Social Lending Goes to Next Level with Pertuity Initiative

So far, social-lending has been pretty much a family and friends deal where people who know and trust each other loan money to each other with easy terms and rates. Today, the model takes a next step with the launch of a new social finance platform offered by Pertuity Inc., a social lender, and National Retail Fund, a mutual fund firm.

The deal works this way: borrowers contact Pertuity Direct which screens them according to FICO scores. Only folks with scores of 660 or better need apply. Unsecured personal loan deals are made drawing on a pool of capital set which is essentially a mutual fund operated by National Retail Fund and administered by Gemini Fund Services with Fifth Third Bank acting as custodian.

Investors can buy into the fund after studying the types of borrowers the fund is providing capital for. This is what moves the concept of social lending forward because before hand, borrowers and lenders were relatives or knew each other. In this model, the two don’t have to know each other, but investors in the fund can review the stories of borrowers and choose where they want their money to go if they want through a vehicle known as “Pertuity Bucks.”

“We’re an aggregator of borrowing and lending, essentially a community for borrowers,” Lisa Lough, senior vice president of marketing for Pertuity, told me.The idea for the model came from Pertuity CEO Kim Muhota who developed the concept for the Vienna, Va.-based firm four years ago.

If a borrower defaults, Pertuity goes through the usual steps in trying to get payments, including using collection agencies. But since the borrowers must have high credit scores, the chances of ending up with deadbeats are limited, Lough says.

In fact, the model has two tiers for borrowers. One is for people with FICO scores of 660 or better and the second is for people with 720 or better. Naturally, borowers in the latter category can get better interest rates, which typically can run from about 8.9 perent to nearly 18 percent. Although no information that can clearly identify a borrower will be used, the borrower can give statements of what he or she needs the money for so investors can see who their market is.

Investors in the mutual fund will probably get yields of about 10 percent, says Andrew Rogers, chairman of National Retail Funds. If a borrower does default, the loss is spread around to investors in the form of lower yields. Regulators include the Federal Trade Commission and various state banking agenices.

A reason why the idea is an advance is that so many middlemen are eliminated. There won’t be big costs for marketing, advertisements, battalions of back office staffers and a complex of global services that megabanks found so enticing some years ago. It remains to be seen if the social lending concept can be taken from its fundamental level to something higher that uses mutual funds. But as much of the financial service structure melt downs, new schemes and delivery systems such as this one are rising up and that’s a good sign.