Sunday, December 30, 2007 - Collections Update hired Doug Fuller to lead "operations" some time around mid September. He's been there 90 days, so we're gonna take a look at how one of Prosper's biggest problems - collections - is doing under Doug's rule. Summary: Improving, but slowly.

You might think its strange to discuss an individual employee. A bit of history may make that more understandable. In the beginning, Prosper thought of themselves as the E-bay of loans. They built an incredible web-based infrastructure to match lenders with borrowers and process payments. Unfortunately, they didn't think enough about the loan business. Not enough attention was paid to loan "operations", identity verification, fraud checks, ensuring valid contact information, handling various payment situations, customer service, and collection of late payments. Prosper may look like E-bay on the outside, but inside a lot of machinery is needed to make the loan business work. They got off to a bad start with that machinery, and how quickly they recover may well determine the future of Prosper.

Example: a year ago, when I first started writing about these problems, the cure rate (the fraction of loans that recovered after going 1 month late) was only 7%. In other words, once a loan went late, you could pretty much write it off. And about 20% of prosper loans per year went 1 month late. The resulting huge default rate discouraged many early lenders, and threatened the future of Prosper and P2P lending. In addition, many lenders were angered by how slowly Prosper took visible steps to fix these problems.

Operations is important. Its the core of the business.

So it was an important event when Prosper two years after it started Prosper openly recognized the importance of loan operations by hiring a VP of Operations, Doug Fuller.

When Doug arrived, he promised a hard line on collections. Its been 90 days. Lender's money is at stake. How's he doin'?

Lets look at the history of Prosper's cure rate, that is the fraction of 1-month-late loans that are eventually broght current. (The rest of them go on to default.)

prosper collections rates

Good news: getting better all the time. Bad news: Not good enough yet.

As often occurs, there are some technical problems with interpretation of this data. The statistic I'm plotting above is the fraction of all loans (over the entire history of Prosper) that have cured while at the collection agency Penncro. In other words, an average over all time. This statistic is weighted down by a lot of old loans that have already defaulted or nearly so. I'd really like to have data showing collections performance on recent loans. Because this average moves up with time, we know that performance on recent loans must be significantly better than the average. But how much better?

Looking at the chart, you'll note that it looks like there's a little "bend" in the curve two months ago around the end of October. Doug Fuller arrived around mid-September, so I'm gonna call the end of October change the "Doug Fuller bend". I don't know that this change came from his efforts, but is seems a resonable possibliity. Things are better, but how much better? ...and what changes has Doug made to cause this improvement?

Besides this "lifetime" statistic, Prosper also provides a "last 3 months" statistic. At first I thought great, that's the thing I should use. The first thing I noticed was that the "last 3 months" numbers are lower than the "lfetime" stats. We know that recent collections performance is better than in the past, so this didn't make sense. I contacted Prosper for clarification. They told me that "last 3 months" doesn't mean loans that have entered the collections process within the last 3 months, as I had presumed. It means all loans that were in work at Penncro at any time during the last 3 months. Suddenly it became obvious why the "last 3 months" numbers are low. They are weighted down by all the bad loans that are stuck in collections, sitting around Penncro, 4 months, 5 months, 6 months, 7 months, etc late just waiting to be sold off. Its a roach motel statistic! That's too difficult to interpret. At least the "lifetime" statistic is unbiased. It contains every loan that has gone to collections exactly once, so the relative weightings of good and bad loans is exactly the relative weighting of same that arrived at collections.

I returned to the "lifetime" statistics. But I really wanted to get a quantitative measure of what fraction of recent loans are getting cured. Starting 10/30/07, in addition to copying the % cured from Prosper's web page each day, I also copied the # of loans in collections. Now that I have this data for 2 months, I can calculate the number of loans that were added to collections during this period and the number of loans that recovered. If I assume that all the loans that recovered were loans that were sent to collections during this period, I can calculate the cure rate that would be required to produce the numbers Prosper gives us. I'll spare you the equations. The number comes out 23.6% .

Now that number is almost surely on the high side, as it presumes that all loans recently cured were recently sent to collections. There were almost surely a few old ones that cured as well. Now we have bounds. The cure rate on recently-gone-late loans is between 15.65% and 23.6%. Its probably around 20%. That's a lot better, but it still means that about 80% of loans that go 1 month late will go on to default. That's still not very good.

We don't know what actions caused these improvments in collections performance. Several times Prosper employees have told me that low contact rates were a big problem. In other words, when the collection agency tried to contact the borrower, a large fraction of the time they would find that the phone numbers and addresses didn't work. Scary. We know that Prosper implemented phone checks and address verification post cards to help with this problem. We don't really know much, because they've been tight-lipped about both their understanding of the problems and ongoing improvements.

Seems to me that if address verification post cards helped, then fraud of some sort was a big problem, because it seems to me that this is the only problem an address verification card can fix. After all, Prosper already used Experian's database to check addresses given by borrowers. If the address matches the name in Experian's database, but the postcard fails, then the name and address matched, but the actual borrower doesn't live there. That's fraud, yet Prosper denies that identiy fraud has been significant. Curious. We just don't know, because Prosper hasn't shared with us any details of the ongoing battle against fraud, or even against nonfraudulent bad addresses and phone numbers.

In a traditional loan company it makes sense to keep this sort of info private, but Prosper isn't a traditional loan company. Because of the poor performance of Prosper's loans, there's a crisis of confidence. To fix that one would need to be more open, but Prosper's relationship with lenders has becme much less open during the last few months. In some cases Prosper has become downright hostile.

I tried to communicate with Doug Fuller once. Sent him an email message. I got back a response from Prosper's Shira Levine, saying that Doug had received my message. I have never had that happen anywhere before. I haven't tried to talk with him since. (If you've had better luck, let me know.)

Prosper began with an incredible philosophy of openness. Who else ever made public the incredible amount of information about loans that Prosper does? Nobody. Somehow things took a turn. It will be impossible to restore lender confidence without openness. That's my advice.

Doug Fuller did say in his 10/2/07 "interview" that there was a "40% increase" in contact rates during September 07. Doug Fuller Interview He said this improvement came from getting Penncro to start their autodialer at different times of day. How could the prior management of collections be so dumb as to dial at the same time every day? Its not like they didn't know collections was an important issue. We told 'em so, and they said they agreed.

In the early days of Prosper, lenders used to debate the causes of the high default rate and low collections cure rate. Some felt that there were just a lot of bad loans, either due to fraud or lender stupidity. Others believed that the collections effort was inept. Maybe it was (or is) all of the above. How are these things changing? How can we regain our confidence if we don't know?

My apologies. This discussion has run downhill. I started with numbers and have descended to speculation about tidbits that have escaped from the perimeter of the castle. To some this speculation may seem rude, but remember these are our loans. The lenders own them. Prosper merely originates and services them for our benefit.


  • Collections is indeed improving, but very slowly
  • The drawbridge is up; little information about collections is being shared
  • Doug Fuller might be improving things if the little bend is for real
  • Wish he were more open

Friday, December 28, 2007

Lendingclub - Reconsiders the Bad Math

A message from Patrick Gannon of Lendingclub ...

Date: 12/24/2007
From: Patrick Gannon ...
Subj: Re: Lendingclub - bad math
Thank you for your analysis of our ROI calculations. We are taking down the ROI section of the statistics page for now while we review your comments, track down potential errors in the calculation and improve the help page. We will blog a response in the next few days after we relaunch that page.

I tried to open an account on your blog to post a public comment but couldn’t sign up.

We appreciate your interest in Lending Club, and we hope that we can win you over as a lender.

Thanks again for your analysis,

Patrick from Lending Club

Thought I'd post this, both to make their response public, and also to unpuzzle anyone who went looking for the page I was complaing about and did not find it.

I do hope they succeed. Prosper needs a competitor .

Sunday, December 23, 2007

Lendingclub - Bad Math

Lendingclub now provides an estimated "Lender ROI" calculation on their web site. Unfortunately, their mathemematics is incompetent, and the resulting numbers are meaningless.

You might say "Gee, why is he so hard on them?" The answer is simple. They want my money. This forces me to set a standard.

I guess us P2P lenders are spoiled because got much of this right. It looks like LendingClub tried to copy the presentation on the Prosper performance web page without understanding the calculation.

Lendingstats performance statistics can be found at

Here's a picture of their ROI chart...

lendingclub ROI table

The page containing this table comes with a popup help page that explains the calculation. Lets try to use it to understand what they have done. Sorry if this is a long slog. There's no other way to show you how utterly bogus this is.

Estimated Lenders ROI table
Average rate: The average interest rate for all loans that have closed within the loan grade (A-G)
Losses: The sum of the principal amount of the loans that are expected to default, expressed as a percentage of
lenders estimated ROI. A loan is "expected to default" for purposes of this estimated ROI calculation (i) at a 50% clip with respect to loans that are at least 15 days late and (ii) at a 90% clip for loans that are at least 120 days late
Processing Fee: Fee paid by the lenders expressed as a percentage of lenders estimated ROI
Estimated ROI: The net estimated return on investment after subtracting estimated losses and fees

Average rate makes sense.

But when we come to "losses" ... Whoa. "sum of principal amount of the loans" ... That I understand. When they say "that are expected to default" they mean late loans multiplied by a factor, 50% or 90%. That I understand. They go on "expressed as a percentage of lenders estimated ROI." I stared at that for quite some time trying to figure out what the heck they could be doing. You see, we're building up to the ROI calculation. These losses are one component of it. We don't know the ROI yet, so we can't possibly divide by it. This is just wrong.

I reverse engineered the numbers in the table. What they actually have done is to add up all the estimated losses (dollars) and then divide by the total principal amount of the loans in that credit grade. So the guy who wrote the explanation didn't understand the thing he was trying to explain. Ok. The losses numbers they actually calculated are closer to being right, but are not right, for two reasons.

First, they are not properly normalized. Second, they include only the loss in principal. They forgot the interest which is lost when a loan defaults. I'll spend a few sentences explaining each of these errors a bit later, so you can understand how big these problems are. For now lets continue reading the help popup.

The processing fee explanation in the help popup is also wrong. The words "expressed as a percentage of lenders estimated ROI" simply don't belong there. After computing these various percentages, they subtract them, which means they had better all be percentages of the same thing: principal.

It isn't easy to describe a calculation precisly in english. Equations are better. So it seemed good that LendingClub's popup went on to provide equations. However, these equations are all wrong. (And by all, I mean each one of them is wrong.)

Estimated ROI = Average Interest Rate - (Loss due to Late Loans - Loss due to Default Loans) - Lending Club Processing Fee

Loss due to Late Loans = Sum (50% * (unpaid percentage) * (interest rate of the late loan))
Loss due to Default Loans = Sum (90% * (unpaid percentage) * (interest rate of the default loan))
Lending Club Processing Fee = 1% of all payments received by lenders.

Ok. Lets start at the top. The equation for Estimated ROI says we should subtract some numbers. I expected that. But look at that minus sign inside the parenthesis. This equation would have us subtract one kind of loss but then add (instead of subtract) another kind of loss. That's wrong. Either the minus sign inside the parens should be a plus, or the parens should be dropped.

Next lets look at the equations for losses. They're similar, so lets just look at the first one. It has us sum some things. We'll assume we're summing over the late loans. Lets look at what's inside the sum.

50% * unpaid percentage * interest rate of the late loan

There are many things wrong with this. First, they don't say percentage of what. Second, the numbers shown in the table are clearly the fraction of principal that is late, which has nothing to do with "interest rate of the late loan". I think what they meant to say was

sum(50%* late principal) / total principal

Finally, there's an equation for processing fee. Well, its not quite an equation. It is the definition of the LendingClub processing fee. Unfortunately, its in units of dollars. 1% of some dollars is going to be some other amount of dollars. The number in the table on the other hand is a percentage rather than dollars, so this equation can't represent what is in the table. Some calculation was done to get from dollars to percent. Not specified. Another problem is that they haven't told us how the dollar amount was calculated. Did they calculate the payments due during a year for each loan, multiply by 1% and then sum? The numbers in the table look too large for that. What they actually calculated is unknown. A proper equation would leave us with none of those questions.

Enough with this unhelpful help file. Lets go back to the two big errors in the actual calculation. These are: 1. the loss rate is not properly normalized. 2. They counted only principal and forgot lost interest.

To understand the normalization problem, we have to look at the units of the numbers in the table. The first line contains the average interest rate of the portfolio. That interest rate is a rate per year. The second line contains the loss rate, which they have forgotten to convert into a per year rate. They're going to subtract these two numbers, but they aren't in the same units!

To understand why this is important, imagine that you borrow some money from me at 3% per month, and lend it to Joe at 5% per year. Now you subtract 3% from 5% and think you are getting a return of 2%. Not so. You subtracted two numbers in different units. To do the calculation correctly, you would convert the 3% per month interest rate into an annual rate and then after you have two numbers in the same units you would subtract them. You would discover that you're losing a lot of money.

That "losses" rate in Lendingclub's table is not a per year rate. It shows loans that have gone bad (late or default) during their life so far. The Lendingclub portfolio is very young. "So far" has not been much time. To convert that number to an annual rate we're going to have to increase it a lot.

I downloaded the Lendingclub database, and calculated the average age of the entire Lendingclub portfolio. The loans in the portfolio are 84 days old on average. A lot less than a year! But that's not the entire story. Loans can't possibly go bad during their first 30 days, because no payment has yet become due. At the very least, we should subtract 30 days. But there's more. Lendingclub uses "15 days late" as the threshold where a loan becomes "bad" for the purposes of our loss calculation. This event cannot occur until a loan is 45 days old. Wow. So we should really subtract 45 days from the 84 day average loan age. You get 39 days, and that's just 0.11 of a year! To normalize the "losses" that Lendingclub shows in their table, we should divide them by 0.11, which is the same as multiplying them by approximately 9. Ouch.

Look at the column for loans of grade "B". The 0.51% losses they show, when properly normalized (annualized) becomes 4.64% per year losses. Quite a difference.

I should mention that this simple normalization method makes several assumptions about the behavior of loans. It is certainly not the only way the normalization can be done. I'd be open to Lendingclub using some other method, as long as they tell us what they've done and it makes sense. Just using 39 days worth of losses to represent a years losses is not acceptable.

The second error in this calculation is more subtle. When a loan defaults. Everybody realizes that you lose principal. You also lose the interest that you expected to get. I can hear people saying "but you didn't get it yet so how could you lose it?" Lets look at a simple example. Suppose I lend you $1 at 5% interest, and to keep this simple you're gonna pay me back in 1 year. My return will be 5% if you pay me back, or -100% if you don't. The difference between those two numbers is 105%. Using the kind of ROI formula that Lendingclub used on their stats page, I would start with the 5% interest rate I expected to receive (that's the "average rate" on the first line of their table), then I would subtract something called "losses", and I want the answer to come out to be my ROI. If I want to come out with an ROI of -100%, I'm going to have to show -105% on the losses line because that's what I need to subtract from 5% to get -100%. That -105% represents loss of both principal and interest.

If you look closely at Prosper's performance table, you will see two losses lines, labelled "net defaults" (which is where they put the estimated principal loss) and "adjustment (interest and fees)" where they put the estimated interest loss.

Lendingclub left out the 2nd line.

In the early days of, they got this one wrong too. They used to explain that all you needed to do was add the ROI you wanted to obtain to the default rate you expected on a certain grade of loan, and that sum was the interest rate you should bid. That calculation ignores the lost interest term. This wrong calculation for a long time was coded into the standing orders web page.

Having trashed their attempt at performance calculation, I don't want to end without saying a few things about some positives at Lendingclub. The principals seem like nice chaps. They seem very open to communication with the lender community. That's a great big positive. Like Prosper, they've also decided to make their loan database available. This is also a great positive. (Its not as extensive as Prosper. They only have loans, no bids or info about lenders. It turns out that in Prosper's data, the information about lenders' behavior and performance is the most useful part.)

I imagine the fine folks at Lendingclub will straigthen all this out. Once they do that, and their portfolio ages enough to be measurable, I'll be very interested to see how the returns numbers look. Before I invest in loans, I need some way to know (or believe, or have a hunch...) that the interest rates on the loans are reasonable. Investing thru, many of us learned that the historical default rates prosper used to give us from Experian were inapplicable. Prosper's default rates turned out to be much higher. I would assume its going to be the same way on Lendingclub. Lendingclub started by giving investors a set of historical default rates from Transunion. It seems likely to me that these will end up being inapplicable to the Lendingclub situation. We need good data from Lendingclub's own operation before we can decide whether these investments make sense.

The folks running Lendingclub set the interest rates for us. To do that properly they need to understand the mathematics of loans. I need to have confidence in their ability to do that math correctly. I'm not there.

Friday, December 21, 2007

My Holiday Wish for

If I could wish for just one thing this holiday season when it comes to it would be redacting any changes that lead to the appearance of censorship.

It is my opinion that the appearance of censorship on the part of and its management will be the downfall of Prosper. PMI needs to remember that this is a place where lenders invest their hard earned dollars and where borrowers ask for same. Everything that is done needs to be above board and honest to a fault. This appearance of censorship started when Prosper erased, completely erased, the old forums and installed a new one.

I have kept track and nine out of my last ten posts to the new forums did not meet approval and were not posted. Add to that that Prosper is sending out letters from attorneys to various members, banning anyone who mentions an outside website on, and erasing profiles that do the same and it looks like Prosper operates under a police state.

I want nothing more than for Prosper to succeed and it is my most fervent wish that I can work within Prosper to affect change.

As it stands now until or unless Prosper takes some action to remember who their customers are I won't be borrowing or lending again. That's a sad statement for me to make and I hope Prosper realizes I'm not the only one who feels this way. Many of us feel that Prosper has squandered not only the goodwill we once had but also the tremendous talents of their lender and borrower base are the customers who have been with them since the beginning. We all share one common goal: to see Prosper succeed and become the premier site for P2P lending. We hope Prosper shares this goal with us.

The words above were written by long-time Prosper member Cushie06. She submitted them to the official blog, where they met the following response:

Unfortunately Prosper is not able to accept your post for to the Prosper Blog. Many of the sentiments expressed are shared, but we fell it is inappropriate for the blog..

Thanks Cushie.

Sunday, December 16, 2007 - late loan statistics update

Here's my 12/15/07 update to the late loan statistics, with some notes on default rates. You've heard me say it before. The default rate of loans is repeatedly misrepresented in the press. This trend continues.

First, today's chart...

prosperlate 2007-12-15 small

A larger more readable version of the chart is available here

An article about appeared on Yahoo today. It contains a misleading statement which has appeared in many articles about prosper. "The default rate on Prosper loans is a meager three percent."

Too bad the author, Glenn Chapman didn't do a little research. Seems likely that he just copied from the last misleading article, the November 27, 2007 Associated Press article

Its pretty easy to see that the default rate on loans is about 20%/year. You can see it in the chart above. Doing an estimate using all the loans on Prosper requires some tricky math because loans are of various ages. That is difficult to explain. To make this simple, lets look at a group of loans that are all almost exactly 1 year old. That way there's no age adjustment to do. We're just gonna estimate how bad things got during that first year. I've written about this before. This time I'm gonna talk numbers instead of theory.

Lets look at all the loans that originated in October 2006. I'm going to consider, as I do in the chart above all those loans that have gone at least 1 month delinquent. The information about such delinquency comes to us with a built-in 2 month delay. In other words, a loan's first payment isn't due until the loan is 1 month old, and that payment can't possibly be 1 month late until a 2nd month has gone by. That's why the curves jump up from zero at 2 months after origination. With that in mind, I chose Oct'06 loans, because they're just now at the point where we have observed 12 months during which it was possible to be 1 month late.

Luckily, Prosper makes all the numbers available via their performance web page. This is a good thing! Now according to Prosper, 740 loans originated in Oct '06. Of those, 81 loans have already defaulted. If we counted only loans that have already gone all the way to default, we would divide 81 by 740, giving us 10.98% of these loans defaulted in the first year.

However, we know a bit more. In Prosper's vernacular, "default" actually means that they have already disposed o the bad loan. There are a great many loans that have gone more than 4 months late, Prosper's criteria for default, but have not yet been sold to junk dealers. These loans are just as bad, but haven't yet been given the name. While it is theoretically possible for one of them to recover, we know 99% will default. In fact, this will happen within the next few days, as Prosper has scheduled a loan sale before the end of the year. Prosper tells us there are 73 of the Oct'06 loans i nthe "4+ late" category. If we add those in, we get (81+73)/740 = 20.81% of Oct'06 loans are defaulting in the 1st year. Wow. That's a lot different than the 3% mentioned in the article, isn't it?

A better estimate can be made by using more of the late data. Based on historical performance, we know that once a loan goes 1 month late, it almost always defaults. It is legitimate to count these as associated with the loan's first year, because there is such a high probability that the "stop paying" event has already occurred. Prosper tells us that of the Oct'06 loans, 13 are 3 months late, 12 are 2 months late, and 16 are 1 month late. Therefore the total number of loans that are 1 month late or worse is 81+72+13+12+16 = 195. Each of these 195 loans was sent to Prosper's collection agency when the loan was 1 month late. We know from the collection agency statistics that Prosper also publishes that about 15% of loans that have gone to the agency have recovered. We can therefore estimate that about 85% of such loans will default. That gives us a way to estimate from loans that have already gone late, how many will default. That estimate is 85% x (81+72+13+12+16) = 165.75 . Finally, if we divide this by the total number of loans, 740, we get 22.4% . Stop pay events in the first year of these loans will cause 22.4% of them to default.

If you look at the chart above, you will see that there's nothing very special about Oct'06. The curves for most other months have the same slope and general shape.

Prosper loans, so far, have been defaulting at about 20%/year, not 3% as the article claims.

This number is important for Prosper lenders to know. The simplest takeaway is this: If you want your portfolio to have a default rate better than 20%, you'd better be selective!

There are many other things I've learned from these curves. Example: I used to see people say things like "After a borrower makes 4 or 5 payments, I think the loan will be ok." Turns out, that's nonsense. If you look at the curves, you see that nonpayment events are well spread out over time. We know so far that they're pretty uniform over the first 18 months or so of the loan, and may well continue thruought the life of the loan. (ie the curves are pretty straight) Nothing magic happens after a few good months. That was a lender's fantasy.

In the last update of the charts, I noted that the Aug'07 curve took a big jump. I wondered whether this was a data glitch. Now confirmed. It was a glitch. A few days later, Prosper revised the numbers. The Aug'07 curve looks perfectly ordinary now.

Sunday, December 9, 2007

Wall of Sham returns!

I just wanted to mention that one of the best Prosper-related web sites has returned from the dead. This ingenious site profiles Prosper deadbeats - borrowers who have defaulted on Prosper loans. The stories of these individuals are real eye-openers, and sometimes just hilarious. If you want to be a successful lender, it helps to understand the deadbeat.

The site temporarily suffers from a few dead links, due to Prosper's recent removal of 2 years of forum content. Don't let that bother you. Much is still intact.

Note added 05/2008: Wall of Sham is again offline. It is sad to see how people fear deadbeats and the laws that protect them.

Sunday, December 2, 2007 - late loan statistics

Prosper no longer allows me to publish this material in the discussion forum, so I will now publish it here on .

Here's the 12/01/2007 update of the late loan chart.

late loan chart - small 2007-12-01

A larger version of this graph is available: here

The following chart presents the same data, except that the curves have been slid to a common starting point. The horizontal axis now shows days since loan origination month. The first three months Mar'06, Apr'06, May'06 have been left off of this chart, because the curves for those months (Prosper's early days) have a different shape. With those curves left out you can easily see how similar the remaining curves are.

prosperlate 2007-12-01 slid

Look about 1 year out. You see about 20% of the loans have gone bad at that point. Individual months vary, but are quite similar.

Notes on methodology:
Each curve contains data on all the loans that originated in a particular month, as identified in the legend. All data comes from Prosper's performance web page. Data points are computed from data observed the 1st and 15th of each month.

Each data point is a ratio. The numerator is the number of loans that have 1 month late or worse. The denominator is the number of loans originated. Thus this ratio is the fraction of loans that have "gone bad".

More specifically, the numberator is the sum of loans in the following states: defaulted + "1-3 months late" + "4+ months late" + repurchased. The first three numbers are read directly from Prosper's performance web page. Prosper does not explicitly display the number of loans repurchased. I calculate the # loans repurchased by tracking changes in the number prosper shows as "loans originated".

The denominator is the number of loans originally shown by prosper as having originated in the designated month. When prosper repurchases a loan found to have been fraudulent, they "unoriginate" the loan, in other words they subsequently show that a lower number of loans have originated. I use the original (higher) number in the denominator of my ratio. For example, in May of 2006, 458 loans originated, although they now show the number of originations as 446, after having repurchased 12 fraudulent loans.

Excluding the early few months of Prosper, these curves look very similar to one another. Separating loans by age allows us to see the time evolution of delinquency. Delinquency grows over time. We can also see the rate at which it grows. For the first year each group of loans shown here has gone bad at more than 20% per year. Because almost all Prosper loans that go more than 1 month late go on to default, we can also see that the default rate on the all-prosper portfolio is approximately 20%/year.

Given that this is so clear from Prosper's own data, it is sad to see the quality of Prosper loans misrepresented in the press over and over. The most recent example is a November 27, 2007 Associated Press article wherein Chris Larsen is quoted as saying:

Prosper’s default rate hovers at about 2.7 percent, Larsen said, but that figure is expected to rise as more loans mature.

Its not difficult to figure out how he comes up with 2.7%. If you take the total $ worth of loans that prosper has declared defaulted so far, and divide it by the total $ worth of loans that Prosper has originated so far, you get approximately 2.7%.

That ratio, however, is not meaningful to lenders.

One problem with the 2.7% number is found in the choice of numerator. The numerator in this fraction includes only loans that have been declared "default" by Prosper. Prosper ages highly delinquent loans quite some time before declaring them "default". Loans are subject to default at 4 months late, but Prosper holds such loans until a quarterly disposal, and only declares them default once they have passed the quarterly event. Loans >4 months late would be in the default state except for the fact that they are waiting for the quarterly auction. Today Prosper shows $2,864,899 of loans in the "default" state, and $3,694,261 in the "4+ months late" state. More loans are in this suspended waiting-for-the-auction state than have so far completed the process and been declared "default"! If the quarterly auction had been held yesterday, the calculation of Larsen's ratio would have come out 6.4% instead of 2.7%.

The denominator is also a bad choice. Itcontains many loans so young that they could not possibly have defaulted yet. (Loans must be 5 months old before they can default.) The denominator also contains many loans old enough to default, but still low on the curve. This methodology is simply defective.

Only when lenders understand the rate at which Prosper loans go bad will they have a chance to understand how selective they must be to succeed. Prosper loans have been going bad on average at about 20% per year.

There was one small surprise in this update. The Aug'07 curve took a jump. This occured because the # of originated loans in Aug'07 dropped. Was 979 originally, and was still 979 at my 11/15/07 reading. As of 12/01/07 Prosper shows only 940 loans originated. This (probably) means that some time during the last two weeks Prosper repurchased 39 loans from Aug'07. Must have discovered a big batch of fraudulent loans. If this theory is correct, it would be the largest batch of fraudulent loans ever detected. Haven't heard anything about this event, but then it seems like it may have occurred at about the same time the Prosper forums were shut down, and there has been less sharing of information in the Prosper community since that time. We should soon hear confirming information from lenders who were part of this repurchase, or else learn that it was a data glitch.

Saturday, November 24, 2007 - Doug Fuller's 60 Day Review

A little over 2 months ago, Prosper presented their new VP of Operations, Doug Fuller. He promised serious improvement in Prosper's disasterous collections department. Now that he's been on the job two months, it seems like time for a status check. How's Doug doin'?

Lets look at Prosper's collection statistics for the time since Doug's arrival.

As you can see from the chart, Prosper's statistic for late loans cured has increased by about 1% in the time since Doug joined.

collections stats since Doug Fuller

How should we think about that improvement? Remember that in February '07, Prosper increased the lower cuttoff credit score for new borrowers, Because of that change the average quality of borrowers since that time is substantially improved. This change alone should cause the cure rate of late loans to increase slowly over time without any change in collection effort. Indeed, the cure rate has increased gradually since that time. The 1% improvement in the last 2 months is likely due to that effect alone.

What if the 1% improvement is due to Doug's effort. Is that a good result? Suppose he continues on this half-a-percent-per-month slope. It will take two years to get to 26% .

What about the "new agency test?" Dunno. Prosper has decided not to share the data. The only evidence of the test is a cryptic note on a few dozen loans. Dunno 'bout you, but none of my loans with the cryptica "new agency test" note have been cured. If there were great positive results, I'd expect Prosper would have shared them. I'd recommend sharing the results in any case, as the lenders are after all the owners of the loans.

So far Doug is just another disappointment. Hope he produces better results during the month of December. Nothing would make me happier. But frankly I believe structural changes are needed. As long as lenders lose thousands, and the collection agency only loses the opportunity to make a few bucks, the right things aren't gonna happen .

See my writeup from May 2007: Open letter #2 to

Tuesday, November 6, 2007 - Oops... (they) did It again!


I've been critical of some of Prosper's misleading advertisements and newsletters in the past. Last time I caught them making incorrect statements in the newsletter, a Prosper spokesman wrote "Going forward with the newsletter, we will diligently fact-check each story before publication." Ok. Great in fact.

They just published their November newsletters. So how did they do this time? If you'll pardon the slightly mangled and heavily overused words of Britney Spears, the title says it all. How can this be?

The November lenders' newsletter contains the "stories" of two lenders. I'll look briefly at each one.

In one story, lender hcjack2208 writes

Right now I have 30 loans that I have invested in.

Even with a few defaulted loans, I am still making a 13% rate of return on my money.

Wow. This dude is making 13%! Cool.

Thanks to Prosper's data export, we can look at the status of hcjack2208's loans. The web site makes it easy for us. We learn that he has 42 loans and 7 of these are late. A pretty substantial fraction of lates. If we estimate his rate of return with the assumption that loans in his portfolio will go bad in the future at the same rate they have in the past (the assumption that lendingstats ROI calculation makes), then hcjack2208 is achieving a rate of return of 4.6%, not 13%. Big difference, eh? Oops.

You can view the details of hcjack2208's portfolio here.

Next there's a story about lender davesax. Davesax writes

At this point I've got $23,000 invested in 200 loans with a gross yield of 14.25% (less 1/2 point for Prosper) and only a few late pays, but none over 15 days at present.

Wow. 200 loans and nothing over 15 days late. This gives the impression that davesax's return will be something close to that gross yield of 14.25% that he quotes. That really sounded great, so figured I should look at his portfolio.

Davesax now has 360 loans, of which 13 are late. 1 loan is 4+ months late. 3 are 3 months late. 2 are 2 months late. 3 are 1 month late. 4 are >15 days late. The facts don't match the statement in the newsletter at all. Well, that's misleading.

If you want to do the davesax rate of return calculation in your head, note that those 13 late loans are about 3.5% of his portfolio. Because his portfolio is less than 6 months late, you've got to more than double that to get an annual default rate. You end up with something around 7%/year estimated defaults. He started with a little over 14% gross interest rate, so you would expect his return to be something a little less than 7%/year. I won't bore you with the numerical details. Lendingstats does a much more careful calculation, applying appropriate roll rates and loss rates.

The lendingstats ROI esimate for davesax comes out 6.29% .

You can view the details of davesax's portfolio here.

The sin in the above examples is that Prosper took quotes from relatively new lenders, then used them more than 4 months later. New lenders often think they are doing better than they really are, because they don't project losses appropriately.

Most lenders don't have the mathematical sophistication to compute how well they're doin'. That's why the portfolio calculations at lendingstats are so very useful. Prosper itself offers a similar calculation, on their "performance" web page, but they don't let you apply the calculation to your portfolio. You can only apply the calculation to various subsets of the whole-prosper portfolio, based on a list of filter criteria (date, credit grade, etc). I believe it is terribly important to make lenders understand their own performance. To do anything less is misleading.

Toward that end, I have suggested that Prosper adjust their "performance" web page so that it will compute the ROI of a lender's portfolio. In the meantime, lenders can use lendingstats.


Google advertisements being run by Prosper recently deliver those who click to a landing page that contains the following graphic:

9.4% advertisement

Unfortunately, the word "average" is pretty well defined, and the average portfolio on Prosper is not earning 9.4% as the ad implies. The mean lender portfolio ROI is 4.39%. (again using the excellent Lendingstats calculations) You can read a discussion of the distribution of Prosper portfolio returns here.

The 9.4% number is obtained by filtering for a small subset of Prosper loans, as explained in a footnote. Showing the results of a cherry-picked set and calling it "average" is well...

I think the ad is misleading. Regulators came down hard on the securities industry for this sort of shenanigans in the 60's and 70's. Now there are quite well defined rules for how one calculates the return of a mutual fund, or an investment manager. The SEC created uniform rules for how mutual funds would present their performance. An industry self-reguating group known as CFA (formerly known as AIMR) created detailed rules describing how investment managers should report their performance. (One of the rules says you don't cherry-pick.)

Prosper believes it is outside of such rules and regulations. This is true only because Prosper's product is new and different, and the regulators aren't engaged. I don't even know what regulator has oversight of the prosper & lender relationship. The regulators don't know yet either. Meanwhile, the best course of action for Prosper would be to very carefully avoid misleading people.

Some good news

Prosper has made some positive changes lately. Until recently, Prosper presented lenders with a set of default rate statistics provided by Experian. These statistics guided lenders by giving them default rate estimates for borrowers in each of the Prosper credit grades. Unfortunately, as long as a year ago we could see that the default rates of Prosper borrowers were running several times higher than the Experian-provided statistics, but Prosper continued to present these misleading numbers to lenders. In a recent upgrade, Prosper did away with the bogus Experian numbers and replaced them with stats derived from historical Prosper loans.

Bravo. One great big misleading thing has been removed.

But the newsletter... still misleading.

Sunday, October 14, 2007 - Collections Still Wanting

I've been charting Prosper's collections statistics ever since Prosper first made them avaiable. Prosper sends loans to a collection agency when they are 1 month late, and the outcome after the collection agency's efforts are charted below.

The big picture is that Prosper's collection results continue to be scandalously bad. Of those loans that go 1 month late, Prosper's data shows that 13.5% of the loans are cured, from which we can estimate that a horrible 86.5% go on to default. (We are forced to estimate, because these stats include loans still in process. However, as you can see from the breakdown, almost nothing is ever collected after the first month, so the estimate is pretty close.) Here's the data for Penncro, the collection agency handling most of Prosper's loans...

Penncro collections chart


The data for this chart comes from Prosper's Collection Agency Web Page. I have shown data only for Penncro. Although Prosper has two collection agencies, almost all late loans have gone to Penncro. The other agency, FirstSource, is doing even worse.

I've hidden the red "net collected" curve prior to 7/4/07, because the data prosper provided for that period was obviously wrong. Older versions of this chart and related discussions can be found in the collections thread on the prosper forum.

A more complete discussion of Prosper's collections can be found in my blog entry from May, "Open letter #2 - Collections is broken".

A couple of weeks ago, Shira Levine published an interview with Doug Fuller, the new fellow in charge of Prosper collections. At one point, Doug was talking about his success improving collections at a prior job, and Shira asked...

Q: Can you do the same thing with Prosper’s collections calls?

A: Actually, for the month of September, we’ve seen greater than a 40% increase in the contact rates at our primary collection agency

Wow! 40% improvement! Sounds great, but looking at the collections rates in the chart, I don't see a corresponding improvement in September. How can it be that a 40% improvement in contact rates produces no results in collections?

One way this could happen is if the contact rates were so small to begin with that a 40% increase is insignificant. Prosper has never published "contact rates", so we don't know how big a 40% increase is. If you were only contacting 5 people before, and you added 2, that would be a 40% increase, but the additional 2 contacts wouldn't affect the overal status of the 1148 loans in collections by much.

To Doug's credit, he has been the first Prosper employee to state publicly that collections has been mismanaged. That's a start. Now lets see some action.

Wednesday, September 26, 2007 - responds

Prosper has asked me to publish the following response:

Dear Fred93,

Thanks for keeping up-to-date on the latest Prosper newsletter. In the Borrower Success Story that you’ve quoted (above), we faithfully reproduced his submitted story without changes. The user's Borrower Success Story quoted the interest rate of "13.4%" when, as you pointed out in your blog, his borrower rate was actually "14.3%." Going forward with the newsletter, we will diligently fact-check each story before publication.

Thanks for posting,


Hey, whadda ya know, they read my blog!

Tuesday, September 25, 2007 - Don't Mislead ... again

Back in April'07 I wrote an open letter to titled "Don't Mislead People". I think that's a pretty good mantra. I don't know how people write entire books on corporate ethics, when you can say most of it in 3 words. That letter contained a long list of things that Prosper was doing that I thought were misleading. To Prosper's credit I think someone understood at least some of what I was saying, because some of 'em got fixed. I don't think they really intended to mislead. They just weren't thinking clearly. End of story, right?

Recently a few more have appeared. There was a recent online advertisement that used a screen image of a listing page where the interest rate was "photoshopped" to show a lower interest rate than the actual loan. To their credit, Prosper fixed it after a member pointed this out. I wasn't on the ball, and didn't save a copy of the original photoshopped ad. Must have been some overzealous marketing person, eh? End of story, right?

Oops. They did it again! The September borrower newsletter contains a story about a borrower and his loan. It says he obtained an interest rate of 13.4%. Here's a picture from the newsletter. (I have added the red oval.)

Newsletter picture

Note that it says he "obtained 13.4%". We have to assume that they mean the interest rate that he actually had to pay. On the system, that's called the "borrower rate" to distinguish it from the lower interest rate that lenders receive. In fact, it is very clear from context of the ad that they mean the rate he had to pay, because in the quote he compares this to "14%" that the bank wanted to charge him. Well, 13.4% is indeed lower than 14%, so this sounds great until we look at the actual listing page. It tells a different story.

Prosper Listing Page Image

Again I added a red oval, circling the borrower rate this borrower actually obtained. It doesn't agree with the story. It is even a higher interest rate than his bank wanted to charge!

Surely would not intentionally publish a misleading story, eh? What do you think?

In either case, it is another in a series of confidence eroding developments. Golly guys, at the very least get your compliance guy to check facts in your ads and newsletters.

Tuesday, August 14, 2007

Ned Interviews Fred

Ned: Well Fred, I see you haven't updated your blog since the two open letters to . Does that mean everything is going along smoothly now?

Fred: Well... not exactly.

Ned: So did Prosper respond to any of the issues you raised?

Fred: There was a little correspondence, but no action.

Ned: So collections hasn't been fixed?

Fred: We haven't seen any change in collections at all. Zip. Nada. Nothing. This is one area where I got some agreement from Prosper management that things were broken. They just don't care. They view themselves as a broker (ala Ebay), and view the loan servicing business as one where you just turn some cranks and money flows thru (or not) and you scrape off some revenue. They don't take ownership of their own performance at all. The entire collections operation continues to be simply an autodialer. This is one of the reasons default performance is so bad. Its not the only reason, but it is a major one.

Ned: Sad. Well what about groups. Are they fixed?

Fred: Well, no. They aren't. There haven't been any substantive changes in groups at all. Prosper management seemed to think that the little change they made in group leader remuneration would have a large effect on group leader behavior. I don't think that's had much fundamental effect. Prosper invented this fabulous friends/endorsement system which has the potential to provide community effects far superior to the silly group system, but they haven't gone anywhere with it. Frustrating to watch.

Ned: So are the issues you raised in your two open letters still valid?

Fred: Generally yes. Especially open letter #2, because it dealt with collections, and collections has been untouched. Letter #1 on the other hand gave a long list of little detailed examples where Prosper misled folks, or allowed group leaders to mislead folks, and some of those have been cleaned up.

Ned: What other subjects did you plan to hit in your letters?

Fred: I had hoped to do one on communication and community. On the other hand, a lot of people are hitting Prosper pretty hard on these issues of late, so it seems like the problems should be obvious. Can I really add any understanding to the issue? Not sure. Also I'd have to work really hard to stay calm while writing on this subject. Also hoped to do one on the math involved in estimating lender performance. Actually have that half written. Just need to find the enthusiasm to finish it.

Ned: Anything else you'd like to say?

Fred: The lendingstats web site is great. I really missed it when it was down for a few weeks. I thank Mr Lendingstats for bring it back up.

Ned: Thanks Fred. We'll check back in another few months.

Fred: See you then.

Sunday, May 6, 2007

Open Letter #2 - Collections is broken

Second installment of my recommendations to management.

Click the link below to view the letter.

Open letter #2 to

Friday, April 20, 2007

Open Letter #1 - Don't Mislead People

The first installment of my recommendations to managment.

Click the link below to view the letter.

Open Letter #1 to

Hello Blog

I’ve been a Prosper lender since near the beginning. Started in April ’06. I was instantly enamored with the idea of Prosper, I mean really excited. I’ve been active every day since then. I’ve invested a substantial amount, which I only mention as a lead in to the next point: I take this seriously.

As the months wore on, I accumulated an understanding that the reality of Prosper, that is the implementation of the great idea, was quite different than the utopian image associated with the idea. I never expected it to be perfect, but I did have some expectations. Of course this is an evolving story, so I continued to participate, and watched. We’re all learning as we go. Me. You. Prosper. Patience is a virtue.

Sadly, I have to report that my disappointment with Prosper’s management has continued to increase month after month, and my enthusiasm has continued to decline. I’m pretty sure that the majority of things that are wrong can be fixed. However my confidence that Prosper’s management will fix them has simply declined with time as I’ve witnessed their response.

So many issues that I don’t really know where to start. Issues of concern range from technical to community relations to ethics. Mixing these randomly produces only soup. I decided the ethics issues should float to the top, so that’s where I will start.

My intention is to post several bundles of thought. It takes time and effort to sort out and package up these ideas cleanly. (Everything I will talk about here has been discussed at length in the Prosper forum, but for whatever reason, that form was incompatible with the input interface to the Prosper management humans. Its like the RJ45 plug didn’t fit into their 25-pin D socket.) I’ll probably poop out long before I’ve covered all the ground that needs to be covered, so let me apologize for that in advance.

It has become popular in modern culture to polarize. Its really a kind of oversimplification . Bush is bad. Bush is good. Whatever it is, boil it down to one sound bite, and then yell and shake your finger. Talk over your opponent to make the TV sound more exciting. I can’t stand that. Everything in the world is more subtle than this dumbed-down approach allows. In particular Prosper-is-bad or Prosper-is-good are not gonna be the subjects here.

Who knows, maybe I will burn thru all the disappointments and post about something positive.