Prosper.com - new prospectus good, but...

The new prospectus that prosper.com filed with the SEC recently (12/5/08) will be approved. It is well written and covers all the bases. The only thing that will hold it up is the ordinary inclination of any regulator to look very very carefully at anything that follows a legal brouhaha.

As I predicted, they dumped the lawyers who wrote the first prospectus a year ago. The new prospectus is authored by a completely new legal team.

As I predicted, they've adoped a business model where the instruments sold to investors are obligations of prosper itself, ie derivatives whose payments are based on the payments (or lack thereof) on the underlying consumer loan. In other words, they copied Lendingclub.

The new prospectus is very thorough. Because the new instruments will be obligations of Prosper, all Prosper's financial detail is in the prospectus. Exactly the same stuff you'd see in a prospectus for a company that was issuing an IPO of common stock. How much cash they have, how fast they're burnin' it, salaries... a voyeur's paradise.

By the way, the filing is actually 6 documents. Serious investors should try to read at least the first two of these. Won't be easy. Nearly 4 megabytes of text here.

1. The Prospectus (S1)
   
2. The Indenture
   
3. Borrower Registration Agreement
   
4. Lender Registration Agreement
   
5. WebBank/Prosper Loan Account Agreement
   
6. WebBank/Prosper Loan Sale Agreement
   

I know you're probably thinkin' hey some of that stuff used to just be on the web site. Now its part of a prospectus? Exactly. We're moving into the regulated world. Prosper's statements about these investments are now cast in concrete (in the SEC's vault), instead of appearing only in fluid web documents changable at a whim, tracked only by a few lenders who frantically archived copies as unannounced changes whizzed by. Sometimes regulation is a good thing.

While this new prospectus probably satisfies all the SEC issues, it does damn little for lenders. The fundamental problems remain. I'll give you a few examples.

We all know that Prosper's lame efforts at collections are a very serious problem. I described it as a symptom of the more general "principal/agent" problem in my ancient open letter to prosper. Have they made any effort to do something about this? No. In fact, they have instead institutionalized the idea that doing almost nothing is ok, by explicitly saying in the S1 that they will do almost nothing!

We are obligated to use commercially reasonable efforts to service and collect the borrower loans, in good faith, accurately and in accordance with industry standards customary for servicing loans such as the borrower loans.

"We are obligated" .. I like that start. But what are those "commercially reasonable efforts" exactly? Don't have to wonder long. They define it pronto.

If we refer a delinquent borrower loan to a collection agency on or after the 31st day of its delinquency, that referral shall be deemed to constitute commercially reasonable servicing and collection efforts.

Whoa! Just the act of sending the loan to a collection agency satisfies their entire obligation with regard to collections! How conveeeenient. (Quarterbacks around the world rejoice! You can now just throw, without worrying about whether anyone receives!) Prosper explicitly takes no responsibility for selecting, checking up on, managing the collection agency, helping them, providing them with good information, or otherwise ensuring that anything at all is actually done. I imagine this cross-examination at some time in the future:

Lawyer: So after sending the package of loans, to the collection agency, you didn't check up to see if it had been received?

Prosper guy: Nope.

Lawyer: You didn't check to see whether the collection agency was working on them?

Prosper guy: Nope.

Lawyer: You didn't know that AmSher had ceased collection operations and become a beauty salon?

Prosper guy: Nope.

Lawyer: And were your actions in this matter reasonable?

Prosper guy: "Hey, we referred that loan to a collection agency. If they didn't do anything, like they didn't call the borrower or anything, hey that's not our fault. We satisfied our obligation as specified in the prospectus."

That's really weak.

Prosper is continuing their longstanding policy of shirking responsibility for the management and servicing of these loans. In one way, the new scheme is worse for lenders. Under the old prosper scheme, lenders owned the loans, so we could argue that prosper, our servicing agent, had a responsibility to us to service those loans competently. Under the new scheme, prosper owns the loans. Its more indirect. Lender's rights are more tenuous. It will be more difficult for lenders to force prosper to act appropriately.

But wait, there's more. Lenders have been concerned about the quality of Prosper's checks of borrower's identity and income since the beginning. In the prospectus, for the first time, prosper gives us some numbers:

For example between September 1, 2007 and August 31, 2008, we verified employment and income for only approximately 22.6% of borrowers. When we perform these verifications, we contact borrowers by email or telephone to request additional information.

If the borrowers fail to provide satisfactory information in response to an income or employment verification inquiry, we may request additional information from the borrowers or cancel the borrower’s listing or refuse to proceed with the funding of the borrower loan.

Of the borrowers undergoing income verification for the period from September 1, 2007 to August 31, 2008:

• approximately 56.7% provided us with satisfactory responses and received a borrower loan;
  
• approximately 37.7% did not provide satisfactory responses, or did not respond, and their listings were canceled; and
  
• approximately 5.9% either withdrew their listings, or failed to receive bids totaling the amount of their requested loan.

Oh my. Depending on how you count that last category, something between 1/3 and 1/2 of borrowers failed income and employment verification! That's an awfully high proportion of liars. Of course this is only within the sample of 22.6% of borrowers who Prosper challenged.

We don't know what the results would have been if Prosper had verified income and employment on the remaining 77.4% of borrowers, but the numbers above give us reason to be concerned.

I tried to write an explanation of how to think about these numbers, but I decided that I had used too many words. Prosper member DakotahFury said it well in a recent discussion:

Holy crap...that is an astonishing, shocking, and infuriating figure.
If you were a factory manager, and 45% of the products you QC'd were faulty... how could you justify NOT checking every single product that went out the door? Heck, how could you justify not shutting down the line and looking for ways to structurally change the way you were going about business?

Indeed. It only takes a small percentage of bad loans to sour the mix.

There are lots more tidbits in there for careful readers. I want to hit just one more.

In the prospectus prosper discusses the legal black cloud (contingent liability they call it) associated with the sale of loans while Prosper was operating without SEC registration. There have been many forum discussions in which prosper members speculate that this could mean the end of Prosper. The liability after all seems huge. I don't think so.

Prosper issued $178M of loans prior to registration. Of these there have been $22.3M net chargeoffs. You can imagine some sort of worst case where class action suits might force Prosper to pay back lenders for all the loans that went bad. That $22.3M looks big relative to the approximately $10M Prosper has in the bank. This is too simple a model.

First, $22.3M isn't a worst case at all. If you look at my late loan curves, you can see that Prosper loans are headed toward about 40% of the loans eventually going bad. 40% of $178M is $71M. A super horrible number.

But then there's a one year statute of limitations. The first class action suit was filed 11/26, and if we look at loans originated in the one year prior to that, we find $77.3M of loans. If my prediction is right, about 40% of those may go bad. 40% of $77.3M is $31M. Well that's sounding less bad. There are situations where lawyers could argue that the statute of limitations should not apply, and these issues are complex and beyond my understanding, so who knows if the lawyers can limit the damage in this way.

But lets use that $31M number. It looks large relative to Prosper's cash in the bank, but that's not the right comparison.

Even if Prosper didn't have this risk, they'd need to raise money before the end of 2009. That's easily calculated from numbers in the prospectus. You might think it would be hard to raise money in their present pickle, and indeed be difficult to raise money for a business that is shut down, but Prosper isn't gonna stay shut down.

I predict that the prospectus will be approved, perhaps with minor modifications, and Prosper will be back running within a few months.

Because Prosper will need cash before the end of 2009 they will do another funding round with VCs. The VCs will invest, because they still believe in the concept. Most opportunities they see haven't built a membership of 800,000 people! It is likely that this will be a "down round", where VCs get shares at a price lower than their last investment, thus substantially diluting the founders. Lets say Prosper gets another $20M. (It might be structured to come in in small chunks, or some other magic which prevents Prosper from looking juicy to the plaintiff's lawyer.)

The class action suit will drag on for at least 2 years, unless Prosper takes initiative to settle it sooner.

In the meantime, Prosper will grow its business, and get itself on the road toward an IPO.

Getting ready for an IPO is hard work involving a lot of accountants and lawyers, but in Prosper's strange case, the accounting and legal work is already done. It had to be done to write the prospectus for "borrower payment dependant notes" that they have just filed. You could cut and paste from that baby, and do an IPO any time you like. ...except for the fact that a shut-down business is not the best candidate, and the fact that the stock market isn't in the mood.

One to two years from now all that will have changed.

If the class action suit proceeds, it will settle for 20% of the $31M of bad loans that get in under the statute of limitations wire, ie $6M. The money will likely come from VCs. (It is also possible that the IPO money could be used to pay the damages, but this is risky, because sight of IPO money would make the plaintiff's lawyer salivate.)

The stock market will recover. Prosper will do an IPO.

I should also mention that there will be a 34% chance of rain tomorrow, diminishing into the evening, with a slight chance of thunderstorms during the early morning hours.

Might be fun to sit in the board meetings, just to hear what the VCs think about all of this .

Prosper.com - 12/01/08 late loan stats update

Here's the December 1, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

The best discussion among prosper.com lenders is found at http://www.prospers.org/

Prosper.com - More legal trouble

Many legal developments for prosper.com in the last 48 hours. New lawsuits. New settlements. All are being reported elsewhere. I'll summarize the major links here for completeness.

An association of state securities regulators called NASAA has piled on, and Prosper has settled with them for $1M: NASAA Settlement (Although the name is similar, I don't think these are the same guys who do the space shuttle.)

A new class action suit has been filed against Prosper.com. The complaint has now become public: Prosper Class Action Complaint

A new blog has appeared, which seems intended to keep us up-to-date on that class action suit: Prosper Class Action Blog

A dumbfounded lawyer blogs about Prosper.com: What were they thinking?

With the legal front so well covered, I can now move on to more interesting subjects !

Prosper.com - SEC Cease & Desist Order

Well... As I predicted in my last writeup, the SEC has found Prosper.com to be in violation of the securities act of 1933. The SEC made this finding public yesterday.

The SEC's public statement can be found here:
SEC Prosper Cease & Desist Order

This SEC release explains why prosper.com has ceased operation.

From the SEC Order. . .
The loan notes issued by Prosper pursuant to this platform are securities and Prosper, from approximately January 2006 through October 14, 2008, violated Sections 5(a) and (c) of the Securities Act, which prohibit the offer or sale of securities without an effective registration statement or a valid exemption from registration.

The details are a fun read, and cover much of the territory that has been discussed here in the past.

Prosper.com - quiet period my ass

It has now been more than one year since Prosper.com's ill-fated SEC filing which attempted to create a secondary market, and apparently failed. In the meantime, Lendingclub filed, got approval, and began operating such a market. Prosper at the very least has lost its first mover advantage.

What happened? And what the hell is this thing they're calling a "quiet period"?

On 10/30/2007, a little more than a year ago, Prosper.com filed a prospectus with the SEC to allow them to sell "notes" from one lender to another. This is what Prosper calls the "resale market". I remember reading the prospectus at the time and thinking how strange it was. If these things are securities, requiring SEC registration when they're traded from one lender to another, then why aren't they securities requiring SEC registration when they're sold to the first lender? And if they are (illegal) unregistered securities when sold to the first lender, then Prosper.com has been selling illegal unregistered securities to thousands of lenders for two years. It seems likely that the SEC had similar concerns, because the prospectus was never approved. It could not possibly be approved now, because there have been material changes since it was written (Co-founder John Witchel left Prosper for example). Prosper's year-old filing therefore is dead. Can't be approved as is. They would need to file again.

For background on selling unregistered securities...
http://invest-faq.com/cbc/warn-unreg-secur.html

In the time since Prosper filed, Lendingclub came along and did the same thing. Lendingclub filed with the SEC on 06/20/08, and was approved on 10/14/08, just 116 days later.

So what's the hangup with Prosper.com?

If you read the prospectuses filed by Prosper.com and Lendingclub, you will see that they are quite different. Lendingclub admitted up front that the thing they are selling lenders is a derivative. It is an obligation of Lendingclub, which pays amounts that depend on what borrowers pay to Lendingclub. This is a pretty standard sort of thing, which the SEC has approved many times. Lendingclub structured the thing so that the SEC could easily recognize this as a kind of thing it had approved before. There existed a precedent.

From the LendingClub prospectus: "The Notes will be unsecured special, limited obligations of Lending Club."

From the Prosper.com prospectus: "The Notes represent unsecured fully-amortizing credit obligations of individual Borrowers on the Platform." and later "All Notes issued on the Platform are unsecured credit obligations of individual Borrowers."

So while Lendingclub admitted to creating derivatives, Prosper tried to step to the side and argue that the securities they were registering were actually the obligations of somebody else. This has no precedent. This is unlikely to be approved by the SEC. That I believe is one fundamental problem.

But there's another problem. If the SEC read the prospectus the way I did, they would have the same question I had about the elephant in the room. If these things Prosper sells require registration, then perhaps they require registration the first time they are sold, not just upon resale.

If the SEC believes that then Prosper is in a pickle. The securities act of 1933 considers the sale of unregistered securities a felony subject to punishment by a 5 year prison term. Its pretty much the SEC who decides what is an unregistered security. It is this consideration that gives the SEC much of its authority!

So now lets go back to the question of Prosper's "quiet period", and what the heck it means. They've called it a quiet period, but that's not what it is.

The term "quiet period" refers to a period of time around the issuance of a new stock when the issuing company is supposed to take careful precautions to avoid any appearance that they are hyping the new issue. This generally means they shouldn't give interviews hyping how great the company is, for example. It just means be quiet. It does not imply that the company should cease operation. Companies do not stop selling shoes, or refrigerators, or whatever they normally sell, during a quiet period.

Prosper has not just gone "quiet". They've stopped issuing new loans. I believe they did this because they believe they are in substantial risk of being charged by the SEC with selling unregistered securities for the last two years. We always knew there was regulatory risk associated with this new kind of business model. Well here it is.

Getting out of this pickle will require either convincing the SEC that they should go back to sleep ... everything is ok, or else filing a new prospectus and getting it approved. Until one of those two things happens, Prosper would be operating at considerable risk if they continued to sell these allegedly unregistered securities. Therefore, they had to cease.

This isn't a 'quiet period'.

Its a 'Shut the doors, turn off the lights, hide in the back, and hope the policeman won't knock down the door period'.

No one knows how long this will take. Prosper hasn't even filed yet. Prosper needs to hire a new law firm (I wish whoever wrote that last prospectus should go work for my competitor.), then write a shiny new prospectus, file it, and get it approved.

In the one month that has passed since the shutdown, I would guess that they have hired the new firm. They obviously haven't filed a new prospectus. That puts them somewhere between step 1 and 2.

When that prospectus is eventually filed, I'm betting it will say, (much like the Lendingclub prospectus does), that the notes investors purchase are obligations of Prosper.com, not obligations of the borrowers. This changes the risk profile for investors (who prosper calls lenders). When considering the purchase of an obligation of Prosper.com, we need to know something about the financial situation of Prosper.com. We need to see a balance sheet! We need to know what other obligations may be senior to ours. Will Prosper understand this and step up and do what's right in the new environment? I don't know. If I were to judge from their past "To heck with the lender" management perspective, I'd have to say no.

Derivatives such as I describe here are commonplace. Awhile back I invested in a NYSE traded floating-rate note of Daimler-Chrysler. Symbol JZD. (You can read about it at http://www.quantumonline.com/search.cfm?tickersymbol=JZD*&sopt=symbol )

Looked great, but it kept going down. Finally I realized that this is actually a derivative. It was an obligation of Lehman, who would pass thru the payments made by Daimler Chrysler, just as Lendingclub or Prosper will pass thru the payments made by borrowers. As Lehman's financial situation became less clear, these derivatives sold off. You've gotta understand the financial condition of the middleman! I was a bit naive. Now I am a bit smarter.

There could be other significant changes in the way the whole thing works too. Prosper has lost its mojo. Although they were first, they no longer act like a frontrunner.

When Lendingclub opened up with a blog full of personal finance drivel, Prosper immediately added a to their site blog full of personal finance drivel. It is as if someone at Prosper said "Oh, of course, Web 2.0, you gotta have a blog! What were we thinking?" Most recently the Prosper blog tells consumers that they should go out and borrow more, at a time when the whole world is deleveraging from the excess borrowing of the last decade. Drivel. Hey Prosper, you were a leader. You don't need to be a copycat. Personal finance drivel advice is not the answer.

I hope they don't continue with this me-to approach. For exampe, I hope they don't adopt Lendingclub's non-auction approach for setting interest rates. I think that's a disaster.

Here's some evidence that Prosper may be thinking about major changes in the platform before they reopen: Several months ago, software development slowed to a trickle.

I've written before about how back in January we were promised monthly statements on the legal-test loans. (Loans where prosper has filed suits against badly delinquent borrowers.) Its November, and no monthly statements have been produced. A lot of months have gone by.

I've written many times about the statistics on collections of late loans. I never could understand how the numbers were so bad. I've written several times about the fact that some of the numbers jumped around faster than was possible, indicating bogosity. Something was wrong, and Prosper kept ignoring it. In August, prosper admitted that the stats they'd been giving us for collection performance at Amsher were wrong, due to a bug in the software interface with Amsher. I figured they'd fix it. Instead, they simply removed the Amsher stats from their web site. August, September, October, November. Nobody fixes the bug. Nobody cares? Lenders figure this is just another sign that Prosper thinks lenders are crap, and don't deserve the data.

How can a company be run this way? It could be rationally run this way if they figured that much of the existing platform was gonna be thrown away soon.

That's just a theory of course.

I'm sure it will all be revealed at ProsperDays 2009! See 'ya there.

Lendingclub - Late Loan Stats

Lendingclub has been around for more than a year now, so I figured maybe there was finally enough data to allow one to understand the default rate behavior of Lendingclub loans. I have prepared charts of the behavior of Lendingclub loans that are similar to the ones I've been making for Prosper.

These charts show statistics for the performance of all Lendingclub.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Lendingclub's performance web page.


The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on the prosper chart. That's because the volume of loans at Lendingclub is still too low to get good stats. We can see that Oct'07 was a really horrible month. Those loans are now 1 year old, and 15% of them have gone bad! That's about as bad as prosper!

After Oct'07 they must have fixed something, because the later curves all seem to have a lower slope. We'll never know. Lets slide these curves over to a common origin, so we can visualize how common their shapes are...


Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

There is a little problem. Although the data is still quite noisy becase there aren't enough loans, we can see that various groups of loans fall between 5% and 15% bad after 1 year.

Lendingclub has given us estimates of the annual default rate for their loans. This used to be on the web site, but is now found in the prospectus. For their best grade, "A1" they predict a 0.16%/year default rate. (Yes, that's really zero point one six percent!) For their worst grade, "G5" they predict a 5.25%/year default rate.

Ideally we would gather statistics for each credit grade and compare them to these default rates that Lengingclub assumed. Unfortunately, if we split the monthly pools of loans into all the different credit grades, there would be very few loans in each group, and the stats would be horribly noisy.

What we can do however is look at all the Lendingclub loans together. If Lendingclub's numbers were right, the default rate would be something between 0.16%/year and 5.25%/year, so it might come out something like say... 2.5%. However, looking at the picture, you can see they're way off. No month is anywhere near 2.5% at the 390 day line. The curves show us that the average might be more like 8%/year. Hard to be precise with such a small amount of data.

If Lendingclub has used faulty estimates of default rate, then the interest rates on Lendingclub loans are all too low. Seems likely.

In the beginning, Prosper.com gave their lenders default rate estimates that came from Experian (their data supplier), showing their experience with a large number of credit card accounts. Many lenders initially used those estimates to determine the rates they bid. Unfortunately, actual Prosper loans turned out to behave very differently than the Experian credit card statistics. Anonymous internet P2P loans apparently don't behave like historical credit card accounts. Sorry. Later, Prosper deleted the hilarously low Experian numbers from their web site, and showed lenders only their own historical performance data. This was a landmark improvement.

Likewise, Lendingclub obtained estimates from historical account data at Transunion (their credit data supplier) and naively used these to calculate the interest rates they offer on their loans. The assumptions aren't holding, so the rates are too low.

Luckily, Lendingclub added a term in the interest rate formula that they call "adjustment for risk and volatility". They set this term equal to 2x the expected default rate, and added it into the interest rate. (There's a good theoretical basis for doing something like this, which I won't bore you with.) The effect is that interest rates end up adjusted for 3x the assumed (bogus) default rate. That provides a little wiggle room, especially for the lower credit grades. For the high credit grades (ie A) however, I suspect they're just way off.

Lendingclub has originated between 100 and 400 loans in each of the months shown above. Unfortunately, the recent months have very low numbers of loans originated, because Lendingclub was not taking in lender money while they fought some regulatory battles. They're only now ramping back up. We really need them to get over 500 loans/month and then accumulate data for several months (a year?) before we can understand Lengingclub loan performance in a more seriously quantitative way.

Best discussion among P2P lenders occurs at www.prospers.org.

Prosper.com - 11/01/08 late loan stats update

Here's the November 1, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

PS: Best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - Google says Site Not Available

This just struck me as funny. Every now and then Prosper takes their web site down to update software. During this time, they put up a "site not available" page.

For several weeks now I have noticed that google has been indexing this "site not available" page. If you did a google search for prosper, "site not available" would be one of the pages listed. That was funny. The google robot must have wandered thru a few times while the site not available page was up.

Yesterday Google decided that "Site Not Available" is the name of Prosper's main page! Oops.

I decided to capture this for posterity.

I checked again today and note that it is already back to normal. Google is quick. Could happen again any day tho.

Note to Prosper webmasters: Consider adding a META command with NAME="robots", CONTENT="noindex", to the site-not-available version of the main page.

Prosper.com - the lawsuits are not going well

In January of this year, Prosper initiated a test program to bring suit against a small set of nonpaying borrowers. 66 very late loans were selected, and Prosper turned these loans over to the law firm of Hunt & Henriques to go after the nonpayers, and try to recover some funds.

Almost 10 months have passed, so it is reasonable to ask the status of the cases in this test program. Unfortunately and amazingly, Prosper does not report any of this status to the lenders whose money is invested in these loans. (They told us they would report to lenders monthly, but they have not.)

I wrote about this earlier here.

Lets review the timeline:

01/15/08 -- Prosper sent many lenders an email message asking them to "opt in" to this project to allow Prosper to sue borrowers on the lenders behalf. I opted in.

02/17/08 -- Prosper repurchased the loans from lenders, to simplify court proceedings. Prosper didn't pay anything to the folks who opted in. Payment will come later, depending on success in the lawsuits.

02/25/08 -- First suit filed. In Riverside county. Prosper vs Cline
04/08 -- Lots more suits filed.

So its now >6 months after the suits were filed. Its time to see what happened.

Although Prosper doesn't tell us anything about the status of these cases, we can look some of them up on the public web sites of various courts. All 66 cases were in California, and several large California counties have excellent web sites that provide status of civil cases. I've visited these court websites, and retrieved status of each case I can see. I've simplified the legal language. If you want to see the details you can visit the court web sites and retrieve the same information directly from the source.

Los Angeles Superior Court
Case Number: 08C00921
PROSPER MARKETPLACE, INC. VS. BROWN, HOLLY
Case filed 2/25/08.
Proof that summons was served on Holly Brown filed on 4/25/08.
Case dismissed 5/12/08. Prosper lost.

Case Number: 08C01750
PROSPER MARKETPLACE, INC. VS. RABOTEAUX, VALENTINO
Case filed 4/21/08.
Summons was apparently never served.
Case dismissed 10/10/08. Prosper lost.

Case Number: 08E04908
PROSPER MARKETPLACE INC. VS WEST, JAMES
Case filed 4/28/08.
Summons was apparently never served.
Case dismissed 10/16/08. Prosper lost.

Case Number: 08C01411
PROSPER MARKETPLACE, INC. VS. BARBOZA, RICARDO
Case filed 4/01/08.
No indication that summons was ever served.
Case dismissed 9/24/08. Prosper lost.

Case Number: 08C01437
PROSPER MARKETPLACE INC. VS. MOFFETT, CRYSTAL
Case filed 4/01/08.
Summons served on Robert Moffett. Proof of service filed 5/8/08.
On 8/11/08 the court clerk rejected Prosper's request for summary judgement. Sounds like some piece of documentation was missing from Prosper's request. I presume they'll try again.
In process.

Case Number: BC388361
PROSPER MARKETPLACE INC VS SHI LI PARK
Case filed 4/02/08.
Summons served and proof of service filed 6/19/08.
Plaintiff (prosper) asked for default judgement on 7/16/08.
Proceeding held on 10/29/08, and "continued" to some future date.
In process.

Case Number: 08K08483
PROSPER MARKETPLACE INC VS COLLET, LOUIS
Case filed 4/02/08.
No indication summons ever served on defendant.
Case dismissed 10/27/08. Prosper lost.


Case Number: 08K08484
PROSPER MARKETPLACE INC VS RIVERA, ROBERT
Case filed 4/02/08.
Summons served and proof of service filed on 7/07/08.
Court clerk rejected Prosper's request for default judgement 9/23/08. Doesn't say why. I presume this is another documentation problem, and that Prosper will resubmit, although a month has gone by and they have apparently not yet done so. In process.

Case Number: 08C01110
PROSPER MARKETPLACE, INC VS. CARR, CHRISTOPHER
Case filed 4/01/08.
Proof of service filed 7/07/08.
Court entered judgement against Carr for PRINCIPAL $ 13478.11 . ATTORNEY FEES $00.00 . INTEREST $ 2692.39 . COSTS $ 350.00 . TOTAL $16,520.50 .
Writ of execution issued to Los Angeles County on behalf of Prosper 9/12/08. (Legal thing telling law enforcement that you can take assets.) Prosper won!

Case Number: 08C01456
PROSPER MARKETPLACE VS. WOKE, CHINYERE
Case filed 4/01/08.
Proof of service filed 10/7/08.
In process.

Case Number: 08C01458
PROSPER MARKETPLACE VS. DELGADO, CARLOS
Case filed 4/01/08.
Proof of service filed 5/19/08.
The court clerk rejected prosper's paperwork on 9/08/08. The clerk's writing is terse, and best I can figure it seems that he believes that prosper filled out the paperwork wrong, asking for more interest than they were due.
The court clerk again rejected prosper's paperwork on 10/30/08, this time he seems to be complainng that some declaration was missing.
In process.

Case Number: 08C01457
PROSPER MARKETPLACE VS. DAVIS, DIANA
Case filed 4/01/08.
Proof of service filed 7/02/08.
Prosper asked for default judgement on 8/11/08.
Court clerk rejected prosper's paperwork on 9/08/08, complaining about wrong interest rate.
Prosper filed again on 10/01/08.
Status conference 10/06/08, continued to 4/14/09. I don't quite understand that, but there are no details available.
In process (I think).

Orange County Court
30-2008-00065226-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Mario Villanueva
Case filed 4/24/08.
Prosper filed proof of service of summons on 7/29/08.
Prosper requested dismissal of the case on 8/12/08.
Case dismissed 8/12/08. Prosper lost.

30-2008-00058684-CL-CL-HLH PROSPER MARKETPLACE, INC. vs Brandi Fitzgerald
Case filed 04/01/08.
No proof of service yet. If they haven't been able to serve the summons in 7 months, that's lookin' bad. Means they can't find the person. In process, but lookin' bad.

30-2008-00058438-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Josephine Sharaba
Case filed 4/01/08.
No proof of service yet.
In process, but lookin' bad.

30-2008-00058436-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Jermaine Massey
Case filed 4/01/08.
Summons served and proof of service filed 7/11/08.
Prosper requested default judgement on 8/12/08.
Court clerk rejected Prosper's paperwork on 8/19/08. Didn't give a reason.
In process.

30-2008-00058426-CL-CL-HLH PROSPER MARKETPLACE INC vs Teresita Spreen
Case filed 4/01/08.
No proof of service yet.
In process, but lookin' bad.

30-2008-00050023-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Karen Rozier
Case filed 2/26/08.
Prosper filed proof of service "substitute" on 5/6/08. I don't know what that is.
Karen Rozier filed requests for waiver of fees and an answer to complaint on 5/14/08.
Prosper filed proof of service on 5/27/08.
In process.

So here are the totals, interpreting the facts that have been made public, of the cases that are easily visible:

Prosper won: 1 case
In process: 8 cases
In process, but lookin' bad: 3 cases
Prosper lost: 6 cases

Now it is entirely possible some of those "case dismissed" are not actually losses, but cases where the borrower coughed up money and got prosper to drop the case. However note that none of them say they were "settled". They just say "dismissed". It is just as likely that these are cases where Prosper discovered they were going after the wrong person, perhaps discovering that there was identity theft involved. Lenders have great interest in the possibility of identity theft, because Prosper has guaranteed our investments against identity theft, and in such cases, must pay off. Note that in several cases Prosper has been unable to serve summons. In other words they couldn't find the borrower to hand him a summons. Might mean that the borrower skipped town, but it might also indicate identity theft. We just don't know.

We just don't know, because Prosper has not made any of this transparent .

Not only has Prosper not told us investors/lenders the status or given us any information about these cases. Nine months after promising lenders a monthly financial accounting for these cases, it has delivered none.

I propose a more communicative approach. Prosper should keep Investors/lenders appraised of the status of their investments, and the actions prosper is taking on investors/lenders behalf.

The best discussion among prosper lenders is found at www.prospers.org . See you there.

Prosper.com - 10/15/08 late loan stats update

Here's the october 15th, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

These curves show loans that are >1 month late, however, you can read them as "default curves" because almost all Prosper.com loans that go 1 month late move on to default. See my discussion of Prosper's collections performance in earlier blog entries.

We continue to see horribly misleading newspaper and magazine articles saying that the default rate on Prosper loans is 3% or 4% or something like that. Investors can only make reasonable investment decisions after understanding the default behavior of Prosper.com loans. Prosper loans default at about 20% per year. You can clearly see this from the charts. Pick your favorite month. Look how high the curve has gone after the first year. About 20%, eh? Prosper loans default at about 20% per year, on the average, considering all Prosper loans. There is considerable variation from month to month. Look at the final chart, where the curves are slid to a common origin. Just look at the vertical line labelled 390 days. (That's 30 days after 360 days, because loan payments can't be 1 month late until you wait 30 days after.) You will see curves cross that line anywhere from 18% to 26%. (Some of the more recent months look like they will come in a little lower.) That's how many loans went bad in the first year. Pretty simple really. Journalists seem to get it wrong time after time. Somebody must be feedin' them bad info, eh? Perhaps they just copy bad data from each other .

At the time of this writing, prosper.com has shut down due to some not fully specified regulatory problem. Meanwhile, the ongoing loans still evolve, and the data is still available, so I will continue to update this charts .

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - You got some 'splainin' to do

Be careful what you say to the judge. It can get you into lots of trouble.

On July 25, 2007, prosper.com issued a loan to "Oakland Gaerke" for $25,000. (We know this from public bankrutpcy court records.) A couple of payments were made, but then payments stopped, and the loan is now long overdue (by something like 9 months).

Six months later, on Jan 23, 2008 Mr. Gaerke entered a chapter 13 bankruptcy proceeding in the Northern district of Ohio bankruptcy court. As part of that proceeding he filed complaints with the court claiming identity theft. (Gaerke's amended complaint of Apr 29, 2008.) He says his wife "Ashley Gaerke" took out the prosper loan (as well as a lot of other credit) without his knowledge. He says he's not responsible for these loans, and he wants the court to let him off the hook. (He wants the court to tell Prosper.com to go pound sand.) There's also a divorce in process. In short, this is now a complex mess.

Whether this is or is not identity theft is of great interest to prosper's lenders, because of prosper's identity theft guarantee. Prosper guarantees that it will repurchase loans from lenders in cases of verified identity theft. If this is identity theft, then lenders must be made whole. If this is not identity theft, then maybe lenders get nothing.

Prosper essentially stopped buying back such loans about a year ago. Lenders wonder whether there has magically been no identity theft in the past year, or the cases are simply hidden in the obscurity of non-public facts and ignored by prosper. There are very few cases where the facts become public. This is a case where facts are public, so lenders are watching closely.

I don't know whether identity theft occurred or not. I wasn't there. I don't know who's telling the truth. However I do want to delve into one small aspect of this mess: How prosper has chosen to respond.

As part of Mr. Gaerke's claim that the Prosper loan was identity theft, he says that Prosper never contacted him, and never verified his identity prior to originating the loan. I would have expected Prosper to defend itself against this charge, producing or at least offering to produce records showing how and when the fellow was contacted and his identity verified prior to loan origination. This verification is Prosper's duty, so I figured maybe they kept records, and could produce them. Maybe sworn statements from the verifier person, or recordings of phone calls. They didn't produce any of these things. Here's what they did...

Prosper chose to deny that Prosper ever made a loan!

Prosper's answer was filed with the court on May 30, 2008, by Prosper's lawyers Patricia Fugee and Gregory Nuti. The meat of the document says:

Loans in a total amount of $25,000.00 were extended to the Plaintiff by individual bidders using Prosper’s website (“Lenders”) and the funds were disbursed to the Plaintiff by Prosper through direct deposit to the joint checking account of Defendant, Ashley Gaerke, and the Plaintiff. Prosper acted as the Plaintiff’s authorized agent to procure loans in the total amount of $25,000.00 from various Lenders on behalf of the Plaintiff.

By way of further answer, it is denied that Prosper loaned any money directly to the Plaintiff or Defendant, Ashley Gaerke.

They're claiming that Prosper never loaned money to Gaerke! They're claiming that the Prosper members who bid on the loan (those folks Prosper calls "lenders") actually loaned the money to Gaerke, and Prosper only acted as an agent to procure these loans from "lenders". In other words, they're effectively saying to the judge, "Hey, this guy has named the wrong defendant in this action. We're not the right guys. This guy should have named the 50 lenders as defendants, not poor little us. We're just the middleman."

I guess you'd call that a "technical defense". Lawyer's soft shoe. Instead of engaging on the issues, you find some techncal point that the plaintiff got wrong, like "He hasn't proved that I'm the guy who should answer for that." There are several problems with this position that Prosper thru its lawyers Patricia Fugee and Gregory Nuti have taken. The most blatant problem is that it isn't true. This position is the exact opposite of rather clear language in written legal agreements between Prosper and its lender members.

Lets examine some of those legal agreements, so we'll know how Prosper actually works. We can then compare that with Fugee and Nuti's statement above.

The most important agreement is called the Lender Registration Agreement (LRA). It defines how Prosper's "lender" members and Prosper interact, and each parties roles. Prosper has changed this agreement many times, but with a little digging, I believe I've found the version of the agreement that was in use mid-2007.

We don't have to look far to find wha the LRA has to say about this issue. It is so important that it is discussed in the very first paragraph at the top of page 1.

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, purchasing loans from Prosper.

Well that's pretty darn clear. Prosper "lender" members buy the loans. We don't lend the money to the borrower directly. Us "lenders" just purchase them. In case there's any ambiguity, they go on and explain who does the lending, and who sells the loans to us.

All loans originated through Prosper are made by Prosper Marketplace, Inc. from its own funds, and then sold by Prosper to the winning bidder or bidders on the listing.

Explicit. Prosper makes the loans from its own funds, then sells 'em to us. If that weren't explicit enough, they go on to tell us why it is done this way.

Prosper is the originating lender for licensing and regulatory reasons and is licensed in all states where licensing is required. Prosper uses the term "lender" instead of "loan purchaser" for the sake of brevity and simplicity, and for the convenience of Prosper users who appropriately view Prosper as a marketplace for connecting individuals who wish to borrow money, with people who have money and the desire to fund loans to other individuals.

Ok, so not only is it done this way, but it has to be done this way, because of lending regulations. It couldn't get much clearer than this.

The next agreement of interest is the "promissory note". Several of these are drafted for every loan that Prosper makes. One contains the name of each "lender" member. Prosper also changes the form of these documents from time to time, so I examined one from mid-2007. The first three llines of the document tell the story. Prosper writes:

Promissory Note
Borrower: xxxxxxx (Real name and address not displayed)
Lender: Prosper Marketplace, Inc. (Assigned to: xxxxxxx)

The Promissory note clearly identifies "Prosper Marketplace" as the lender, and goes on to say that the note has been assigned (ie sold) to the lender member. (I've x'd out the names of the actual borrower and lender members.) Prosper has issued many thousands of these documents, and they all identify Prosper Marketplace as the lender. This could not be more clear.

With these facts clear, how can it be that Prosper's lawyers have told the court the exact opposite?

If Prosper's statement to the court is truthful, then Prosper loans would appear to be in violation of various lending regulations, and Prosper would have acted in violation of its legal agreement with its "lender" members. If on the other hand, Prosper's statement to the court is not truthful, then ... What's that word for when you lie to the judge?

In summary (and with apologies to Ricky Ricardo) :
Prosper, you got some 'splainin' to do!

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Reference materials:
Documents that were filed with the bankruptcy court are available to the public via www.pacer.gov I have copied here a few documents relevant to this discussion for your convenience..

Mr Gaerke's amended complaint
Prosper's response to Gaerke's amended complaint
Ms Gaerke's response to Gaerke's amended complaint
Prosper LRA, circa mid-2007

Prosper also filed an 'S1' with the Securities and Exchange commission on Oct 1, 2007, disclosing the Prosper loan process in great detail. I haven't quoted it here, but on the matter at hand it is consistent with the LRA. You can find the Prosper 'S1' at www.sec.gov .

Notes:
I have avoided mentioning the Prosper listing# or loan# or the borrower's Prosper screen name here, to comply with Prosper's wishes that borrower's screen names remain anonymous, in other words not be associated with the borrower's name.

PS: I don't take credit for finding this. I learned about it in an active online discussion about this loan among prosper lenders .

Prosper.com - lender statements now 7 months late

In early 2008, $735,000 of late prosper loans disappeared from lender's statements. On 01/15/08, prosper promised monthly "supplementary statements" to lenders covering these loans. Hasn't happened. No statements have been produced. By my count, Prosper.com is now 7 months late on delivery of these statements to lenders, on the status of OUR loans.

This is simply one example of a much larger problem. Prosper management refuses to accept their responsibility to lenders. Once loans go late, they don't lift a finger. In this case, that includes not even telling lenders the status of collection efforts on these loans.

Shame. Over and over again. Shame.

For a more detailed explanation, see http://www.prospers.org/blogs/Fred93/2008/08/03/prosper_com_lender_statements_6_months_l

Prosper told us they would take legal action against the 68 late borrowers in this "legal test" group of loans. Today, eight months after they started the "legal test", many of the defendants have not even been served (with legal papers initiating a suit). We can tell that by observing the county court web sites, some of which display this information. Judging from the filings we can observe, it looks like about half of the suits haven't been served yet, eight months after the program began. You could never tell this by looking at statements provided by prosper, of course, because there are no statements, even tho they promised them! There aren't even excuses!

Shame. What a way to run a company.

Where do they get the chutzpah to act this way?

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org

Prosper.com - lender statements 6 months late

Supplemental statements tracking $735,000 of loans were promised monthly, and are now 6 months overdue.

On 01/15/2008, Prosper.com sent an email message to many lenders, explaining that 68 very late loans were being moved to a new category, a "legal test". In this test, Prosper would try taking legal action against very late borrowers, instead of just doing nothing. I thought at the time that it was a good move.

Prosper's 01/15/2008 email promised ...

Since this is a test, we have not yet designed the system to track these revenues within the normal statement process. As such, the loans will be defaulted at zero value and the accounting provided on a monthly basis in a supplementary statement.

However, Prosper has never bothered to send lenders any of these promised supplemental statements! $735,000 of loans have simply disappeared from lender's view.

That's right. No statements. No reporting. Prosper has kept lenders completely in the dark on the status of these loans. I figure January's promise of monthly statements should have produced one in February, and another in March, April, May, June, and July. That makes them now 6 months late.

Fact is, with great effort lenders can track the status of some of these lawsuits. This happens because many courts make some lawsuit status details public via their web sites. (Not all courts make status available online, so we can't see the status of all of them, without travelling around to the various county courts, and checking the records manually.) The visible status isn't pretty. Most of the suits weren't filed until April. Four months later, many of these suits have not even been served against the borrowers. Among the suits that have been served, it appears that none has yet come to trial.

It looks like the entire legal test has been horribly underfunded by Prosper. Now seems more likely that it will be aborted rather than serve as a symbol of Prosper's strength and a deterrent to deadbeat borrowers.

PS: The best discussion among Prosper.com lenders can be found at
http://prospers.org

Prosper.com - 08/01/08 late loan stats update

Here's the August 1st update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

These curves show loans that are >1 month late, however, you can read them as "default curves" because almost all Prosper.com loans that go 1 month late move on to default. See my discussion of Prosper's collections performance in earlier blog entries.

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - collections - you have forsaken lenders

Collections on late prosper.com loans are getting worse. Prosper simply doesn't take their responsibility to lenders seriously. Along the way there have been words from Prosper saying they were going to improve this or that, but they've all been hollow. Ding ding .. nobody's home.

Here's the latest data on collections performance, direct from prosper.com. Most late Prosper loans are sent to the collection agency Amsher. To keep things simple, I've graphed only Amsher's performance here. I've shown the fraction of loans sent to Amsher that have been cured. These numbers come directly from Prosper's web site, with no manipulation whatsoever. Prosper breaks this statistic down into three categories, according to credit grade, and that's what you see in the graph.

Prosper switched to Amsher, and dumped a bunch of loans on them, on 2/23/08, so of course the fraction of those loans that Amsher had cured on that date was zero. It took a couple of months for the stats to recover from that initial impulse, and to climb the learning curve, in other words learning how to collect Prosper loans. Well, according to this data, the honymoon is over. Since 6/1/08 Amsher's stats have been going down.

It wouldn't be so bad if there had ever been any good performance here, but Amsher never did anything good (according to the stats Prosper.com has published).

In fact, according to Prosper's stats, Amsher has never done as good as Penncro, the collection agency it replaced. Now how the heck can that be? In some of my earlier posts on this subject I've included a graph showing combined Penncro+Amsher performance. This is the all-time performance of loans worked on by either or both. This representation eliminates the startup impulse problem in the above graph. However, it involves some manipulation of the data, which confuses some folk. Here's an update on that graph:

This curve changes from blue to red when the handoff from Penncro to Amsher occurred. As you can see, Penncro got up to over 17% cured, and Amsher has been mostly downhill from there. As the number of loans handled by Amsher has increased, their lower cure rate has started really pulling down the combined curve. The explanation of how the data is combined can be found here.

How (expletive deleted) could things be this bad? Prosper management has made comments over the past few months about how collection statistics are improving. The stats Prosper.com gives us, on the other hand, are getting worse. What's the deal?

I put this question to Prosper management in mid-June. They said they'd have to look into the numbers and get back to me. I'm sure they ment to do just that, but no answers have been forthcoming. Perhaps higher priorities intervened. Ain't it always the way.

One possibility is that the numbers Prosper displays on the web site may be faulty. It wouldn't be the first time. Prosper used to display a statistic they called "net collected". There's still a row with this label on the web site, but they no longer fill in the numbers. I used to graph this statistic vs time, and as a result, I knew it was ... well ... I suppose the polite word is "bogus". This was discussed at length in the old prosper.com forum. Here's a chart I made about a year ago:

The red curve jerked up and down faster than was physically possible. From that I knew it was bogus. Prosper never did admit there was a problem. They just deleted the statistic from their web site. Well maybe that is an admission.

With that precedent in mind, is it possible that the collection statistics they provide for us now are just wrong? I don't know. I look forward to some feedback from inside Prosper.

If the numbers correctly reflect collection activity, then how the hell could it be that they are so horrible? When a loan goes 1 month late, I'd expect it to recover a significant fraction of the time. Amsher's 6% is not my idea of a significant fraction of the time. In fact, I'd expect more than 6% of 1-month-late loans to recover all by themselves, without any collection activity at all.

Something is horribly wrong.

Nobody seems to be doing anything about it. Seems like nobody cares.

Prosper, you have forsaken us (lenders).

See my prior writings on this subject, including:
Written 05/06/07: Collections is broken
Written 05/04/08: Collections is not improving

Update 08/08/2008: Just got a note from Prosper saying they have found and corrected a major bug in the way they were calculating the collection statistics they present on the web site, and believe that there is an additional problem, for which they are continuing to search. So... It looks like the data they were giving us was indeed faulty.

Prosper.com - 07/01/08 late loan stats update

Here's the July 1st update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans once have become late. Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken
Written 05/04/08: Collections is not improving

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - lender lawsuit

A group of prosper.com lenders has retained counsel, and started the process to take legal action against prosper.com, with the letter copied below. While I have not signed on to this letter or this action at this time, I do agree with much of what they have to say. There is a considerable overlap between the issues raised in this letter and the issues I have been writing about for the last 2 years. The letter, sent by the group's legal counsel to Prosper on June 3, 2008, asked for a response by June 24, 2008. Apparently prosper chose not to respond.

The group has made public this first letter to Prosper, and I am copying its contents below.

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June 3, 2008

Edward A. GiedGowd, Esq.
Chief Compliance Officer and General Counsel
PROSPER MARKETPLACE, INC.
111 Sutter St, 22nd Floor
San Francisco, CA 94104-4540
Phone: (415) 593-5418
Fax: (415) 362-7233
e-mail:

RE: INCREASED RISKS OF LOSS AND ACTUAL LOSSES CAUSED BY PROSPER'S FAILURES

Dear Mr. Giedgowd:

I represent a group of Prosper lenders who are frustrated about the platform and its nonresponsiveness to lender concerns. This letter summarizes these lenders’ major concerns, and proposals for addressing them. This letter is sent with the hope that these issues will be resolved quickly and informally.

I. Failure to Provide Accurate Information About Risks Presented By Certain Locations or Types of Loans

It has become apparent to lenders that Prosper has permitted loans to originate in states where it cannot or will not make meaningful efforts to collect on late loans. Prosper has not informed lenders of the difference in debt collection laws of the various states, nor how Prosper permits these different laws to impact its performance of its fiduciary duties to lenders. Prosper apparently is also more interested in pursuing collections on larger loans than on smaller loans. Prosper has not informed lenders that the difference in state laws, or in Prosper’s own collection practices, may impact Prosper’s fiduciary duty to collect lenders’ funds in the event of delinquency, or that sales of those loans upon default may result in lower prices.

This information, and any other information Prosper has collected about trends from various states or types of loans or that is otherwise material to a lender’s decision to bid on a listing, must be provided to lenders.

II. Poor Collections Results

Lenders have been expressing concern about the extremely poor collection performance for more than a year. (See, for example, http://www.prospers.org/blogs/media/blogs/Fred93/open letter number 2.pdf.) Adding to that concern is the lack of any information – specific or general – about the status of collections on particular loans. My clients have not been furnished with any information about efforts to collect on their late loans, including whether the collection agency has even successfully contacted the delinquent borrowers. This is unacceptable. Prosper, as my clients’ loan servicer, must immediately amend its policies and procedures to provide lenders with specific information about the efforts made to collect on the loans, including the borrowers’ stated intent with respect to repayment. That information must be provided along with all other data about loan payments.

If a borrower has sent a “cease and desist” letter to the collection agency, Prosper must assume responsibility for collections, and for informing lenders of the status of those efforts.

In addition, lenders have repeatedly raised concerns about “blenders,” borrowers who are also lenders, with late loans. The LRA, and all other appropriate legal documents, must be amended immediately to provide Prosper with the right to withhold payments due to blenders whose loans are more than fifteen days late, and apply those payments to the blenders’ overdue loan balances. Prosper already promised lenders in writing on March 2, 2007 that "If one of them defaults, we'll find a way to take the gains from the borrower's lending portfolio and give it to lenders on their loan." Demand is hereby made that Prosper rectify its breach of this promise by paying the lenders on every such loan their pro rata portion of the blender's own lending account that should have been, but wasn't, given to them when the blender defaulted.

III. Failure to Sell Defaulted Loans

My clients are dismayed by the increasingly large portfolio of non performing loans on the platform, and Prosper’s refusal to sell them. The LRA currently states:

Except in the case of borrower bankruptcy, Notes that become over 120 days past due are charged off and offered for sale to an unaffiliated debt buyer authorized and willing to purchase consumer loans. You authorize Prosper to offer for sale and sell your Notes that become over 120 days past due to a debt buyer in accordance with this Section. Because debt purchasers buy many past due Notes at once, Notes that are in default might not be offered for sale at the point at which they are exactly 120 days past due, but may remain unsold for some period after they are 120 days past due.

Many lenders have loans that are eight or nine months past due, or more. The older these loans become, the less they are worth – and the more likely the borrowers are to file for bankruptcy. Prosper controls the timing of the debt sales, and does not appear to be abiding by the terms of the LRA.

It is particularly troubling that one offer to purchase a delinquent loan at twice what the junk debt buyer ultimately paid was unjustifiably rejected by Prosper. That demonstrates that Prosper may not be putting its lenders' interests first, as Prosper's fiduciary duties to its lenders require it to do. Demand is hereby made that Prosper immediately sell all loans that are delinquent by more than 120 days, unless the borrower has made a payment of at least one month’s principal and interest in the prior thirty days, or there is some other individualized reason that Prosper reasonably believes that holding that loan out of the debt sale is in the lenders' best interests. That reason must be disclosed to lenders. In addition, demand is hereby made that Prosper reimburse each and every lender on loan 4018 the money that Prosper's improper rejection of the high bid for that defaulting loan cost them. If Prosper wishes to accept a low bid, rather than a higher bid, then Prosper, not the lenders, should suffer the loss caused by that decision.

Prosper’s failure to hold quarterly debt sales has resulted in clear harm to lenders. Prosper last sold defaulted loans in December, 2008, and the sales price was substantially less than at the prior sale. Prosper apparently attempted another debt sale in late April, 2008 (a month later than it should have), where the bids were substantially lower than in December. Instead of selling the loans for the best price Prosper could get (as its fiduciary duty and the LRA obligated it to do), Prosper permitted the loans to age even longer, devaluing the older debt even more, and in late May, 2008 was apparently offered less than half of what it had been offered a month earlier.

Demand is hereby made that Prosper treat all loans that were 121+ days late as of the date of the December debt sale as having been sold in March, 2008. To that end, Prosper must provide very specific detail about the debt sale proceeds received in December, 2007 and the bids made in April and May, 2008 so lenders can determine a fair price.

Prosper has recently notified lenders that the bids it received to buy defaulted loans in May were either very low or attached conditions that Prosper deemed unacceptable. Prosper must specify, in detail, the “conditions” that made the May, 2008 bids unacceptable to it, and explain why it rejected those bids. With respect to all debt sale negotiations in 2008, Prosper must disclose the identity of the debt bidders and buyers to the lenders, as well as the terms of each offer so that the lenders can verify that Prosper did, indeed, make a commercially reasonable effort to obtain the best possible price for the loans. Further, for each effort to sell the debt, Prosper must disclose to lenders the identity of each bidder and the winning bidder on past sales, and every potential debt buyer that Prosper notified of the upcoming sale in an effort to solicit bids.

In another express violation of the LRA, Prosper apparently no longer intends to hold debt sales, instead planning to have some unspecified person “apply” unspecified “charge off collection techniques” to debt that is 121+ days old. Prosper cannot unilaterally decide that it is in the lenders’ best interests despite the terms of the LRA for these loans to be subjected to “charge off collection techniques.” Instead, should Prosper wish to deviate from the terms of the LRA, Prosper must provide lenders with detail about these proposed “techniques,” including, at a minimum, what they consist of, who will “apply” them and what the cost to lenders will be. Then, Prosper must permit lenders to opt in or out of this experiment. And, in the future, Prosper must hold debt sales at least quarterly. If the current method of conducting debt sales does not provide Prosper with a mechanism to dispose of non performing loans, Prosper should investigate alternative means of debt sales, perhaps even in the form of a secondary auction on its platform, open to all qualified buyers.

IV. Failure to Prosecute “New Agency Test” Lawsuits

Last year, Prosper invited lenders to opt in or out of a series of planned lawsuits against 66 borrowers whose loans were more than four months late. The lenders who opted in to these suits have not been told whether suit has actually been filed on each of the loans. It appears that where suits have been filed, they most likely have not been served, since very few proofs of service have been filed with the courts. It therefore appears that the cases have not been litigated aggressively – or, in most cases, at all. The LRA instructs lenders not to contact Prosper’s collection law firm, yet very little information about the prosecution of these cases has been provided. Any unserved lawsuit must be served immediately, and, if service is unsuccessful, Prosper’s counsel must take prompt steps to obtain leave of court to serve the complaints via publication. If an answer is filed, Prosper should promptly evaluate the action for summary judgment.

Further, information about the status of these actions must be provided to all lenders, and updated at least monthly.

V. Failure to Protect Lenders’ Interests After A Borrower Claims to Have Declared Bankruptcy

Prosper's fiduciary duty towards its lenders requires that Prosper act in a manner that is most likely to protect the interests of lenders on loans where the borrower has filed or states their intention of filing for bankruptcy.

Prosper has admitted, in writing, to treating loan 2139 (listing number 23444) as being in bankruptcy for more than a year based solely on the borrower’s claim that she was “going to” file. Prosper did nothing to verify the borrower’s claim, and has not yet sold that loan. The loan continues to show that it is both in collections and in bankruptcy, and the lenders do not know whether it truly is. Whether or not this borrower ultimately filed a bankruptcy petition, the lenders on this loan suffered monetary damage as a result of this loan not being sold timely, both in terms of lost interest and in terms of the diminishing amount debt buyers are willing to pay for Prosper loans. Demand is hereby made that Prosper reimburse all lenders on that loan in at least the amount they would have received had the loan been sold timely, together with interest thereon.

Similarly, loans 1323 and 7107, likely among many others, show they are simultaneously in collections and in bankruptcy, suggesting that Prosper has relied solely on the borrower’s stated future intent to file. A recent PACER search did not turn up any bankruptcy filing by the borrower on loan 7107.

These loans highlight the harm caused to lenders by Prosper taking the unsubstantiated word of borrowers. While lenders are aware that Prosper intends at some unspecified future date to provide information to lenders about the petition filing date and chapter, that is inadequate. Prosper must verify that the petition has been filed, and must file all documents needed to protect the interests of the lenders. Prosper must also file appropriate documents to perfect the lenders’ claims, must challenge the dischargeability of any loan obtained fraudulently or too close in time to the bankruptcy filing, and must verify that the bankruptcy actually results in a discharge of the Prosper loan. If the bankruptcy petition is dismissed, Prosper must notify lenders of that, and promptly recommence collection activity, or sell the loan as defaulted.

Prosper must provide the following documentation of any loan in bankruptcy on the loan information pages on its website: (1) the date and chapter of the petition; (2) the steps Prosper has taken to protect the lenders’ interests; (3) the status of the bankruptcy; and (4) whether the bankruptcy has been discharged. Prosper must also provide lenders with a detailed summation of the adversary proceedings or other challenges it has made, and the outcome of those filings.

If no bankruptcy petition has been filed, of course, Prosper and its agents must continue collection efforts on the lenders’ behalf. Borrowers should not be permitted to avoid collection efforts and their repayment obligations while they consider how best to address their financial situation, as this is to the lenders’ clear detriment. Prosper must treat all loans as being delinquent until it is furnished with paperwork from the Court establishing that a bankruptcy petition has truly been filed.

VI. Failure to Honor Repurchase Guarantee

Lenders have identified cases of apparent identity theft after loans go late. One example is Listing No. 102017, where the borrower represented himself to be a woman who had a credit history extending back 12 years and a six-figure income. In reality, the borrower was a 22 year old man. Prosper inexplicably refused to honor its identity theft guarantee on this loan. Please honor that guarantee immediately.

Additionally, there are many loans where the borrower never made even one payment, or where a borrower made two or fewer payments. Prosper must diligently investigate potential identity theft with respect to those loans (which include, without limitation, the loans resulting from listings 102580, 137658, 140191, 179350 and 208191) and advise the lenders on those loans, with specificity, about the outcome of the investigations. If identity theft is found, Prosper must promptly honor its repurchase guarantee.

Lenders are also concerned by the fact that Prosper has essentially stopped repurchasing loans under its identity theft guarantee. To date, Prosper has repurchased 122 loans. These include the 66 New Agency Test loans and a handful of loans Prosper repurchased due to credit data issues. Thus, roughly fifty loans were repurchased by Prosper for other reasons (which we presume include the identity theft guarantee). Prosper has repurchased only one loan that originated after August 1, 2007 despite the fact that more than 40% of all Prosper's loans originated after that date. It is extremely unlikely that there has only been one identity theft loan in all that time; it is far more likely that the near complete absence of repurchases is due to the "success" of Prosper's strenuous efforts since last summer to deprive lenders of the information they formerly used to discover numerous fraudulent and identity theft loans on their own. As you know, many of the loans Prosper repurchased were identified by lenders through discussions on Prosper's own forums, before Prosper eliminated those forums and stripped basic information from the listings. Because Prosper knows that its conduct has severely impaired the ability of lenders to ferret out fraud, it has a fiduciary duty to increase its own efforts to determine whether the listing was fraudulent in any manner. Instead of fulfilling that duty, it appears that Prosper may have used this as an opportunity to cease having to spend its own capital repurchasing fraudulent loans. Please be aware that we intend to vigorously pursue discovery on this and other topics should further action be required to protect lenders' interests.

VII. Failure to Protect Lenders From Other Instances of Borrower Fraud

Prosper’s fiduciary duty requires Prosper to protect lenders from garden variety fraud, as well. That includes borrowers who take out loans with no intention of repaying them, such as the loan resulting from Listing 71273, which funded after lenders warned Prosper that the borrower had posted his lack of intent to repay the loan as well as admitting that he lied about the purpose of the loan. Not surprisingly, after Prosper permitted this loan to fund, the borrower defaulted.

Prosper must investigate all listings reported as fraudulent. Prosper must investigate all reports of suspected fraud before permitting loans to fund. Listings 18121 and 71273 provide but two examples of loans that originated despite many well supported reports of suspected fraud, then subsequently defaulted. Demand is hereby made for a full explanation of Prosper's investigation (or lack thereof) of these reports of fraud on these listings, and why Prosper believes (if it does) that its investigation was "commercially reasonable" as required by the Lender Registration Agreement (“LRA”). Needless to say, if Prosper's investigation was not commercially reasonable, Prosper must reimburse all lenders on these loans (and any other loans that were permitted to fund despite reports of fraud) for their losses.

VIII. Failure to Provide Accurate Performance Information

Prosper misrepresents the value of lenders’ portfolios, both on each lender’s individual overview page and on its Marketplace Performance page. On the lending overview page, the interest rate is artificially inflated since it does not take into account the lack of interest actually paid on late loans. Prosper could easily correct this misleading information, since at least two third party sites (www.lendingstats.com and www.ericscc.com) provide more accurate – and significantly lower - estimated rates of return than does Prosper.

With collections remaining at less than 20%, Prosper must adjust the manner in which it reports account values to lenders. A loan that is four months late is worth significantly less to a lender than one that is two days late. Loans in bankruptcy likely have no value. Despite this, Prosper portrays all loans, regardless of their status, at full face value, including accrued interest and late fees, which substantially overstates the portfolio's real value. Prosper must provide lenders with more accurate loan valuation.

Prosper must immediately cease providing lenders with inflated interest rate data and inflated loan valuations. Prosper must disclose the number of bankruptcies on the lender overview page, and must value them accordingly. Once a loan goes more than thirty days late, it must be valued in the lenders' portfolios at the discounted value that represents the probability of curing. Loans that are subject to a debt sale (+4 month loans) should be valued in lenders’ portfolios at no more than the proceeds obtained for a loan of that nature in the previous debt sale. If a loan is charged off it must be treated as having no value.

Similarly, Prosper must provide accurate information on its Marketplace Performance page, which it invites lenders to use “to figure out what kinds of borrowers will yield the highest return for your portfolio.” The data there is inaccurate, due, at least in part, to matters noted above. The failure to hold timely debt sales distorts that data, since loans that should be counted as defaults are instead counted as 4+ month lates. In addition, the New Agency Test loans are erroneously treated by Prosper as if they had never originated. Since these loans are by definition "defaults" in everything but name (indeed, for the lenders opting out of the New Agency Test, these loans are defaults, since these lenders were paid the pennies on the dollar that these loans would have received had they been sold at the last junk debt sale), they should be treated as defaults for all reporting purposes. Loans that Prosper charges off must be clearly identified on the Marketplace Performance page, as well, and must be treated as having no value for purposes of ROI calculations and lender bidding guidance. Under no circumstances shall "charged off" loans be treated like the New Agency Test loans are currently treated (i.e., as if they had never originated). Not surprisingly, Prosper’s actual results are substantially worse than reported. These misrepresentations must be corrected, and only correct data posted in the future.

X. Retroactive Changes to Terms of Service, to the Detriment of Lenders

Prosper has repeatedly amended the LRA and terms of service, until recently not even notifying lenders of such changes (much less obtaining lenders' consent). Needless to say, Prosper has no authority to unilaterally amend any agreement governing the relationship between the parties, particularly in a retroactive fashion.

One change that resulted in significant lender concern was Prosper’s unilateral decision to permit borrowers to obtain second loans without having paid off their first loans. Several lenders advised Prosper that the terms of service permitted only one loan at a time, and this change presented real increased risk. Prosper was urged to permit second loans only on first loans that originated after this change, and notification to lenders, so lenders could decide for themselves whether they wanted to assume this much greater risk. Prosper ignored the likely risk to lenders, and declined to permit second loans only on first loans that were listed after the amendments. Thus, lenders who bid with the certain knowledge that Prosper would only allow one loan at a time were suddenly faced with additional risk. Many lenders would not have made loans in the first instance had they known that Prosper might later permit second loans because of the additional risk.

This additional risk is evident with borrower "dbfunding," who first borrowed $15,000 (listing 29537), then, after second loans were permitted, borrowed another $14,650 (listing 228201). The loans now show they are in bankruptcy. At least with respect to those lenders who have not implicitly acquiesced to the new terms of service by continuing to lend, Prosper must immediately repurchase the first loan. When any similar situation arises in the future, whether the first loan defaults or files for bankruptcy, Prosper must immediately reimburse all lenders who have not loaned since the changes in the terms of service.

Prosper unilaterally decided to move collections away from Penncro to AmSher, which charges lenders a higher fee. At the time of this switch, Prosper promised that lenders would not be charged more than they would have been had the loans remained at Penncro. After it was pointed out to Prosper that notwithstanding its promise, lenders were actually being charged the higher AmSher fees, Prosper stated that this was due to a "coding error," and that Prosper would reimburse lenders the over charges. Apparently, no such reimbursement has yet occurred, despite months having passed. Demand is hereby made that Prosper immediately provide that reimbursement to lenders.

Prosper unquestionably has a fiduciary duty to lenders, which it has breached in many respects. The foregoing are areas where breaches have clearly and repeatedly occurred, and which must promptly be addressed to avoid litigation. I look forward to your written response, with the specific steps with which Prosper will address these concerns, by June 24, 2008.

cc: John B. Witchel
Christian A. Larsen
Kirk T. Inglis
James W. Breyer
Lawrence W. Cheng
Paul M. Hazen

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A pdf scanned image of the letter can be found at http://p2pla.org/docs/4187_001.pdf

Discussion of all issues related to prosper.com can be found at http://www.prospers.org