Sunday, August 23, 2009 - Its a Deadbeats' Party

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

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

Of great concern to folks who lend thru 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, takes full authority and responsibilty for servicing the loans. That means only 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, 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 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 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 lenders is found at .


  1. I admire your style and analytical ability. The work you have done in analyzing Prosper's operations is probably the gold standard.

    This brings to mind one small question. Many of us, using your analyses, stopped lending a long time before you.

    Given the size of your investment, I would argue that to some extent you have enabled Prosper. Other large lenders, such as Annapolis, L5 (the haiku guy), and Cellardoor stopped lending substantially earlier. Why did you continue to lend even after the likely outcome became evident?

  2. No, I don't consider myself an "enabler". Prosper would have proceeded with or without me.

    Judging large lenders by the time they stopped lending may not be the best comparison. For example I invested in the high credit grades, whereas L5 and Annapolis invested in a mix with a much lower average grade, so our portfolios behaved differently.

    Actually annapolis and I stopped at around the same time. Perhaps I had more patience with Prosper management than L5 and Cellardoor did, or perhaps they just had something more interesting to distract them.

  3. Your blog and analysis are always insightful. It's pretty mind blowing to me that you - as an outsider - are able to analyze Prosper's problems better than anyone at Prosper itself. I invested a few thousand bucks in Prosper 2 1/2 years ago. I chose the easy way and just had Prosper select loans in the highest risk group. This was the group that they suggested would give me an overall return of 12-13%. Instead 65% of the loans have been charged off. My losses led me to your blog which in turn has taught me a lot. So thanks for partially easing my pain. Stan.

  4. Fred, have you checked out the Prosper site once it reopened? Are you interested at all in selling your portfolio holdings in the 2ndary market they set up?

    I haven't checked out the 2ndary market at all, for the principal reason that I don't trust Prosper to send out my SS number and other vital personal/financial details to this new organization and have them set up an account for me.

  5. MikeT,
    The secondary market can only trade new loans originated after Prosper reopened. The old loans aren't registered with the SEC, so can't be traded there.

    Whether I would be interested in selling old loans of course would depend on the price!

  6. zlsk01
    since they reopen i can' do any loans because of being in texas. so i have to take my money out and move on.

  7. Fred, I joined prosper at the end of 2007. It sounded like a great idea. Helping my fellow man and making a few dollars doing it. I was not only dismayed but shocked at the people who refused to pay. I noticed especially the 25,000 borrowers. Some made one payment and quit. I now stick to CD's. At least I know I'll at least get my money back.