Sunday, August 23, 2009
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 .
Sunday, August 2, 2009
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 or "charge off" as it is now called). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.
Loans created in the worst month so far, October '06, have now gone past 43% bad!
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
Many of the very early posts in this blog are still on point, and provide background on prosper, from a lender's perspective. If you're new to this, please read old posts before sending questions. Thanks.
The basic fact about Prosper.com loans so far is that about 40% of the borrowers are not paying back the loans. This is horrendous. You don't see this in the summary stats that Prosper gives you, because they mix new loans in with the old loans, and new loans haven't had time to go bad yet. Separating out the loans by time of origination, as I do above allows you to see how Prosper.com loans evolve over time. It seems that they evolve to about 40% bad.
I've written before about the reasons I believe that investments in Prosper loans have done so poorly. Prosper has done a poor or nonexistent job of basic tasks necessary for successful lending: verifying information provided by borrowers, and collecting loan payments.
In early 2008, I was pleased to see Prosper saying they wanted to try doing some things differently. As it turns out, it was all fake.
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 had done such a horrible job of collecting on late loans, lenders were desperate for improvement, and the promise of legal action against some of the professional deadbeats who had ripped us off just sounded right to us. Many of us opted in.
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 monthly acccounting statements as promised. No reporting. Prosper has kept lenders completely in the dark on the status of the legal action on these loans. None of these accounting statements were ever produced during any of the 12 months of 2008, nor the 8 months so far of 2009!
I have written to Prosper about this a few times now. My most recent correspondence was in early July 2009. Their response was that there would be some status real soon now. No word, however, on the missing 20 months of statements or when or if they intended to ever produce any.
Fact is, even tho Prosper is keeping the details secret, 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 traveling around to the various county courts, and checking the records manually.)
From the lawsuits that are visible on the web, it appears that Prosper has lost most of the cases. No one from Prosper has ever offered an explanation for this. Isn't that outrageous? I think it is. I think it shows a disdain for lenders. It shows that Prosper management believes it is not necessary to do the things that they say they will do. They believe this even when $735,000 of lender's money is at stake.
I seems that the legal test was horribly underfunded by Prosper, and at some point they just aborted. A damn weak effort. Instead of a symbol of Prosper's strength and a deterrent to deadbeat borrowers, it is just another sad joke in the Prosper.com story.
So what does that tell us?