Prosper.com - Don't Mislead Investors

That was the subject of my very first blog about Prosper.com. Sadly here I am again two years later discussing the same subject.

During Prosper's lifetime, a great many newspaper and magazine articles have contained misleading statements about the quality of Prosper.com loans. It just seems to happen again and again. That was in fact the impetus for this blog. I wanted to counterbalance the misinformation. More about history later. Lets start with the most recent outrage.

An article in the 9/19/09 Washington Post, said "Prosper's default rate is about 5 percent." That statement is bunk. Prosper loans are far worse than that. The difference between what was printed and reality is important to investors, because it makes the difference between profit and loss.

As many of you know, I've tracked Prosper loan performance for several years, and you can see from the charts I publish that Prosper loans go bad much faster than this. But lets start with a more authoritative source than me: Prosper's most recent prospectus filed with the SEC.

The prospectus says: "As of March 31, 2009, of the 29,000 borrower loans, ...5,840 loans or 20.1% had defaulted. " Well, that doesn't directly tell us a default rate, because the 29,000 loans outstanding are spread across a wide range of ages. Loans go bad over time, and many of these loans haven't had much time to go bad yet. Still, it doesn't take a genius to see that you can't get a 5% default rate from 20% of the pool having already gone bad! The Washington Post article is clearly in conflict with the prospectus.

The statement in the Washington Post is misinformation, just like the many similar examples of misinformation which have preceded it.

If we separate out Prosper.com loans by age, the facts become clear. The following chart shows Prosper.com loans broken out by month of origination, and you can clearly see that the early (ie old) cohorts are headed toward about 40% of loans going bad. The younger cohorts are doing a little better, as I've discussed before. Still they are similar. These are 3 year loans. If 40% of them go bad over 3 years, that's equivalent to roughly a 16% per year default rate. The Washington Post article is bunk.

Click on the chart to see a larger clearer version.


Now lets go back and visit some of the prior examples of misleading press. You may see a pattern. I'm sure I haven't caught this lie every time it has appeared in the press. A few should do to let you appreciate the pattern.

I first wrote about this in my very first blog entry on April 20, 2007. I was an enthusiastic Prosper investor at the time, and believed I could sway Chris Larsen's behavior by just getting the facts out to the public. Turns out I didn't have much influence.

In that blog, I wrote about an April 1, 2007 article about Prosper in the Baltimore Sun. (The article is so old now that they make you pay to read it, but you can read the abstract for free, and the abstract contains the Chris Larsen quote of interest.)

This article quotes Chris Larsen... "Larsen says the default rate - payments 120 days past due - is about 0.50 percent. But that will likely climb as the three-year loans mature, he says."

Even back then, with limited data at my disposal, I was estimating a total Prosper.com default rate around 17%/year. (I said so in my first blog entry.) That is so horribly different than 0.50% that I just couldn't imagine how Larsen could say that sort of thing to the media.

When you're a young loan company, it is easy to point to the portfolio and say "Look, not many of our loans have defaulted!" Of course that isn't what matters. What matters is the rate at which loans are going bad. Prosper doesn't default a loan until it is 4 months past due, and the first payment doesn't become due until 1 month after the loan originates, so loans younger than 5 months don't give you any defaults, and at the time of that article, most of Prosper's loans were very young. However, given the data available at the time, anyone could see, without any analysis, that Larsen's statement was incorrect. Even letting the various ages of Prosper loans be mixed together, Prosper's own data shows that on April 1, 2007, they had originated 9003 loans, and of those, 291 had already defaulted. That's 3.23% . How can you possibly get from that number to a claim of a 0.50% default rate? You can't.

I thought perhaps if I exposed this sort of thing, the misinformation would stop. It did not.

There was an AP/MSNBC article on Nov 27, 2007 "Prosper’s default rate hovers at about 2.7 percent, Larsen said, but that figure is expected to rise as more loans mature." This was misinformation.

By that time, even using the most simple possible method of dividing the number of already defaulted loans by the total number of loans would tell you that 9.15% of prosper loans had already defaulted, and remember a great many of those loans were so young they could not possibly have yet defaulted.

If, using Prosper's own data again, observing on Nov 27, 2007, we take out the loans so young that they could not possibly default, then we have 1502 defaults out of a total of 12035 loans. That's right, 12.48% of loans old enough to meet the 4-month-late criteria for default had already in fact defaulted!

The simplest possible calculations tell you that Chris Larsen's quote is terribly misleading.

The true default rate, ie the rate at which loans were going bad could be easily estimated by looking at the slope of the curves on my charts, and this told me loans were going bad somewhere in the range of 15% to 20% per year. How could he say 2.7% to the press? ...and thereby the investing public?

There was a Dec 16, 2007 article (now expired) on Yahoo news which said "The default rate on Prosper loans is a meager three percent." They probably just copied from the AP article. The misleading information echoes and repeats over and over.

Chicago Tribune article of 01/13/07 talks of a 4.7% default rate. (Article may be offline now. The links I had no longer work.)

The long series of misinformation continues with the recent Washington Post article's statement "Prosper's default rate is about 5 percent."

No my dear. Prosper's loans have experienced a default rate of something like 17% per year. As anyone can plainly see from my charts, about 40% of Prosper.com loans go bad over their 3 year life.

When you're loaning money to someone, especially someone anonymous, your estimate of the default rate is really important. It is the most important piece of information you use to judge what interest rate to charge the borrower. That's why I began tracking the numbers. I was an enthusiastic early Prosper.com investor, and I wanted to understand.

On Prosper.com, lenders must rely on their understanding of historical default rates.

The continued material misrepresentation of this important data in the press, apparently driven by interviews with Prosper's CEO Chris Larsen, is disturbing.

PS: Great discussion among P2P investors can always be found at prospers.org

Prosper.com - 09/2009 late loan stats update

Here's the September 2009 update to to my Prosper.com 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 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.

Prosper loans created in the worst month so far, October '06, are now more than 43% bad! This number could still go higher! These are 3-year loans, but we don't know the final number of loans that have gone bad until 3 years + 4 months after origination, because loans are "charged off" when they are 4 months late. On March 1, 2010 we'll know the final numbers for loans originated in October 2006.

Click on the chart to see a larger clearer version.

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 loans go bad.

Something unexpected happened this month. The Securities and Exchange Commission has begun to disclose (on their web site) some of the correspondence between the SEC and Prosper while Prosper was attempting to get SEC approval to reopen. I've not seen such correspondence released before, but it seems like a great thing.

From some of these documents we learn that the SEC reads Fred93's blog! A few issues that have often been discussed here are mentioned, and in one place Fred93's blog is referenced by name.

Here are some snips from a June 12 2009 letter from SEC to Prosper:

"We note analysis of the prosper loan originations posted by prosper members which shows loans that are not paying according to their terms approaching 40% for your oldest tranches."

"...there have been concerns expressed about the number of reported loans that closed during a particular month changing. ... Please refer to http://fred93blog.blogspot.com ."

Right on! I was surprised but pleased to learn somebody reads this stuff.

To see the correspondence, go to the SEC's list of Prosper.com filings, and scan thru pages and pages of documents looking for the keyword "UPLOAD" in the first column. Only the letters from the SEC to Prosper are available, so this is like listening to only one side of a conversation. (I wish I could see Prosper's answer to the # of loans originated changing over time issue. I asked Prosper about that myself several times, but never got an answer.) Still reading the SEC letters is quite educational. The SEC really got into the details.

PS: The best discussion among P2P and Prosper.com lenders are found on prospers.org. See you there!

Lendingclub - 09/01/2009 Late Loan Stats Update

These charts show statistics for the performance of all Lendingclub.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 Lendingclub's performance web page.


The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on my charts of prosper.com loan performance. That's because the volume of loans at Lendingclub is still too low to get really good stats.

Lets slide these curves over to a common origin, so we can compare their shapes ...


Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

Loans originated during the first few months of lendingclub's operation have performed very poorly. Oct, Nov 2007, and Jan 2008 have had about 15% of loans go bad during the first year. This is similar to the performance of Prosper.com loans.

Loans originated in later months have performed much better. This gives investors some hope, but...

Why have Lendingclub's later loans performed better than earlier Lendingclub loans? It seems that Lendingclub management must have learned some things and improved their verification criteria. Perhaps they learned how to filter out more of the identity theft or professional deadbeat borrowers. Unfortunately, I don't know what they changed. That makes it difficult to have faith that the improved quality of loans will continue.

The best discussion among P2P lenders occurs at http://www.prospers.org/forum/. See you there!

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 .

Prosper.com - 08/01/09 late loan stats update

Here's the August 2009 update to to my Prosper.com 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 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!

Click on the chart to see a larger clearer version.

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?

PS: The best discussion among P2P and Prosper.com lenders are found on prospers.org. See you there!

Prosper.com - 06/01/09 late loan stats update

Here's the June 2009 update to to my Prosper.com late loan statistics charts. Prosper remains closed for (legal) repairs, but we can (and do) still track the performance of the 28,939 loans they made before the hiatus.

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.

Click on the chart to see a larger clearer version.

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 earlier 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.

On June 1st, Prosper.com made their fifth try at submitting an acceptable registration statement to the SEC that will enable Prosper to reopen. Good luck Prosper. This is a huge document, and I've just about given up on following the changes. With each version it appears that they're becoming more like Lendingclub. Other opinions welcome.

Great discussions among P2P and Prosper.com lenders are found on prospers.org.

Lendingclub - 05/2009 late loan stats update

These charts show statistics for the performance of all Lendingclub.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 Lendingclub's performance web page.


The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on the prosper chart. That's because the volume of loans at Lendingclub is still too low to get really good stats.

Lets slide these curves over to a common origin, so we can visualize how common their shapes are...


Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

Yipes! What you see is that these various cohorts are defaulting at rates between 9%/year and 17%/year. Conclusion: These are pretty junky loans. It seems unlikely that lenders will do well when such a large fraction of borrowers are not repaying lendingclub loans.

The best discussion among P2P lenders occurs at www.prospers.org. See you there!

Prosper.com - 05/01/09 late loan stats update

Here's the May 1, 2009 update to to my Prosper.com 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.

Click on the chart to see a larger clearer version.

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

For the "big picture" you can just look at that last chart. From the point of view of these performance statistics, Prosper.com loans run about 1150 days. (1 month before the first payment is due, 36 months during which payments are due, and another month before that last payment is declared 1 month late) The numbers aren't final for another 2 months, because it is possible for loans to recover during the next three months before the loan is charged off at the 4 month late point. Therefore about 1250 days is the final point. Look at the curves, and extend them to where you believe they will be at 1250 days.

Looking at the first year of Prosper.com loans, it is pretty clear that they're headed toward something like 42% bad. Loans that originated later (the shorter curves) are doing a bit better. They might end up around 35% bad. Big picture: On the average, these are junk loans. Caveat emptor. Any investor who doesn't realize this will do very poorly loaning money to folks who about 40% of the time don't pay you back!

This month, after a several month hiatus, Prosper has done more "unoriginations". For those of you who haven't followed these statistics for a long time, this requires some explanation. On the Prosper performance web page, they show a number labelled "loans originated". One might assume that this is the number of loans that were originated. It is not. This number goes down over time. Loans are from time to time removed from the set of loans described by these statistics. I track this, and count loans that are removed as having gone bad. (The name "unoriginated" comes from a word I learned in the third grade. In the old Sovient Union, people who were an embarassement to the government became "unpeople". Record of their existance was simply removed.) It is important to understand that these unoriginated loans are not loans that paid off, or are late, or have been charged off. Those categories are explicitly shown. The unoriginated loans are never explicitly shown. They just disappear.

The numbers I chart above are ratios. The numerator is the number of loans that have gone bad, and the denominator is the number of loans originally created (originated). Although Prosper reduces the number "originated" in their display over time, I keep the number constant, the original number of loans made. A ratio with a constant denominator is easy to understand as it evolves over time.

Lets look at an example. Consider the loans Prosper originated in October 2006. Initially there were 743 loans in this cohort. That's the number I use as a denominator. Starting in April '07, Prosper showed that there were only 742 loans originated in Oct '06. History changed. Starting in August '07, Prosper showed that only 740 loans had originated in Oct '06. Starting in March '08, Prosper showed only 736 loans originated in Oct '06. History keeps changing. In July '08, Prosper changed the number back to 740. Some unoriginated loans suddenly un-unoriginated themselves. I couldn't make this stuff up. In May '09 Prosper changed the number to 738. Here and there a few loans seem to come and go from the database. Nevertheless, I hold the denominator constant at 743, the number of loans actually created in October 2006. The latest statistic for Oct'06 is then calculated like this: The numberator is 16 loans in the 1-3 month late category + 281 loans charged off + 5 loans unoriginated = 302 bad loans. The denominator is (of course) 743 total loans. Finally 302/743 = 40.65% of the Oct'06 loans have gone bad so far.

Oct'06 is not the only month to have recent unoriginations.

Nov'06 originally 701 loans, in Apr'09 they showed 698, in May'09 they show 697.
Dec'06 originally 969 loans, in Apr'09 they showed 965, in May'09 they show 964.
Mar'07 originally 1161 loans, in Apr'09 they showed 1160, in May'09 they show 1159.
Apr'07 originally 1101 loans, in Apr'09 they showed 1098, in May'09 they show 1097.
Jun'07 originally 951 loans, in Apr'09 they showed 950, in May'09 they show 947.
Jul'07 originally 935 loans, in Apr'09 they showed 934, in May'09 they show 932.
Sep'07 originally 758 loans, in Apr'09 they showed 758, in May'09 they show 757.
Oct'07 originally 928 loans, in Apr'09 they showed 928, in May'09 they show 927.

I could go on, but I'm sure you get the idea. What causes these loans to be removed from the data? In the early days of Prosper, there were some cases where the loan origination numbers went down like this, and we were told that it was due to loans where identity fraud had been discovered. Prosper decided to treat those loans as if they never existed. There was some merit to their position, because at that time Prosper repaid the lenders (investors, note purchasers) in full for these loans. However, in later years, although I have been in discussion with a large number of lenders, I have never heard of Prosper repaying a lender in full for any loan. Therefore, I doubt that admitted identity theft is the reason now. (Prosper employees, feel free to add a comment to this blog explaining where these loans have gone.) Whatever the reason, this is a detail that adds complexity to the task of understanding loan performance. I wish they wouldn't rewrite history.

A few days ago Prosper ended their self-imposed quiet period, and has started originating loans again. They've changed the credit score limits, and a few other things that seem likely to change the statistics a bit, but it doesn't look like they've done anything to fix the structural problems which I have often discussed. Therefore I expect that as in the past, a large fraction of the loans will go bad.

The best discussion among P2P and Prosper.com lenders always found on prospers.org.

Prosper.com 03/01/09 - late loan stats update

Here's the March 1, 2009 update to to my Prosper.com 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.

Click on the chart to see a larger clearer version.

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

A milestone was reached this month when one cohort, the loans prosper.com issued in October '06, have hit 40% bad (ie 1 month late or worse). Well actually only 39.97%, but that rounds to 40%.

Oh my god. How can anyone make money off loans that go bad at this rate? Prosper never implemented proper fraud control, collections, legal practices, etc required to operate a successful lending business. How could that have happened?

I now believe my trust in Prosper.com's founder Chris Larsen was misplaced. I based that trust on the fact that he had created the successful (I thought) loan company E-loan. Now I realize that E-loan wasn't really a loan company at all. It was yet another marketing front, part of the giant machine that gathered up borrowers and stuffed them into securitized loan packages, to be owned by someone else. Somebody else's problem. Who cares if they pay the money back. E-loan was part of the problem that drove our economy to disaster.

After buying E-loan from Larsen, Banco Popular gave up and shut it down. It is now just another chapter in the history of the mortgage fiasco.

The best discussion among P2P and Prosper.com lenders always found on prospers.org.

Prosper.com - SEC Offer of Settlement

Back on 11/24/08 the Securities and Exchange Commission issued a Cease & Desist order which told us that Prosper.com had violated the securities act. That SEC order mentioned that the SEC had accepted Prosper's "offer of settlement", but the offer was not made pubic at that time. Prosper's offer has now been released by the SEC, and we bring it to you here and now.

I've transcribed Prosper's offer letter below, and provided a link to a scanned version. The transcribed text differs in formatting, but is identical in word.

---

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

ADMINISTRATIVE PROCEEDING
File No.
In the Matter of
Prosper Marketplace, Inc.
Respondent.

OFFER OF SETTLEMENT
OF PROSPER MARKETPLACE, INC.

I. Prosper Marketplace, Inc. ("Prosper" or "Respondent"), pursuant to Rule 240(a) of the Rules of Practice of the Securities and Exchange Commission ("Commission") [17 C.F.R. § 201.240(a)], submits this Offer of Settlement ("Offer") in anticipation of cease-and-desist proceedings to be instituted against it by the Commission, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act").

II. This Offer is submitted solely for the purpose of settling these proceedings, with the express understanding that it will not be used in any way in these or any other proceedings, unless the Offer is accepted by the Commission. If the Offer is not accepted by the Commission, the Offer is withdrawn without prejudice to the Respondent and shall not become a part of the record in these or any other proceedings, except for the waiver expressed in Section IV with respect to Rule 240(c)(5) of the Commission's Rules of Practice [17 C.F.R. § 201.240(c)(5)].

III. On the basis of the foregoing, the Respondent hereby:

A. Admits the jurisdiction of the Commission over it and over the matters set forth in the Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order ("Order").

B. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et seq., and without admitting or denying the findings contained in that Order, except as to the Commission's jurisdiction over Prosper and the subject matter of these proceedings, which are admitted, Prosper consents to the entry of an Order by the Commission containing the following findings:

1. that Prosper violated Sections 5(a) and (c) of the Securities Act; and

2. ordering that, pursuant to Section 8A of the Securities Act, Prosper cease and desist from committing or causing any violations of, and committing or causing any future violations of, Sections 5(a) and (c) of the Securities Act.

IV. By submitting this Offer, Respondent hereby acknowledges its waiver of those rights specified in Rules 240(c)(4) and (5) [17 C.F.R. § 240(c)(4) and (5)] of the Commission's Rules of Practice. respondent also hereby waives service of the Order.

V. Respondent understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings" (17 C.F.R. § 202.5(e)). In compliance with this policy, Respondent agrees: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in the Order or creating the impression that the Order is without factual basis; and (ii) that upon the filing of this Offer of Settlement, Respondent hereby withdraws any papers previously filed in this proceeding to the extent that they deny, directly or indirectly, any finding in the Order. If Respondent breaches this agreement, the Division of Enforcement may petition the Commission to vacate the Order and restore this proceeding to its active docket. Nothing in this provision affects Respondent's: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.

VI. Consistent with the provisions of 17 C.F.R. § 202.5(f), Respondent waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein.

VII. Respondent hereby waives any rights under the Equal Access to Justice Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of the law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement of attorney's fees or other fees, expenses, or costs expended by Respondent to defend against this action. For these purposes, Respondent agrees that Respondent is not the prevailing party in this action since the parties have reached a good faith settlement.

VIII. Prosper states that it has read and understands the foregoing Offer, that this Offer is made voluntarily, and that no promises, offers, threats, or inducements of any kind or nature whatsoever have been made by the Commission or any member, officer, employee, agent, or representative of the Commission in consideration of this Offer or otherwise to induce it to submit to this Offer.

10th day of November {2008}
Prosper Marketplace Inc
By: {signature}
Print Name: Christian A. Larsen
Title: CEO & Chairman

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Here's a scanned version of Prosper's Offer of Settlement.

Doesn't make for very exciting reading, does it?

When I read the SEC Cease & Desist order, and saw that it said the SEC had accepted Prosper's offer of settlement, I wondered whether the offer (and therefore the acceptance by the SEC) had contained some elements not found in the SEC's public Cease & Desist order. For example I wondered whether Prosper had agreed to any specific actions that had not been made public. Turns out, there aren't any such agreements in the offer. Most of the words in the offer simply say that if the SEC agrees to end the matter by issuing the Cease & Desist, then Prosper won't argue about it. It looks to be all boilerplate. Its like something from a sci fi horror flick: Sign here so the shock treatments can begin. Then we can set you free.

Thank you to the SEC for releasing this document to the public.

For those of you who have read the above and are completely baffled, be advised that the SEC Cease & Desist order makes much better reading. It actually sets the stage by explaining the context of the SEC's action.

The best discussion among peer-to-peer lenders takes place at prospers.org
See you there!

Prosper.com - one of your loans was charged off

It is so sad. Day after day, lenders see loan after loan go in the toilet. "Charged off" in prosper lingo. Here's my Prosper.com in-box...



I've written extensively about the lack of moxy in Prosper's collections department. (and that's the most polite way I can say it) In May 2007 I wrote an open letter to Prosper.com .

May 2007 - collections is broken

A year later I wrote another appeal to prosper to get their collections act together.

May 2008 - here's what you should do with the lawyers

They never listen.

They never respond, except to say "One of your loans was charged off".

PS: The best discussion among P2P lenders occurs on prospers.org

lendingclub - 02/01/09 late loan stats update

These charts show statistics for the performance of all Lendingclub.com loans. (If you were looking for prosper.com stats, find them here.)

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 Lendingclub's performance web page.


The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on the prosper chart. That's because the volume of loans at Lendingclub is still too low to get really good stats.

Something odd is happening in the last month. Looks like lendingclub must have goosed up their collections activity. Bravo!

Lets slide these curves over to a common origin, so we can visualize how common their shapes are...


Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

The best discussion among P2P lenders occurs at www.prospers.org. See you there!