IRA Investors Can Make Peer-to-Peer Loans Through Prosper, Millennium Trust

Using IRAs to finance loans provides tax benefits for lenders, Prosper says

Investors who want to use their self-directed IRAs to invest in peer-to-peer loans through Prosper can use Millennium Trust Co. to custody those accounts, the company announced Thursday.

Investors can use IRA funds custodied with Millennium Trust to finance consumers’ loans and collect interest.

“We are an exchange for credit where people with cash and people with debt can meet,” Ron Suber, president of Prosper Marketplace, told ThinkAdvisor on Monday. “We’ve chosen Millennium Trust to be the IRA custodian to those lenders with cash that have IRA accounts that would like to make loans or investments in the borrowers’ debt.”

Suber said the decision to use Millennium Trust as the custodian was based on their “commitment to customer service and quality and very thorough documentation in a reasonable amount of time.”

Reggie Karas, managing director of the alternative solutions group at Millennium Trust, noted the firm has extensive expertise in that industry. “Self-directed IRAs are Millennium’s specialty,” she said on Monday. “We specialize in the custody of alternatives of all different asset classes; however, one of the things that we bring to the table is very early on we entered into the custody of electronic notes and loans. We have been working in that space for quite a while. We spent an awful lot of time learning and understanding the space and the business and the investors, both on the individual and the institutional side.”

IRAs are a popular way to fund these kinds of loans, Suber said. “The main reason is the income that the lender, or the investor, receives is ordinary income. By using retirement money, IRA money, that income that we report on the 1099 in an IRA structure is deferred income, and you don’t have to pay taxes every year. The return for IRA money is essentially much higher than taxable money.”

“For a lot of people, especially when we move to the institutional side, it’s a huge pool of investment funds that they have available to them, so the IRA makes a lot of sense,” Karas added.

Prosper originated $77 million in loans in March, and by mid-April, will have originated $1 billion, according to Suber. “The interest from borrowers is rapidly accelerating, given their increased awareness that there is a new source and a new exchange for credit, where they can refinance at a fixed rate and a lower rate, backed by people and not just banks.”

Historically, borrowers have had to choose between banks and credit cards, friends and family for loans, Suber said. Now they have a fourth source of potential funding that they can receive quickly — funds will arrive in a borrower’s checking account within three or four days, Suber said — easily and from the comfort of their own home.

There are three main kinds of loans investors can finance. “The first is that debt-consolidation borrower who has credit card debt and wants a lower rate with a fixed rate and a fixed term,” Suber said.  “The second kind of borrower is the person who wants to buy something: An example might be home improvement or vacation, or some other special occasion, or a motorcycle or second car. That type of borrower is now actively coming to us. The third type of borrow is a person with good credit, a minimum 640 FICO, who has a small business and isn’t getting a business loan or the bank wants a personal guarantee or collateral.”

Suber said of the partnership with Millennium Trust, “Our clients have been very, very happy. We’ve had a lot of new business based on the partnership and the announcement.”

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