term (60-months), fixed amount ($5,000), if you purchase more you garner more subscriptions, and a fixed rate of return (8%-11%), once you subscribe 100% of your investment goes into a loan product for a car or truck.

What the process is on the loans is that ClickChoice combines up to five P2P lenders into on auto loan, totaling $25,000, but on average most loans will be $15,000. Both the P2P Lenders and the Auto Loan end up as a single item (we call a unit) of accounting within ClickChoice, which means we know who is funding the P2P loan, as well as who the Borrower is, and since this will be mainly a loan though a dealer we know the dealer. This unit, a loan product has a corresponding loss reserve established in cash, as well as a related vehicle title, and reinsurance on future loss. As payments are made, the accounting for the P2P investor, the borrower is updated monthly, and payments received by ClickChoice are accounted for, and payments of interest and principal is made to the P2P investor monthly.

In our forecast we know the life-time loss ratios for all FICO score levels, which range from 15% for FICO 620 to up to 60% for FICO 475, this loss ratio is how we establish our reserves, loan to value and other requirements even before the loan is granted. Each risk has a corresponding cash reserve requirement, reinsurance, and other protections, not only for the investor, but the borrower, as well as the company.

I will address only defaults here, let’s say a “Unit” goes into collections, the P2P lender will receive payments of interest and principal during 30, 60 and 90 days of default, and the account management system the P2P investor will track all loans will show the status. Since, we will be dealing with the subprime credit market, our collection window is short. We allow for 90 days to fix, and correct a delinquent account, if it is still delinquent on the 91st day, then by policy we pay the P2P investors back the outstanding principal balance, upon payment ClickChoice controls the unit, asset and cash reserves. At that point, further collection, settlement and or repossession is solely on the company.

Let’s address your question if we go out of business: Even, in the worst case of going out of business, which every business faces there is something to remember, if we were to cease operations certain things will still be in place for investor and borrower protection, uncollected business will continue with someone’s oversight.

First, there would still be loan business on the books being collected on a month to month basis by contract, and revenue would still be originating. Second, ClickChoice still holds the titles on all contracts outstanding, which is an asset. Third, all the cash reserves established for losses is still in insurance accounts (an outside company) which will have the cash on hand to pay claims, and losses. And lastly, any insurance purchased as reinsurance for the loans on the books will still be in place. Overall we only offer return of principle, based on the structure and policy it is as close a guarantee (we call it prinicipal protection) an investment could have. All I can say, is there is risk in every investment, loan or business, what we do with our program and policy is mitigate any potential loss that may occur, I feel we have done that. Thank you for your comments.

C. Jensen
Jun. 7, 2011 12:29 pm

@Jeff: Any timeframes? I like the concept.

Jeff Fortin
Jeff Fortin
Jun. 7, 2011 12:58 pm

We are launching in WA and ID in October 2011, with about 100 beta loans, and full launch in January 2012, and will be nationally beginning in 2013. Our goal is 500,000 auto loans over 5-years, with 1.5M P2P lenders, and about 8,500 auto dealers. The indirect lending will be first, with direct lending in 2013. Over the next 30-day I will be enhancing our website, and adding more information on the segmentation and areas of the business and other information. We are in discussons to close our series funding, and our management team, and board is complete. We will be accepting P2P participants and subscribers in January, we’re starting the SEC process to become effective. More to follow. Thank you follow us on Twitter at @clickchoiceauto.

Jeff Fortin
Jeff Fortin
Jun. 7, 2011 1:39 pm

, we do have a complex and innovating model. P2P is one of the three segments, the other two are Peer2Dealer, and Consumer2Consumer. Our goal was offering an investment program to the general public which competes with programs only the few get to participate in, as well as offering access to loans for the hard to place customers, with varied degree of risk. With a good model, adequate P2P funding, this business will achieve three goals 1) offering goods and services which enhance consumers with access to better returns, and access to loans, 2) effective business model which is scalable and profitable, and 3) contributes to the betterment of the community, consumers and investors with sound business practices, fair treatment of consumers, and open to adapting our programs to the needs of those we serve. Thank you for this venue to introduce this P2P aspect to your members. Kindly.

Dan B
Dan B
Jun. 7, 2011 2:02 pm

I’m not questioning your uniqueness, your business plan, nor am I asking for an encyclopedic dissertation of auto finance procedures.

All I asked was a very simple question…………….Are the lender funds secured by the loans or are they in fact secured by your promise or guarantee to cover the principal in case of default? It’s pretty clear from your responses that it’s not the loans themselves.

Like other p2p outfits, we the lenders are lending to you the company, who in turn are lending it out (through registered securities) to the borrowers. Therefore if you as a company were to go out of business, (like most new businesses do), then we the lenders would very likely end up standing in line together with other creditors. And like other bankrupt companies, such a company would most certainly go out of business heavily in debt & in circumstances where their assets WILL NOT cover the demands of all their creditors.

In other words it would be up to the courts to decide how to best allocate the assets of the bankrupt company & we may still end up with nothing.

Therefore the bottom line is that the “secured” part is in fact as good as your guarantee. Your guarantee as a new company with no track record.

Would it not be possible to secure the investors money through an outside guarantor? Would 1% of returns be sufficient to purchase such insurance?

Jeff Fortin
Jeff Fortin
Jun. 7, 2011 2:27 pm

@Dan Yes, our model is not dependant on the P2P model, its one segment of fund acquisition, we can go the traditional route to institutional and fund managed pools, which will be part of our funding policy. The uniqueness of this is bringing the ClickChoice P2P fund access to the general public who would welcome a better than average return on investment. All the flushing out of the terms, works of the plan, and the disclosures are under development, not everyone will chose this option for retirement funds and ordinary income, but a lot will, as we get more defined program materials.

We will keep you posted on progress, send me your email to contact@clickchoice.com and I will add you to our distribution list so you can be fully informed on the benefits, risks and terms of our P2P offering as it is rolled out in January.

Your input and questions are right on, and much appreciated. Being innovating and unique, its evolving and an education curve will be necessary. All the best, chat with you on an ongoing basis.

Thank you and kindly.

On a side note, we are not debt burdened, we allocated adequate reserves and assets to cover the loan potential loss in the future. Let’s say for every $1.0M in loans, we have a loss ratio across the board of 10% or $100,000, the total loans for $1.0M would be 67 unit loans (Full repossession), the cash reserve on 67 loans would be $105,500, plus at worst case 70% actual cash value on the collateral of 7 defaulted loans would be $73,500 for a total of $179,000 in available assets (ACV on Vehicle and Cash) to cover the 10% loss of $100,000, leaving a reserve for future losses.

This explanation is simplistic, since we have a very complex loss ratio algorithm based on LTV, FICO Score, and Reserve Requirements, and likelihood of such loss.

Our model is not is incur debt, rather developing a cash flow on earned interest and fees, which will provide for the losses which will occur, but remember not every loan will fail, based on sound fiscal management, proof of operations of existing lenders, internal policies, and adequate loss protection guidelines with loan underwriting and proper staging of reserves, which under current discussion in Congress, will require at least 5% of loan value to be staged in reserves, we support this legislation (Dodd-Frank Bill )for the betterment of the community we serve. We actually stage almost twice the pending legal amount.

Brian B
Brian B
Jun. 7, 2011 2:29 pm

Jeff,
who will be able to lend?

1. Accredited Investors only?
2. Everyone?
3. Something in the middle? (for example Lending Club requires something like $250k NW or $70k income for 3 years)

Is this decision up to you, or will the answer be forced upon you by the SEC?

Jeff Fortin
Jeff Fortin
Jun. 7, 2011 2:43 pm

@Brian the product will be registered as a securities debt offering by ClickChoice and offered though registered investment brokers and investment advisors for retirement funds, or directly from ClickChoice as ordinary income accounts off our online platform The subscriptions will be registered under Regulation AB (Asset-Backed Securities) which will allow for the general public to invest, we however limit the amount (company directed not by regulations) of the investment to $25,000 or 5 units, which will fund five individual notes with other P2P funders.

Everyone will be able to purchase, there will be no accredited investor requirement since we will be trading these on the investment securities market. Of course, the SEC, and local state regulators may adapt some of their requirements and CC will adapt our processes. This is one reason for the two state launch to work out all the legal, regulatory and investment questions and processes.

As the program rolls out, we may increase the amount an individual may invest. There will be no limit on funds an accredited investor or institutional investor may purchase from our registered fund pools. Another unique feature of CC is that we hold all notes, service and collect the notes, and handle all defaults, we do not bundle or package for resale our loan portfolios, CC maintains full control and ownership of the pools, assets, and reserves. Thank you Brian. Kindly.

Jeff Fortin
Jeff Fortin
Jun. 7, 2011 3:27 pm

– You bet! Keep the discussion flowing, I welcome comments and ideas, it takes a community to build a community. Thank you all!

Andy Gross
Jun. 22, 2011 1:04 pm

An exciting market entry!

Zachary Skidel
Zachary Skidel
Dec. 13, 2013 11:23 am

What ever happened to this company? From my research it looks like they changed the name to Beze Ventures but still never got off the ground? It’s a very interesting concept and would have like it to come to fruition.

On another note, I came across a new secured P2P startup company called CreditCircle (creditcircle.com). It looks like they do secured P2P lending but not specific to any type of loan. Would love to hear your thoughts on their business and hopefully they will make it!