Prosper.com - a mishandled loan

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Prosper.com - here's what you should do with the lawyers

When we invest in prosper.com loans, we make a deal with prosper. The lender buys the loan, and prosper retains the right to service the loan and charge a fee for that service. This would be fine if prosper did a good job of servicing loans, but they don't.

Don't get me wrong. Prosper has done many things right. The idea was great. They built an incredible web site. They just don't service loans well, which unfortunately is a critical thing.

In any other situation I can imagine, if I owned a loan, I could decide who services the loan. That way there would be competition. If my loan servicing guy proved to be incompetent, I could move to another loan servicing guy. This sort of competition drives everyone to be serious and pay attention to business. (Economics 101)

If you're locked in to one loan servicing guy, then what's his incentive to actually care about your loan?

In the case of Prosper, you might think the incentive would be that their survival ultimately depends on this. If, over time, the world learns that their product is bad, then no one will want their product. I'm not the only one who has said things like this.

John Witchel (Prosper CTO) wrote (in private correspondence) on 05/09/2007:

Prosper is heavily motivated to keep defaults in line. If they aren't tractable everyone's returns go to the dogs and Prosper fails, and there's no amount of "new blood" that will keep that problem at bay

Today 3,215 of Prosper's loans have gone in the toilet (ITT). I'm counting loans that have defaulted, as well as loans that are at least 2 months late, which by past Prosper performance means they will almost certainly end in default. In other words, these are loans where the lenders have been stiffed.

Prosper has originated 18,819 loans that are now at least 3 months old (ie old enough to be at least 2 months late). For the record, those 3,215 loans in the toilet are 17.1% of Prosper's total 18,819 loans old enough to be ITT. (Gosh I hope I don't read any more of those newspaper articles that say Prosper has a default rate of 3%.)

(You can get all these numbers for yourself from Prosper's performance web page, or from one of the third party stats sites, etc.)

But that 17.1% is not the really interesting fraction. Prosper has insulated itself from the loan-making decision, so some would say the high default rate is not entirely Prosper's fault. Read on.

For almost all of those late loans, all Prosper ever did was send the borrowers emails and phone calls, asking them to pay. In other words, Prosper did almost nothing. To be certain, there have been some small improvements. For example here's an improvement announced earlier this year:

Doug fuller quote (from prosper blog)...
http://blog.prosper.com/2008/01/04/doug-fuller-on-collections-1/

One of the many activities aimed at improving collections undertaken in the last couple of months was the testing and implementation of an ?Early Delinquency? letter series. Although borrowers were already receiving reminder emails and phone calls during the early delinquency period (1 -30 days past due), we thought it worth seeing if an actual letter might drive additional payments.

Oh boy! Now they send a letter. An improvement. But ... Frankly, a letter ain't much, and Prosper's collections is still super-wimpy. Prosper management just doesn't take this stuff seriously. They don't take handling your money seriously.

When Prosper was conceived, the founders didn't realize that bad loans, deadbeat borrowers, defaults and collections would be such a bad problem. They had a notion, now proven to be incorrect, that the "community" aspects of Prosper would create loans which went bad at a lower rate than other consumer loans, credit cards, etc. That aspect was widely hyped to lenders. (Remember those web pages where they talked about Joe the fireman, and how after he joined the fireman's Prosper group he would feel an obligation to all other firemen, so would keep his loan current?) Turns out: It ain't so.

I don't fault the founders for getting this wrong. In every startup the founders envision some future business, an act which forces them to predict how the future will turn out. As the saying goes "Predicting is really difficult. Especially the future." Some part of the vision is always wrong. You have to adapt. Prosper management hasn't adapted.

(And for the record, I still believe there is value in the community aspects of Prosper. Its untapped. I'll write about that in a future blog.)

To be fair, they have made changes which attempt to reduce the rate at which loans go bad. They added a post card to verify the address of the borrower. They increased the lower bound on credit score for HR borrowers, to cut off some of the really bad credit risks. Finally they added bidding guidance in an attempt to scare naive lenders away from high risk loans. Good stuff... but no real improvements in the collections department, where thousands of loans sit rotting.

Because the Prosper founders didn't think collections would be much of a problem, they didn't devise a good method to fund collection activities. The existing legal documents (lender agreement, borrower agreement) don't provide mechanisms that would fund legal action against borrowers, even when it is clearly in the interest of lenders. In other words, we have lenders willing to pay for action, but Prosper unable to act. Prosper could have adapted, and changed these agreements, inventing the new mechanisms to fund the functions they now saw were needed, but they have not. They're still tryin' to run collections on the cheap.

More discussion about funding collections can be found in my Open letter #2 to Prosper management, written almost exactly a year ago. Much of it is still on point.

Lets get back to those 3,215 loans in the toilet. 1,458 of those have already defaulted, ie were sold to junk dealers, so they're gone, and there's nothing we can do about them. The remaining 1,757 in the toilet loans are still in Prosper's hands, and they could do something about those, if they had the desire to act.

They have taken some action, but I want to show you how tiny that action is. Back in January '08, Prosper started a "legal test" where they took 66 very late loans, in California only, and initiated legal action. Oh boy! There are several small problems.

First, that's 66 out of (1757+66) = 3.6% ! They only initiated legal action against 3.6% of the late loans in their hands that are in the toilet.

Are you a lender on some of the other 96.4%? Sorry. Your loans are going to default. Nothing is being done. The "legal test" should be 10 times larger.

Second, I said they "initiated" legal action, but that's almost too strong a word. Remember the project started in January. In May they filed the first "proof of service" documents with some of the courts, meaning that the complaints have actually just now been served against some of these deadbeats. Slooow. No requests for summary judgement have yet been filed. No court dates have yet been set. If we run at this pace, it will take a year before we have any results. During that time, more thousands of loans will default due to Prosper's inaction. This is irresponsible. This may be the most economical way to proceed, but it is not the most responsible.

Here's my request of Prosper's management:

You have, in your hands, 1,272 loans that are 4+ late. (For the record some of this group are as much as 10 months late, such as loan #901.) Establish objective criteria to pick half of those loans that are worthy of legal action, in other words about 660 loans, ten times the size of the existing legal test, and begin legal action on them immediately. Take lenders, and your obligations to them, seriously.

Make the changes in the legal documents required to allow you to fund this legal activity while complying with the terms of the documents. This won't help you for the existing loans, but at least it gets you straight with the lawyers for future loans.

Oh, and please make the process transparent.

Prosper.com - 05/15/08 late loan stats update

Here's the mid-May 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. Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken

Written 05/04/08: Collections is not improving

Prosper.com - the lawsuits begin

Grant Wanapat, Jerald Teixeira, Holly Brown, Valentino Raboteaux, Ricardo Barboza, Crystal Moffett, Shi Li Park, Louis Collet, Robert Riviera, Christopher Carr, Chinyere Woke, Carlos Delgado, Diana Davis, Victoria Crawford, Mario Villanueva, Brandi Fitzgerald, Josephine Sharaba, Jermaine Massey, Teresita Spreen, Karen Rozier, Coleen Alexadria Dacey, Krag Pappas, Teresa Calvert, Lovel Hoxie, Deniece Todd, Kimberly Jones, Vickie Brown, Michelle Wiese, Rory Manning, Jeremy Brom, Lynn Horton, Del Phillips, Mark Dionne, Chona Dionne, Oscar Monge, Gregory Kolesar, Roger Treskunoff, Lavina Lewis, S. White ***

Question: What do these people have in common?

Answer: They have all been sued by Prosper.com, for not paying back their loans.

I have good news and bad news for lenders.

The good news is that legal action is finally happening. We've waited a long long time for this, and its good to finally see some serious action against deadbeats who have stiffed us. Prosper's collection activity up to this point has consisted of phone calls, with the recently added modern technological innovation of a letter asking deadbeats to repay.

The bad news is that the legal test project is very small, and is moving at a snail's pace. Lets review the schedule, so you can see what I mean.

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
02/26/08 -- Second suit filed. In Orange County. Prosper vs Rozier

Its now 05/06/08 and neither of those two cases has yet had proof of service filed with the court. You can't get very far until you tell the court that you have served the complaint to the defendant!

A great many more cases were filed 04/01/08, and a few more later in April.

So after starting the project on 01/15/08, four months later we only have proof of service for one defendant. That's movin' kinda slow. How many months must we wait to serve the other 65 defendants?

If the very first step takes four months, imagine how long the other steps are gonna take! In what year might we have verdicts? We have to move more aggressively than this.

Second problem is that Prosper is only suing 66 nonpaying borrowers in this project. They think of it as a test. If it goes well, maybe they'll do more someday. Today there are 1187 more Prosper loans that are more than 4 months past due (not counting the 66 in this test). These loans are on a fast track to nowheresville. If Prosper follows its standard procedure, these 1187 loans will be auctioned off for pennies on the dollar. This could happen to the majority of them within days.

Pennies on the dollar ain't good. In a recent note from Doug Fuller to lenders, he told us that the bids he received on the current set of 4+ late loans was about 1/3 the price they've received in earlier auctions. That means $0.03 or $0.04 on the dollar I think. This $0.03 or so is what lenders are going to get for most bad Prosper loans for the foresable future, because the legal test program is tiny tiny tiny, and slow slow slow.

Doing a "test" for a year or so on a small number of loans sounds prudent if its not your money that was lent and is now being washed down the drain. If it is your money, you have a different view. Prosper has simply never taken collections seriously. The lawers need to put some of these cases in high gear. Get them served for heaven sake! Learn what we need to learn in a few cases, and then greatly expand the program. This must be done, because the status quo sucks.

You can't be a successful loan company if you don't try real hard to get borrowers to pay the money back. "Try real hard" doesn't mean "phone calls and one letter". Most of Prosper's management effort is focused on making a better website, or "Are we a Web 2.0 company?" (the title of a real session at Prosper Days '08 ... I kid you not). Get real. You're a loan company. Your success depends on the value of your product.

*** This is not a complete set of names of folks being sued by Prosper. I obtained these names by looking up the suits in public court records in the large counties of California. You may obtain this information, and also status of each case from the county court websites.

Prosper.com - collections is not improving

Prosper's biggest hangnail is the fact that its loans perform so poorly. One aspect of this is collections. Once a Prosper loan goes 1 month late, the loan is sent to collections, and it almost always defaults. If you can't collect, then Prosper loans aren't worth much.

Collections performance has improved at various times, but it has been stagnant for the last 3 months.

I've graphed a simple ratio. The denominator is the total number of loans Prosper has sent to collections (over all time up to the observation date) and the numerator is the total number of loans which became current after going into collections. I have included only loans sent to Penncro and Amsher, because historically those are the numbers I collected daily from Prosper's web site. I never had much interest in the other collection agencies, because they never were given more than a handful of loans. The color of the curve changes on the day (2/23/08) that Prosper fired Penncro and moved all the in-collections loans to Amsher.

When the curve bends upward, it means that recent performance is better than historical, and is thereby pulling up this all-time average number. When the curve is flat there is no improvement. It is -- most recently -- flat.

I started complaining about Prosper's collections operation back when the numbers were around 6%. That's really a ridiculously low number! Its amazing how much flak I got at the time. Several know-it-all lenders told me that collecting on Prosper loans was inherently impossible. "Can't get blood from a turnip." etc. I never believed that. I believed that Prosper's operations were simply not competent. Over time it became clear that with a lot of pushing from vocal lenders, Prosper did pay more attention and roughly doubled this measure of collections performance during early 2007.

By spring 2008 the curve levelled off again, as Prosper stopped paying attention.

Sometime around mid-September of 2007, Prosper hired Doug Fuller to head operations, which means "taking care of your loans". After Doug arrived, the curve started heading up again. October thru December of 2007 were great months. It looked like Doug was able to make Penncro perform much better than they did before. I called that bend in the curve in Nov'07 the "Doug Fuller bend".

Eventually Doug expressed displeasure with Penncro. As a result, he hired a new company, Amsher, in February 2008. Now from everything I've read about Amsher, they seem like a great company. You should read their web page. Unfortunately, about the time Prosper's collections business moved from Penncro to Amsher, performance sagged. The curve is now once again horizontal. This means that Amsher's performance is around 17.5%, simply matching the all-time historical norm. Stagnation. Bummer. There has been no explanation of this from Prosper.

Doug Fuller occasionally posts a collections status update in the official Prosper blog. These generally have a postive message, like things are improving, and some ad-hoc statistics that you can't verify. For example, in the most recent update, he talked about dollars per loan per month being recovered. For example, we have no idea what loans he counted in that denominator. He described this number as higher than in the past, but depending on which loans he counted, this may not have been a fair comparison between Penncro and Amsher. I think my presentation makes more sense.

Background reading:

Over a year ago I wrote an open letter to Prosper about the collections problem. Some of it is a little dated, but the main ideas are still correct. You can read it here: Open Letter #2

Doug Fuller gave a lengthy talk on Prosper's collections at ProsperDays'08. You can watch it here: PD08 Collections Video

Technical notes: I left this part for the end, because most people aren't interested in the details.

When lenders attempt to understand collections performance, they face several difficulties. Prosper publishes collections statistics, but these statistics are not very helpful when we try to compare two collection agencies. You may have noted that Amsher's "brought current" percentages are all lower than Penncro's numbers were. Why? One reason is that the characteristics of the pile of loans they're working on are different. Penncro got loans that were freshly late, whereas Amsher started with a pile of loans that had been sitting around Penncro for several months. Its not a fair comparison. I've chosen a methodology which avoids this sort of problem.

I've generated a measure which combines the effort of all the players: Prosper, Penncro, Amsher into one number. As described above, the denominator is the count of all loans that have gone to collections, and the numerator is the count of such loans that got fixed. Simple.

Here's how I form the combined statistic.

On 2/22/08 Prosper's collections page showed us that 3348 loans had been sent to Penncro. On 2/23/08 the same page showed us that 1181 loans had arrived at Amsher. 2167 loans "disappeared" from the statistics. I asked Prosper about that, and I learned that only the "live" loans were transferred. Loans that were not actively being collected (either became current, or defaulted) were not transferred. Ok. Whatever. Sorta makes sense, but it makes it more difficult to understand history. I add those 2167 loans back to the number of loans Prosper reports as sent to Amsher. This gives me the total number of loans sent to either Penncro or Amsher, in other words, my denominator.

Forming the numerator is a similar exercise. On 2/22/08, Prosper showed that Penncro had been sent 3348 loans, and that 17.3% of these had been brought current. 17.3% * 3348 = 578 loans brought current by Penncro. From the percentages brought current that Prosper gives us for Amsher I compute the number of loans Amsher has brought current. To this I add the 578 loans brought current by Penncro, giving me total number of loans cured, in other words, my numerator.

I record several of the numbers on the Prosper collection agency web page every day, do the calculations I've described, and draw the curve.