Prosper.com hired Doug Fuller to lead "operations" some time around mid September. He's been there 90 days, so we're gonna take a look at how one of Prosper's biggest problems - collections - is doing under Doug's rule. Summary: Improving, but slowly.
You might think its strange to discuss an individual employee. A bit of history may make that more understandable. In the beginning, Prosper thought of themselves as the E-bay of loans. They built an incredible web-based infrastructure to match lenders with borrowers and process payments. Unfortunately, they didn't think enough about the loan business. Not enough attention was paid to loan "operations", identity verification, fraud checks, ensuring valid contact information, handling various payment situations, customer service, and collection of late payments. Prosper may look like E-bay on the outside, but inside a lot of machinery is needed to make the loan business work. They got off to a bad start with that machinery, and how quickly they recover may well determine the future of Prosper.
Example: a year ago, when I first started writing about these problems, the cure rate (the fraction of loans that recovered after going 1 month late) was only 7%. In other words, once a loan went late, you could pretty much write it off. And about 20% of prosper loans per year went 1 month late. The resulting huge default rate discouraged many early lenders, and threatened the future of Prosper and P2P lending. In addition, many lenders were angered by how slowly Prosper took visible steps to fix these problems.
Operations is important. Its the core of the business.
So it was an important event when Prosper two years after it started Prosper openly recognized the importance of loan operations by hiring a VP of Operations, Doug Fuller.
When Doug arrived, he promised a hard line on collections. Its been 90 days. Lender's money is at stake. How's he doin'?
Lets look at the history of Prosper's cure rate, that is the fraction of 1-month-late loans that are eventually broght current. (The rest of them go on to default.)
Good news: getting better all the time. Bad news: Not good enough yet.
As often occurs, there are some technical problems with interpretation of this data. The statistic I'm plotting above is the fraction of all loans (over the entire history of Prosper) that have cured while at the collection agency Penncro. In other words, an average over all time. This statistic is weighted down by a lot of old loans that have already defaulted or nearly so. I'd really like to have data showing collections performance on recent loans. Because this average moves up with time, we know that performance on recent loans must be significantly better than the average. But how much better?
Looking at the chart, you'll note that it looks like there's a little "bend" in the curve two months ago around the end of October. Doug Fuller arrived around mid-September, so I'm gonna call the end of October change the "Doug Fuller bend". I don't know that this change came from his efforts, but is seems a resonable possibliity. Things are better, but how much better? ...and what changes has Doug made to cause this improvement?
Besides this "lifetime" statistic, Prosper also provides a "last 3 months" statistic. At first I thought great, that's the thing I should use. The first thing I noticed was that the "last 3 months" numbers are lower than the "lfetime" stats. We know that recent collections performance is better than in the past, so this didn't make sense. I contacted Prosper for clarification. They told me that "last 3 months" doesn't mean loans that have entered the collections process within the last 3 months, as I had presumed. It means all loans that were in work at Penncro at any time during the last 3 months. Suddenly it became obvious why the "last 3 months" numbers are low. They are weighted down by all the bad loans that are stuck in collections, sitting around Penncro, 4 months, 5 months, 6 months, 7 months, etc late just waiting to be sold off. Its a roach motel statistic! That's too difficult to interpret. At least the "lifetime" statistic is unbiased. It contains every loan that has gone to collections exactly once, so the relative weightings of good and bad loans is exactly the relative weighting of same that arrived at collections.
I returned to the "lifetime" statistics. But I really wanted to get a quantitative measure of what fraction of recent loans are getting cured. Starting 10/30/07, in addition to copying the % cured from Prosper's web page each day, I also copied the # of loans in collections. Now that I have this data for 2 months, I can calculate the number of loans that were added to collections during this period and the number of loans that recovered. If I assume that all the loans that recovered were loans that were sent to collections during this period, I can calculate the cure rate that would be required to produce the numbers Prosper gives us. I'll spare you the equations. The number comes out 23.6% .
Now that number is almost surely on the high side, as it presumes that all loans recently cured were recently sent to collections. There were almost surely a few old ones that cured as well. Now we have bounds. The cure rate on recently-gone-late loans is between 15.65% and 23.6%. Its probably around 20%. That's a lot better, but it still means that about 80% of loans that go 1 month late will go on to default. That's still not very good.
We don't know what actions caused these improvments in collections performance. Several times Prosper employees have told me that low contact rates were a big problem. In other words, when the collection agency tried to contact the borrower, a large fraction of the time they would find that the phone numbers and addresses didn't work. Scary. We know that Prosper implemented phone checks and address verification post cards to help with this problem. We don't really know much, because they've been tight-lipped about both their understanding of the problems and ongoing improvements.
Seems to me that if address verification post cards helped, then fraud of some sort was a big problem, because it seems to me that this is the only problem an address verification card can fix. After all, Prosper already used Experian's database to check addresses given by borrowers. If the address matches the name in Experian's database, but the postcard fails, then the name and address matched, but the actual borrower doesn't live there. That's fraud, yet Prosper denies that identiy fraud has been significant. Curious. We just don't know, because Prosper hasn't shared with us any details of the ongoing battle against fraud, or even against nonfraudulent bad addresses and phone numbers.
In a traditional loan company it makes sense to keep this sort of info private, but Prosper isn't a traditional loan company. Because of the poor performance of Prosper's loans, there's a crisis of confidence. To fix that one would need to be more open, but Prosper's relationship with lenders has becme much less open during the last few months. In some cases Prosper has become downright hostile.
I tried to communicate with Doug Fuller once. Sent him an email message. I got back a response from Prosper's Shira Levine, saying that Doug had received my message. I have never had that happen anywhere before. I haven't tried to talk with him since. (If you've had better luck, let me know.)
Prosper began with an incredible philosophy of openness. Who else ever made public the incredible amount of information about loans that Prosper does? Nobody. Somehow things took a turn. It will be impossible to restore lender confidence without openness. That's my advice.
Doug Fuller did say in his 10/2/07 "interview" that there was a "40% increase" in contact rates during September 07. Doug Fuller Interview He said this improvement came from getting Penncro to start their autodialer at different times of day. How could the prior management of collections be so dumb as to dial at the same time every day? Its not like they didn't know collections was an important issue. We told 'em so, and they said they agreed.
In the early days of Prosper, lenders used to debate the causes of the high default rate and low collections cure rate. Some felt that there were just a lot of bad loans, either due to fraud or lender stupidity. Others believed that the collections effort was inept. Maybe it was (or is) all of the above. How are these things changing? How can we regain our confidence if we don't know?
My apologies. This discussion has run downhill. I started with numbers and have descended to speculation about tidbits that have escaped from the perimeter of the castle. To some this speculation may seem rude, but remember these are our loans. The lenders own them. Prosper merely originates and services them for our benefit.
- Collections is indeed improving, but very slowly
- The drawbridge is up; little information about collections is being shared
- Doug Fuller might be improving things if the little bend is for real
- Wish he were more open