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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Dec 20, 2013

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Freedom Financial Network (FNN), a debt consolidation company, received a massive $125 million investment from Venture Capital, a firm co-founded by Microsoft magnate Paul Allen.

The goal of the investment is to create FreedomPlus, a new direct lending platform that will lend personal loans to struggling consumers in need of financing. FNN touts that FreedomPlus will be able to overcome the challenges and benefits of peer-to-peer lending found in rival platforms by offering direct lending to “emerging prime” consumers.

Emerging Prime refers to subprime consumers who are not yet qualified for prime credit but in the near future will become prime consumers.

Michael Azzano, Spokesperson for FFN said that FreedomPlus has been years in the making.

“FreedomPlus is the outgrowth of more than five years of FFN lending experience, during which FFN extended consolidation loans at reasonable rates to consumers struggling with their existing debt,” he said. “The program extended unsecured loans with average balances greater than $15,000 at responsible rates and experienced annual default rates of less than two percent.”

Unlike peer-to-peer lending, which it claims to be able to outcompete, FreedomPlus will be a direct lender. Andrew Housser, co-founder of FFN and CEO of budding FreedomPlus, compared FreedomPlus to Amazon with peer-to-peer lending being akin to eBay.

FNN isn’t the only organization or body to believe that peer-to-peer lending, for all its benefits, can be outcompeted.

Lending in 2014

According to Brendan Ross, Founder of Direct Lending Investments, all online lenders, including new entrants such as FreedomPlus, are going to have banner years in 2014 because they bring a Silicon Valley attitude to the process of using data to find good borrowers.

“During the next three years, time will finally wash away the stains that Great Recession bankruptcies and near-bankruptcies inflicted on millions of credit reports,” said Ross. “Increases in the unemployment rate correlate to decreases in credit scores and more credit-harming occurrences, like late payments.”

Despite ongoing unemployment, Ross believes that the economy has been slowly recovering and as a result many subprime borrowers will soon ascend to the prime category. This ascent is being noticed by companies just like FNN and other personal loan lenders eager to give financing to borrowers that will be considered prime in a matter of months.

“Let’s say you’re running a bank,” said Ross. “Should you loan money to Jane Doe, whose house was foreclosed on 6 years and 364 days ago, or should you wait until tomorrow when it hits the 7 year mark and disappears from her credit report? Is Jane subprime today but prime tomorrow?”

In Ross’ estimation, online lenders have made investors a lot of money by being smarter than banks. Online lenders attract the best borrowers and lower their rates, then they split the profits with investors. These tactics are now recognized as broadly effective by institutional investors who are crowding out the individual ‘peer-to-peer’ investors that powered the early growth of online lending.

“Most new platforms are limiting their lenders to accredited or institutional investors only,” said Ross. “It’s not exactly ‘peer-to-peer’ if the borrowers are consolidating credit card debt and the lenders are worth a minimum of $1 million.”

While this change isn’t likely to impact such peer-to-peer lenders as LendingClub and Prosper, new platforms would rather avoid the SEC filings that come with selling securities to non-accredited investors, hence the reliance on lenders who are high network individuals.

“If the ‘peer’ part of p2p lending is dying, it is only because online lending is having quintuplets,” said Ross. “Silicon Valley is producing lending platforms as fast as entrepreneurs can incorporate, and this is no surprise: building highly efficient, technology and data-driven lending platforms while outsourcing the balance sheet to hedge funds makes terrific sense for borrowers, lenders, and the economy. Banks won’t feel the sting in 2014, but they will by 2020.”

Ignoring a Lending Goldmine

If Ross’ analysis is accurate, then peer-to-peer lending has become a way for high net worth individuals to lend money to struggling borrowers at a time when subprime consumers are about to become prime and creditworthy. However, while online lenders like FNN and peer-to-peer lending companies are nimble enough to notice and act upon this trend, not all lenders are as fortunate.

Bill Kassul, Partner at Ranger Capital, said that traditional lenders are ignoring emerging prime borrowers.

“Many borrowers who are in this category were previously in the ‘prime’ borrower category but the financial crisis pushed them to subprime,” said Kassul. “I think when this group does move back into the prime borrower category, they are still going to be largely ignored because traditional lenders now have tighter lending requirements than were previously available.”