Sid's Blog of Doom :: Comments

Post a comment, and fuel my narcissism!

Sunday, 6 May 2007 at 20.32 / 105

Stay away from Prosper —

If you're not familiar with Prosper, it's like Ebay-style peer-to-peer lending. People who want to borrow money post listings containing how much they want, how much interest they're willing to pay, their freeform story, and Prosper adds in a summary of their credit data from Experian. Lenders can bid for as little as $50 of a loan. If enough lenders bid, the loan listing will turn into a loan. As more lenders bid, the interest rate can then go down, reverse auction style. You can read all of the gory mechanics of the process on their web site.

I have been lending on Prosper for nearly a year, but it is my opinion that the time has come to stop. Like most lenders, I treat Prosper as an investment, and I can't see how to make money on the site in the wake of several things that have been going on over the past couple months. I'll just list them off in more or less random order.

Borrower quality is WAY down. I don't know why this is, but over the past two months, it has been very hard to find listings which I think are good risks. The reverse side of this coin is that there is a lot more lender money in the system than there are profitable borrowers to take it. This drives the rates down and makes it hard to beat the future defaults and risk-free rates on Treasury securities, and you need to make a high rate to beat the defaults because a lot of the borrowers are subprime. (My average rate is 15%, which will be somewhere between 5% and 10% in three years after the defaults have played out.)
Unprofessional actions from Prosper employees. Prosper used to display the city and state of borrowers, but they recently removed the city and now display only the state, ostensibly for reasons of privacy. Prosper's response to one lender dissatisfied about the change was basically `what part of privacy do you not understand?' Additionally, I'm sorry, but if you're a random person on the Internet and you want me to loan you my money, you are going to have to give up a little bit of your privacy to induce me to do that. (Lenders are already contractually prohibited from contacting a borrower in any way after a loan has originated.)
Stupid community alienation. They did a global search and replace on all group names to replace `Prosper' with `-------.' They also performed a number of kneejerk forum access suspensions a few weeks ago.
Groups are a failure. The idea is you join a group with which you have some personal connection, and this is supposed to lower your interest rate because the group leader can vouch for you and lean on you if you don't make your payments. Unfortunately, groups have no teeth due to contractual and regulatory prohibitions, and Prosper caters to megagroups who scam the system to exploit the rewards payments that group leaders get. Group leaders are also basically prohibited from obtaining any information on prospective borrowers to evaluate their creditworthiness.
Poor treatment of the self-employed. Prosper's verification department told one self-employed guy they were going to need to see a big stack of personal and business documentation within two days or else his funded listing would be cancelled and he would be permanently banned from Prosper. He called to complain, and they told him he now needed to throw in two years of his business's balance sheets, too.
Not much fraud detection. Prosper guarantees against identity theft, but fraud is the responsibility of the lender. Unfortunately, everybody is supposed to be anonymous, so how can you investigate the veracity of anything? The frauds that have been uncovered by the board warriors have generally come out because the veil of Internet anonymity was pierced through information revealed in the listing.
Poor conversion on collections. Loans that are one month late are sent to a collection agency, but those agencies stand to make so little money that they can't afford to do much to collect. There are no suits being filed, no garnishments, no liens, nothing.
Junk debt sits and rots. Loans are supposed to be sold to junk debt buyers sometime after going three months late. There has been only one junk debt sale in the history of Prosper, and there are loans that are TEN MONTHS late at this point which still have not yet been sold. While that paper might have been worth something seven months ago when it was still fresh, today it's probably next to worthless if not a total write-off.
Prosper misrepresents default rates in the media. Prosper founder Chris Larsen was reported to have said that on 1 April 2007, the default rate (120 days past due) was about 0.5%. Fortunately, the real data are available on Prosper's web site. If you roll the clock back to that date, you'll see that while indeed 0.5% of loans (by money) had been declared defaulted, another 4.6% were three or more months late and would count as defaults if only they had been sold. That's a wrong by a factor of ten.
Glacial development. The site today pretty much is the site I started lending on a year ago; nearly nothing has changed. They changed the layout and have added some more statistics and credit information. They did a massive revamp of the per-state interest rate caps. (This presumably means they had been violating various state usury laws for some time in spite of their attempts at compliance.) No secondary market. Little progress on getting interest rate caps raised.

Anyway, that's all I want to take time to list out. Needless to day, I quickly moved from stopping further transfers in to stopping further lending. I'm now transferring money out whilst I await the US launch of Zopa, who have been doing a similar but different kind of prime lending in the UK for the past two years and should be going live in the US within a few months.

Add a comment!

Keep your comments clean and on topic. Inappropriate comments will be edited, censored, or deleted.

This form is not accessible due to spam protection. If you cannot use the form below and wish to post a comment, feel free to e-mail me, and I will post it for you.

Comments are owned by their respective authors.

Name:
E-mail:
Format:	text HTML
Human Verification:	Enter the text on the right. Why?