When is a Loan not a Loan?

[Guest]

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[AccountAbility]

While the Advanta Kiva Credit Card is so far the only place where someone has come right out and said so, the current Terms of Use (Found at the bottom of each page on Kiva) undercut the concept that any of our "loans" are indeed loans.  Among other things the terms say:

"You hereby acknowledge and agree that neither Kiva, its Field Partner(s) nor the Borrower(s) will be obligated or pay you any principal (other than to the extent actually received by Kiva from a Field Partner with respect to such Borrower) interest or other fees or amounts to you or any other Lender in connection with any Loan you make."

There are only three (3) parties who might be obligated for the loan: Kiva, The MFI Field Partner, or the Borrower.  The Terms currently say none of them are obligated.

No obligation, no loan.  That has led Advanta to call them "Grants".

I suggest removing the Borrowers from the highlighted sentence above, thereby leaving an obligation intact. 

However, to avoid having some lender pursuing a borrower over a defaulted loan, I also suggest that the Terms should specify that each Lender delegates to Kiva and the MFI Field Partner, as the Lender's agent, the exclusive right to determine and declare a loan in default and to be written off.

The current language leaves cautious potential "lenders" on the sidelines and careful but already committed "lenders" reluctant to increase their portfolios.

Dan

[RichardF]

Dan, based on my proprietary P2P rating system, I give Kiva 2 1/2 stars out of five.  Using www.prosper.com as one of their benchmark organizations on financial transparency, Kiva just doesn't measure up. 

An example from Prosper follows.  By analogy, the "borrowers" of Kiva Lenders' money are the Field Partners, not the entrepreneurs.  Apparently, we are not purchasing promissory notes from anyone.


Prosper - Legal Compliance

The Prosper marketplace is a person-to-person online credit auction platform operated by Prosper Marketplace, Inc. ("Prosper"). Prosper handles the registration of borrowers, lenders and group leaders; the receipt, display and matching of listings and bids for loans; and the origination, sale, servicing and collection of principal and interest and other charges payable on loans.

All loans originated through the Prosper marketplace are made by WebBank, a Utah-chartered Industrial Bank. Prosper provides services to WebBank in connection with the origination of such loans and Prosper services loans made to Prosper borrowers on behalf of registered Prosper lenders who purchase such loans.

All loans are fixed rate, unsecured, 3-year, fully amortizing with simple interest. All loans are obligations of individual borrowers and not of corporations or businesses. Borrowers who obtain a loan to be used for business purposes, are personally obligated to repay the loan, regardless of the success or failure of the business for which the loan may be used.

Lender Requirements

Your role as a Prosper "Lender" is that of a loan purchaser. Although you are referred to on the Prosper website as a "Lender," you are not actually lending your money directly to Prosper borrowers, but are, instead, making loan purchase commitments and purchasing promissory notes from Prosper, representing loans made by WebBank, a Utah-chartered Industrial Bank to borrowers and subsequently assigned to Prosper.

A bid by a Lender is the Lender's commitment to purchase a promissory note in the principal amount of the Lender's bid, should the listing receive an amount of bids totaling the amount of the Borrower's requested loan.

Your rights and obligations as a Prosper Lender are set forth in the Lender Registration Agreement.

Loans and returns on loans are not FDIC-insured and have no Prosper guarantee. Loans may lose value.


"No guarantee" and "not obligated" certainly don't convey the same meaning in terms of legal responsibility.   Maybe I should take off another half-star.

[Dagfinn]

I think it slowly is getting to me that I place a lot of trust in Kiva for the thousands od USD I place in their care.  Maybe it is about time that Kiva had some kind of advisroy board elected from the lenders that had some mandate to oversee theor operation is reasonably fair and balanced.

What I specifically think of is whether Kiva actually have an obligation to pay me as a lender for funds actually paid back from the entrepenours or should I say MFI's to be correct?

I am not used to all this legalese but reading up on what you guys find out I am surpirsed to the level of non committal on Kiva's side.

I hope someone can straighten me out on this

Thank you for taking the trouble getting the facts, Dagfinn A.

[AccountAbility]

Richard - I appreciate you showing a comparison set of provisions.  Prosper apparently has concluded that their "instruments" must comply with banking and/or investment requirements.  I think Kiva is still attempting to stay outside of that arena, hence some of the language. 

The question remains unanswered as to whether Kiva can walk the tightrope between calling them "loans" while staying outside those regulatory environments. 

The average "lender" thinks of them as loans as that term is normally construed. 
But as we see from the comments on delinquent or defaulted loans, many seem to put these closer to "grants" that they really are quite willing to walk away from in a charitable way.

Dan
P.S. Dagfinn, I think the language is clear that if Kiva gets the repayment, then Kiva has an obligation to the lender to eventually pass that amount on.

[wthepoo]

What I specifically think of is whether Kiva actually have an obligation to pay me as a lender for funds actually paid back from the entrepenours or should I say MFI's to be correct?

Yes, definitely. Kiva is under an obligation to repay any actually recovered sum in full to its lenders.

It's still true that we put a lot of trust in Kiva - because
(1) we take their word that they will (and do) transfer our funds to the MFIs,
(2) the money paid to Kiva is potentially at risk from the moment it reaches Kiva's account to the moment the lender actually withdraws it, again; this risk refers to possible bankruptcy (it's hard to tell - especially for a German lawyer - if the funds under US law would be protected as some kind of fiduciary deposits; under German law they would probably be at risk) or - even though highly unlikely - embezzlement or similar crimes,
(3) Kiva decides how to deal with delinquent MFIs; Kiva's declaration of default seems to free them of any obligation to attempt further collection.

Kiva is the truly "weak link" because there is no space for diversification or any due diligence on our part, there.
Sounds very bad, I know - but I guess that's the way it is and that lenders should know to evaluate their risk.

I am perfectly willing to take the risks (1) and (2) because I do trust Kiva and their mission and also because as far as I understand it Kiva should have relatively few obligations to non-lenders so that in case of bankruptcy the scope of external liabilities should be very limited. I am not so happy with risk (3), though - but since that risk seems to be rather small and neglectable for the time being, I will go ahead.

Best wishes,
Wolfgang.

[AccountAbility]

Yes, definitely. Kiva is under an obligation to repay any actually recovered sum in full to its lenders.

It's still true that we put a lot of trust in Kiva -....
Kiva is the truly "weak link" because there is no space for diversification or any due diligence on our part, there.
Sounds very bad, I know - but I guess that's the way it is and that lenders should know to evaluate their risk.

Best wishes,
Wolfgang.

I don't know if I would agree that Kiva is the weak link, though.  The pipeline consists of Kiva, the MFI Field Partner and the borrower.  From the outset we know that this isn't AAA rated stuff.  We are exploring a financial world that most established banking outfits wouldn't touch.  Yunus proved that poor borrowers are highly likely to repay such loans.  But as we have seen, there are many impediments beyond the control of the poor which can put the funds at risk.

Dan

[Henry]

I don't know if I would agree that Kiva is the weak link, though. Dan

not saying they were the weak link....  just a big dissapointment is in my heart at the moment regarding this.

My feelings - cause I have them ... is when an MFI goes south like recent on a bunch of loans- KIVA should bear some responsibility and accept some because apparently some policy and procedures for 'helping' safeguard our Money are not in place, or were not being followed.  If KIVA does not have any procedures in place that attempt to 'safeguard' our loans - then that's my fault because I assumed they would.

 
Henry - who has capped his personal KIVA account due to being afraid now.  I only 'give' money away to local charities and the occasional need elsewhere.

[wthepoo]

True, Dan, thank you for correcting my overly bold statement.

I did not mean "weak" as particularly prone to (de-)fault but rather as: If something happened there, the impact could be huge - and we have little means to reduce the risk (whereas with MFIs and borrowers we can choose from a range of offers) or to control or even evaluate it. "Weak link" was a wrong metaphor, I agree.

Take care,
Wolfgang.

[RichardF]

Dan, I agree Prosper has crossed some lending line in the sand Kiva hasn't.  I expect that's why Prosper appears (is obligated) to offer more explicit protections to its "lenders" compared to what Kiva does.

[Soriak]

Prosper is a for-profit company and its lenders use the service as a way to invest money. They try to be an alternative to other types of investment, hence they have to meet a much higher standard. Not that there aren't a lot of sites complaining about the conduct and policies. Kiva isn't an alternative to your 401(k) (if in the US) or some other investment portfolio, but rather an alternative to donating $50 to some charity.

As long as we trust that the entrepreneurs on the site are real and that they are being helped, that's really all I need. That's the reason we're here after all, and why Kiva is around. Other charitable giving is gone the second the money is transferred, never to be heard from again. Just knowing that the money we loan isn't used on administrative expenses is a big plus in my view.