Prosper.com - Its a Deadbeats' Party

Apologies to Oingo Boingo. I borrowed that title from one of their songs.

Now on to Prosper.com, and the sad story of "Post Charge-Off Collection Techniques".

Of great concern to folks who lend thru Prosper.com is just how hard Prosper actually tries to collect loan payments from borrowers. Sadly they don't try very hard at all. I've written about this before, so I'll skip much of the history, and just talk about recent revelations, and some juicy revelations they are!

Here are some links to some prior discussions:
May 6 ,2007 Collections is Broken
October 14, 2007 Collections Still Wanting
July 26, 2008 Collections: You have forsaken lenders

Remember that while lenders supply the money, Prosper.com takes full authority and responsibilty for servicing the loans. That means only Prosper.com can take collection actions. Only Prosper can remind borrowers to pay. Only Prosper can hire collection agents. Only Prosper (or their agents) can call the borrower, knock on their door, etc. Therefore, if Prosper doesn't do these things well, or doesn't do them at all, then money doesn't get collected, and lenders lose. With that in mind, we're gonna discuss what happens to loans that go very late.

Originally, Prosper.com loans that went 4 months late were declared "in default", and were sold by Prosper to a junk debt dealer. This action was codified in a contract between Prosper.com and lenders called the "lender agreement".

But then one day in May of 2008, Prosper decided to stop selling these loans to junk debt dealers. The decision was unilateral, without the consent of lenders, and in violation of the lender agreement. Lenders at the time scratched their heads about Prosper's willingness to ignore the contract, but lenders didn't raise a legal fuss. Prosper after all argued that they were going to do something even better than sell to junk debt dealers. They were going to apply "Post Charge-Off Collection Techniques"! Hallelujah, lenders thought. They're finally gonna get serious!

In May of 2008, Doug Fuller of Prosper wrote on the official Prosper.com blog:
We believe the prudent course of business is to not sell at this time. Instead, we are going to consider the loans as charged off, and keep them and continue to try to collect them as charged off debts. You will continue to own the loans as we apply post charge off collection techniques to these accounts. We recognize that this is different than our normal process, but firmly believe that it will result in a higher return for our lenders.

Lenders mused ... What the heck are these "post charge off collection techniques" anyway? We coined the acronym PCOCT. What the heck is PCOCT? In our fantasies, big knarly biker bar bouncer guys knocked on borrowers' doors and politely asked for payment. In the back of our minds we suspected that PCOCT meant precisely "nothing". In spite of much prodding from the lender community, Prosper never defined PCOCT, and in fact never said anything at all about it. ... until now.

More than a year later, August 2009, Doug Fuller of Prosper wrote in the official Prosper blog
Starting now, our plans relative to charged off accounts are as follows:
1. We continue to monitor the distressed debt market and to see if a sale is a possibility.
2. Until such time that the expected sale price exceeds the projected net recoveries for the first 12 months after charge-off, we are not going to sell.
3. We are going to place the accounts with a collection agency that specializes in charged-off accounts (the first agency has been identified and the contract is in the works).
4. The agency is going to employ a settlement strategy with settlement authority based on age, charge-off balance and current credit score. For post charge-off accounts, this is the best strategy to maximize total dollars recovered.

Well that was a letdown. Remember that more than a year has passed since Prosper began putting our loans into the PCOCT basket. It is shocking therefore to see this official statement discuss collection actions in the future tense. We "are going to" place the accounts... The agency "is going to" employ a settlement strategy...

In other words, in the more than a year since Prosper began throwing our loans into the PCOCT pile, Prosper has not hired an agency to carry out the post-charge-off collection techniques plan. In line with lender's worst fears, the true meaning of PCOCT was "The loans just sit in this pile here, and we don't do anything."

This is not an idle issue, because as you can see from the late loan statistics charts I publish almost every month, about 40% of Prosper loans go bad. That means we're talking about what happens to 40% of Prosper loans. And what happens is that those 40% of loans go into a pile where nothing is done. Think about that when you lend money via Prosper.

The execution is lacking. Caveat Emptor.

PS: As always, great discussion among Prosper.com lenders is found at prospers.org .