Monday, March 31, 2008

Is there a difference...

In Prosper's old Lender Agreement, the "things" I as a "lender" bought were called "loans." Now in the new agreements, they are called "notes."

Loans, according to the banking dictionary at are:

Money advanced to a borrower, to be repaid at a later date, usually with interest. Legally, a loan is a contract between a buyer (the borrower) and a seller (the lender), enforceable under the Uniform Commercial Code in most states. The terms and conditions for repayment of a loan, including the finance charge or interest rate, are specified in a loan agreement.

A "note," on the other hand, is not defined. In the preamble to the Lender's agreement, Prosper says this:

Note: Your role as a Prosper "Lender" is that of a loan purchaser, and your rights and obligations as a purchaser or prospective purchaser of Prosper loans are set forth below. Although you are referred to in this Agreement and 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 representing loans made by Prosper to borrowers. All loans originated through Prosper are made to borrowers by Prosper Marketplace, Inc. from its own funds, and then sold and assigned by Prosper to the winning bidder or bidders on the listing without recourse to Prosper. Prosper is the originating lender for licensing and regulatory reasons and is licensed in all states where licensing is required given Prosper's current lending criteria, which may change from time to time in its discretion. Prosper uses the term "Lender" instead of "loan purchaser" for the sake of brevity and simplicity.

Bolding is mine.

So what is a "promissory note?" Well, according to the same dictionary at, it is a:

Written promise to pay, frequently used in installment loans and commercial loans. A promissory note is the legal evidence of a debt, a promissory note may be transferred to a third party as a Negotiable Instrument.

So, what's missing between the two terms? Maybe it is an oversight in the dictionary (you can't always trust sites on the Internet), but the most significant part that is missing is the enforceability under the Uniform Commercial Code (UCC).

That's pretty significant. The UCC, according to is a:
Standardized set of business laws that has been adopted by most states. The Uniform Commercial Code governs a wide range of transactions including borrowing, contracts, and many other everyday business practices. It is useful because it standardizes practices from state to state.

So without the umbrella protection of the UCC, are we at the mercy of the laws and regulations of the individual states?

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