Peer-to-peer lending programs were once heralded as a promising way for extending credit, but the initial reports suggest that the model still has a long way to go.

Prosper and Lending Club are several of the largest peer-to-peer sites. In just the last few years, both have witnessed huge huge gains in overall volume. That should underscores their appeal, both for borrowers as well as for lenders. These sites reduce many of the transactional costs involved in lending. Most of the underwriting work is shifted to lenders. The costs of hosting and maintaining sites is not de minimis, but nonetheless, it is hardly anything when compared to costs of maintaining a branch location.

One problem is that the Prosper loans are not performing. A report in 2010 said that almost 23 percent of Prosper (more…)

President Obama’s new mandate that all recipients of government checks could be a game changer in the prepaid market. The policy, which makes all recipients of repeat government payments required to accept their payments through direct deposit, should put more Treasury-designed Direct Express cards in the pockets of Americans.

The new rule makes a lot of sense. The motive for this policy, reported by ABC on June 14th, is not driven by a political agenda. Rather, it is just a cost-cutting measure. ABC suggests that it will save at least $60 million per year. Ultimately, it might result in an annual savings of as much as $120 million.

The new rule would go into effect in March 2011.

Where it Will Matter

The idea is that government checks would be sent to “personal accounts,” or would be paid to recipients via Treasury’s Direct Express debit card. That card, issued by Comerica Bank, is the ideal debit card program. It is largely free of fees.

This rule should expand the number of households that put a Treasury Direct card in their pockets. Consumers may realize that this is a great product, and certainly a far more affordable option compared to the products offered by Green Dot, NetSpend, or the Rush Card. That would be bad news for MetaBank, Urban Trust Bank, Bancorp Bank, Columbus Bank & Trust (Synovus), and First Bank of Delaware, all of whom issue debit cards through marketing relationships.

What If

Let’s imagine that these changes, which are currently open for comment, take place. It changes the landscape of prepaid debit cards.

Ah, but let’s just imagine that the rule didn’t exclude payments from the IRS.  Let’s consider a hypothetical: all tax refunds have to go through a bank account or a Direct Express card.  Again, this is all hypothetical, but if refunds were included, it would be the next major disruption for RALs.  I’ve noticed that some tax preparers are already buzzing that this could be coming.

The date is not irrelevant.  Starting after March 2011 means that the new rule would still have a muted impact on RAL demand in 2011. Most RAL and RAC consumers file their taxes as soon as they can. Tax-payers wait as long as they can, while those getting a refund get down to their preparer soon after their W-2s come in the mail.

This would have macro and micro consequences. The issue of tax settlement is still not addressed. How will consumers pay for the cost of their tax preparation.  The motives that are suggested by consumers with the economic preferences that are implicit in the choice to use a RAL are the ones least likely to have the $70 to $200 needed to pay for their tax prep. Perhaps JTX or HRB would be willing to extend credit. Perhaps. That would be quite a feat, though.  Moreover, it would mean that the tax prep business would suddenly become a debt collection business.

On a firm level, the impact of the disruption are even harder to estimate.  H&R Block has a commitment from HSBC to provide its RALs for at least the next years, and at a scale that their current book of business will never extinguish. Jackson Hewitt, on the other hand, has to be scrappy. Their funding with Republic is limited, and by their own estimates, they only had enough RAL funding last year to satisfy about half of what their customers might have wanted. That is one check in favor of JTX, because they may have dodged a bullet.

At the same time, if there is no means for paying for settlement, then tax prep is suddenly a debt collection business. It could require a lot of liquidity to extend credit, even for just 9 days, to millions of consumers. JTX only has $7 million in cash. They just won’t be able to do that. Block, by contrast, has more than $1.7 billion in cash and cash equivalents. That is a night-and-day difference. Liberty‘s balance sheets, as a private company, are not readily available. So that is one check in favor of Block.

The last unknown is the degree to which consumers would shop around for a RAL.  Block thought it would have an advantage this year. Having missed that opportunity, they’re now telling investors that they will see a gain next year. Well, maybe. Part of this is an issue of management. Another force, though, is the behavioral impulse of consumers. Many people, upon arriving at their Jackson Hewitt shop and finding out that they would have to wait at least a few days for their refund, still went ahead and filed there. People appear to like continuity, even when it is only a simple return.

The RAL market, as part of the tax market, is about to be disrupted anyway. Jackson Hewitt is about to be delisted. How is that going to help? JTX is already under enough pressure to perform. Their loan with Wells Fargo won’t let them stumble again.

H&R Block’s Q4 Earnings Call is interesting, not just to someone who follows tax preparation, but what the changes at this company tell us about the nature of our larger economy.

Although many would agree with Woodrow Wilson that ‘what’s good for GM is good for the country, and vice versa,” it could also be said that whatever ills plague working people are sure to have an impact on H&R Block. Block is the nation’s largest tax preparer. They file one in every seven returns in the United States.

While they do have a broader range of services than some of the other chains, they still depend upon basic 1040A (more…)

An issue is emerging in the Motor City: can General Motors wean itself off of subprime financing? The classic GM customer was a credit guzzler. How many GMs were purchased in the last decade on the heels of a cash-out refinance? That won’t work any more. GM’s credit rating has fallen way below investment grade, and there’s little thirst for a chance to drink from a firehouse of sub-prime asset-backed securities.

Someone else has got to be the one saying “approve, approve, approve.”

Woodrow Wilson once said “what’s good for GM is good for the country, and vice versa.” Maybe the unsaid rejoinder (more…)

The recession, coupled with its supporting burst of the housing bubble, is prompting a re-evaluation of the role for rental housing. Knowing that it is time to rethink assumptions about home-ownership and rental housing is easy. It gets harder when people ask what should be done. That is because there is no clear agreement on rental demand.

Let’s start with a fact: rents increased this quarter, for the first time since 2008. That should tell us that things are getting better.  However, it gets more complicated when people try to read into the messages underneath the numbers.

Why Rental Housing Is About to Boom

Some would conclude that the foreclosure crisis will put more families into the market for rentals. Call it the Transformation Hypothesis. Homeowners are being transformed into renters. Fannie Mae is foreclosing on tens of thousands of mortgages every day. Certainly, says the reasoning of some, this would mean more renters.That view is (more…)