Adopt and Prosper?

An article in today’s Wall Street Journal about online lending reports that Zopa, a British person-to-person lending market, is starting operations in the U.S. It will join, among others, Prosper.com, which the WSJ reports will issue $100 million in person-to-person loans this year, with future loan originations projected to be $1 billion in 2010 and $9 billion in 2017. Can you imagine: $9 billion in person-to-person, unsecured loans? That should certainly shake up the credit markets.

I love cruising the loan offers at Prosper.com. There is a lot of information attached to each offer, and I’d imagine you could learn quite a bit about human behavior, decision making, and biases by playing with their data. I wonder if any economists are already working with the Prosper data (think “What Makes You Click,” the online-dating paper); I am looking forward to learning more about Prosper first-hand in a couple of months.

Even a quick glance at Prosper loans seems to show that lenders leap to loan money to people with a “good” cause — expanding a family business, e.g. — as opposed to simply consolidating credit card debt. A lot of the loan offers are great reading, too.

I found this listing particularly interesting: a couple who is trying to adopt their second child, the first one from China and the second one from Guatemala; meanwhile, the husband recently had a heart attack and their grown daughter “got shot in the face at work in September.” (Note to reality TV producers: maybe you guys should be cruising the Prosper site, for show ideas.)

What I found most interesting was this link to the family’s budget. It shows that their two adopted sons will provide more than $1,200 in monthly income:

Because my husband is retired, his dependents also get a Social Security Check. Because he did not go with me to China, we have to readopt our China son for this to start therefore it won’t start until Jan or Feb, but he is going with me to Guatemala.

I didn’t know that you could add dependents like that under Social Security provisions. The couple is hardly going to get rich by having two adopted sons, but the cash certainly changes the incentive of older couples to adopt, whether from the U.S. or beyond.

As the market for person-to-person lending continues to expand, I look forward to reading more such tales via Prosper, Zopa, and all the rest.


John T

Prosper is based on P2P lending. While P2P lending is great in theory (individuals will know one another and create a shame factor for those who do not repay) it has not proven to be sustainable in practice. There are not enough 'communities' of borrowers and lenders out in the real world to support a site like Prosper who had hoped to turn the lending industry upside down.

So what did they do?

When Prosper realized that its original model wasn't going to work it quickly adapted and allowed the market to drive the platform in a new direction. Prosper became a marketplace for individuals with no previous knowledge or experience with one another to come together and create loans. This new model proved far more sustainable, because it didn't place a limit on the potential volume of loans, but it also eliminated the fundamental and crucial principal required for success in P2P lending, community.

Without ‘community' there is no shame factor at play on Prosper's platform. The result of this missing component is evident. Prosper's loan default rates are nearly double the average default rates quoted by Experian and the Prosper collections statistics are even worse.

The other issue with Prosper is the way in which it presents itself. Prosper would like all existing and potential members to believe that they are entering into a safe transaction, with credible individuals, who honestly represent themselves when seeking a loan on Prosper. Unfortunately, that is not the case. Fraud, ID theft and even last flings before a bankruptcy filings are all common place on the Prosper platform. Additionally, lenders (especially new ones) often buy into the story created by the borrower about how they are changing, just need a break or want to expand their business. What lenders don't do is stop to ask…If that is the case, if all that the borrower is stating is true, then why would they use Prosper?

The simple fact of the matter is that there is a reason why many borrowers come to Prosper, and it isn't because they want to change or expand a business. It is because these borrowers have repeatedly failed on opportunities extended to them by creditors or they have become such a significant risk to traditional lenders that they no longer justify further investment. Prosper has become a haven for these individuals, a place of last resort and there are plenty of unsuspecting lenders available to dole out cash to these individuals. Prosper has further contributed to the ignorance of its lenders by posting misleading statistical data and eliminating community conversation forums that previously allowed for candid discussion regarding these issues.

In the end, it becomes quite simple. Prosper was a wonderful idea in concept. The problem is that Prosper didn't remain committed to its original community concept, and as such the platform as a whole has suffered. The result is a platform in turmoil, a community in chaos and a marketplace on the verge of collapse. Buyers beware if you become involved in Prosper…don't say you weren't warned!

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Tyler Style

Prosper lender here, about 9 months in so far. I would agree that Prosper is a fabulous idea, badly managed. I can certainly see how many of the initial investors, often with big money, got burnt - it requires a lot of diligence and work to select decent listings to lend to. Generally you can't automate that process, and people who want to invest a lot and diversify won't have the time to evaluate enough listings to make it worthwhile. I would think this is a huge problem for Prosper, in that they would want as many people to invest as much as possible as quickly as possible.

Prosper did have one mechanism in place to help out with that - group leaders, who basically could act as loan brokers for a fee. They were dumped after some abuses of the system. I'm unsure why Prosper didn't close some of the the loopholes that allowed abuse - lenders had many good suggestions - but it basically cut off lenders from brokers who would vet loans for them.

Prosper also cut off a secondary information channel for discussing loans and advice for both lenders and borrowers when they simply deleted the enormous amount of information in the forums, and replaced it with a heavily edited (and extremely slow) forum with fewer topic areas and extremely poor user controls for navigation, topic monitoring, etc. No FAQs or help guides were posted on how to use the new system, either; I personally still haven't figured out how everything actually works (and I'm an IT manager!) Worst of all, there is no easy way to interact with borrowers about their listings - the dedicated forum "Review My Listing" is one of the casualties in the new scheme. Prosper seems intent on limiting the ability of lenders to talk to borrowers...which is the only real way lenders have to accurately vet loans, as the Prosper provided information often is not really complete enough (as others have pointed out).

As an investor, rather than as a lender, what I am most concerned about is Prosper's long term survival. As someone pointed out, they just service the loans for lenders; if they go belly up, I still have the loans. But *I* don't want to have to service them, nor deal with the fallout of having them switched to another company! Despite all the other problems with Prosper, this is the one that actually stops ME from putting any more $ into it; there is no clear exit strategyon what happens if Prosper.com closes its' doors. As an investor, this is important to ME; I'm sure Prosper as a COMPANY is not as concerned to what happens after if it folds :)

I like p2p lending as a concept; I like helping people who I think need hand up and for whom the regular credit system doesn't work. I've made $1400 in loans, and none of them has defaulted yet. But I am not using it as a serious investment vehicle (which is what Prosper as a company needs for income) and don't see how it can be anything more than a hobby for caring people. Zopa.com may have the more workable model for a serious investor - sell people 5.1% CDs whose funds are then used to provide loans to people that the investors proceed to elect.

If Prosper is to survive, it needs a strategy that will attract *lenders* - they have more borrowers than funding. Prosper's capital after the venture capital runs out won't be from borrowers, it will be from lenders, and if the investors cum lenders feel abused or not confident and so avoid investing, then Prosper has no sustainability.

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moremoneymarK

As an early purchaser of loan payments who was active in the forums since the early days I wanted to try to add some balance to the various sides of this thread.

I was content to get slightly better than CD rates at Prosper from the ~20K I utilized and although difficult it appears I did. The lower credit grades were the worst performing and some have been removed.

The old forum was getting out of control, and I believe Prosper contributed to this by stressing community and involvement and then sharply reversing this without adequate explanation.
Three separate times Prosper attempted to be more open at a relatively high level. I have no personal knowledge of what ever openness appeared at Prosper day functions. In two of these the openness lasted effectively a day or two.

It is one thing when the CEO of a company whose stock you have purchased does seemingly irrational things, it is another when the management of a company where you own an illiquid asset seems irrational. Should Prosper actually start a secondary market the lenders who feel helpless and angry could at least sell their asset and move on.

For what it is worth, Prosper has made many changes that I applaud. I am sure some of the apparently irrational actions occurred due to legal considerations that forum folk were not privy too.

I did a small trial loan as well as buying loan payments. I suggest that Prosper read the book from the 1960's entitled Games People Play to better understand why lenders feel as they do.

MMM

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Willie

If your credit is bad,the possibilities of geeting a loan is low. You would probably do better going to a bank or loan company. Interest rates can be as high as 35%.

NewHorizon

As mentioned in a blog today, and for those who aren't keeping track as we quickly come up on Prosper Days '08 and Stephen Dubner's keynote speech, Prosper has to date made 18,707 loans of which 3,066 - or about 16% - are either late or defaulted.

And here we are, by many accounts, now entering a recession...

lhsbandnurd

I have experienced Prosper from bothe ends and it has been a relatively painless experience all around. For me.
As a borrower, I applied for a $2000 loan. Due to an A credit rating (which I have come to believe was an inaccurate rating of my credit history) I funded quickly, and my loan was created with absolutely no verification done by Prosper. I never recieved a phonecall, an adress verification postcard, or even income verification. They verified my account when I registered as a Lender, but not when I applied for a loan.
As a Lender, I haven't experienced any of the issues and trials expressed by other posters. I consider myself to be very lucky and hope that the ~$300 I have invested returns the estimated 14%. The worst thing that has happened to me is that I went from having ~50 forum posts to having 1 get through moderation (and it was a bug post complaining about the lack of navigation links!). I may not be the best conversationalist, but I am hardly a rabblerouser. My heart goes out to all those who have trusted Prosper with large amounts of money. Glad I'm not you.

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Mark

As excited as I was about prosper (I just joined before I found this article), I am grateful for all your posts, as clearly, I am extremely uncomfortable that the company removed two years of posts; there is no valid reason to take away people's experiences--- except to hide something.

This company could have been "a light on a hill", had they simply allowed people to communicate (whether pro or con).

I realize I just cannot lend with the "daffy" practices of this company

discordian

Is this Haram?
Has anyone started a sharia service like this?
hmmm....

Nate

I found the rates they list interesting:
http://www.prosper.com/borrow/

I wonder why D grade loans would have a lower percentage (at the $10,000-$15,000 range) than C grade loans?

AC

absolutely! Academics in psychology and economics are jumping over each other trying to get this data. Great post.

Xavier Vespa

Credits are as vital as education and health. Prosper could be another way to make money online. Mostly, the more we get to try those new financial solutions, the more financial institutes lose their monopoly over credits.

Here's a short video interview of Chris Larsen, ceo of Prosper.com

Shauna Nelson

Browsing Prosper's listings is often an easy way to kill an hour and either end up shaking your head at the way some people spend money (a budget of $100 a month for food for a family of four but a cable bill of $250) or feeling completely depressed that very few have learned to live below their means.

However, with the way Prosper management has chosen to spend their time and resources is often far more puzzling. There is little to no collection efforts on loans that go bad, management all but sneers at lenders and any fraud detection by members results in members getting the boot. Even Chris Larsen, the CEO of Prosper, choses to quote numbers on defaults that are simply not true. Prosper publishes marketing material saying they beat the S&P500 - oh, but only if you look at this and this and this data and ignore whole segments of their marketplace.

As many members will tell you, Prosper is a good idea gone sad.

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Alian

Excellent article, please contact me ador [at] agoratalk.com. I have material for the continuation article! I will give examples of real exchanges of credit.

Hovie

Someone has already posted a request for money to be used to invest back into Prosper.

http://www.prosper.com/lend/listing.aspx?listingID=239164

Leporello

I have over $100,000 invested in Prosper, and was at one time one of their thirty largest lenders and very enthusiastic about the company. However: Their management treats lenders with disdain, and retaliates when they make any accurate, but negative comments about Prosper on their discussion boards. The site uses antiquated technology and is extremely unreliable. The default rate on Prosper loans is extremely high, and their marketing literature and press releases are full of deliberate misrepresentations, such as quoting performance statistics that includes only the absolute cream of the crop of their loans, and on occasion even outright lies. The final straw for me occurred yesterday, when their discussion board automatically rewrote the URL of competing sites to "prosper.com". The company is misguided and dishonest, and has no integrity.

Mark Young

Thank you for the blog entry.

I am one of a growing number of former lenders on Prosper.com. I started out small (around $100/mo.) to test the waters, but since April 2006 I have had growing concerns that finally convinced me that Prosper was not for me.

1. Prosper has a "Report this listing" link where we can alert Prosper of potential problems with a listing. One day someone confessed that he wasn't going to use the money as claimed. I reported that to Prosper through the "Report this listing" link and my report included a pointer to the very message where that confession occurred. A later loan went through with predictable results: the borrower defaulted. That was a few months after someone else had said in the forums that he would take the money from the loan and run and others reported him, yet he did just as he posted: got a good loan and defaulted on the first payment. (Unfortunately, with the removal of the old forums, the proof of what I say is also gone.) When Prosper Marketplace, Inc., doesn't catch cases of fraud that we have brought to their attention through the very mechanisms they had set up, what does that do with the confidence we should have that they would detect fraud that we don't see?

2. Prosper used to encourage community, but on Friday, March 30, 2007, Prosper ended up banning about ten of the most active forum participants, apparently because they had posted comments that shined the spotlight on some of the more shady Prosper members a few months before, more specifically on those who engaged in what has informally been referred to as "pump and dump" (bidding a large amount on a listing of a member in their group, even though that listing wouldn't fund without this help; this fools the less knowledgeable lenders into thinking "the community" likes this listing, but in the end these new lenders are the ones who are left without their money). The best I have been able to determine, these active and, for most of them, beneficial participants were banned for a week for doing something that wasn't in the rules at the time they did it, so the rules were enforced ex post facto and, in some cases, "for violation of rules we are planning to add to the Terms of Service in the future". I had seen reported confessors of loan fraud get loans, but when I saw how the community wasn't esteemed by Prosper, contrary to their earlier statements, I decided to stop lending. Apparently that wasn't an isolated event, e.g., someone who had a link to an FBI news release of a borrower being indicted by the FBI for loan fraud was banned even though I would think "loan fraud" would be a material piece of information for lenders bidding on the indicted borrower's listing. Someone else used Prosper's Private Message system to invite lenders to look at the forums (his message didn't contain any criticisms, just "Are you aware that Prosper has forums? It is here: forums.prosper.com", which is where the forums were until this week) and his account was suspended because of that.

3. Prosper's advertising has been uncomfortable to my morals. I saw advertisements where statements like "Borrow up to $25,000, as low as 5.67%" were made, yet there was NOT ONE single loan that had funded for $25,000 at 5.67%. Prosper advertised one could get a business loan for as low as 5.67% when, usually, anyone who is self-employed fails Prosper's income verification and has to relist as "income not verifiable" or $1/yr income and then it is almost impossible to get a loan at a good rate, let alone as low as 5.67%. A more recent advertisement compared a 1-year average return from Prosper to a 2-year annualized return from the S&P 500 index. You had to get to the footnotes to see the "average" had been pretty well cherry-picked: just the cream of the crop borrowers. When default rates are quoted, they are always in terms of what had been sold to the junk debt buyers, but sometimes even those numbers are pretty old; those of us who have had loans for over 1.5 years know that defaults can occur at any time during the life of the loan, that when a loan is even 1 month delinquent, there is a 82% chance it will end up defaulting, but those numbers aren't considered when Prosper news releases include a sunny small default rate.

4. Recently Prosper had eliminated the old forums (where default rate charts were posted, among other things) and deployed a new, in-house forum. While there are many things one could criticize about the implementation they chose, the one thing that I found quite unconscionable was whenever someone used a url to prospers.org (a forum that was set up where lenders and borrowers could discuss topics without moderation, where, for example, verified lenders could discuss items that wouldn't be in view of the public, such as ways we could help spot warning signs on listings), the new Prosper software would change "prospers.org" to "prosper.com", not warn us of it, not flag it anywhere, so it would look like we wrote one thing when we wrote another. Prosper could replace "prospers.org" with "***" or "[Deleted]" and then it wouldn't be quite as bad, but to replace one thing we wrote with another but without any indication of having done so is "misrepresentation".

The above are just a few reasons why I am uncomfortable using Prosper and why I have been pulling out my money since March 30, 2007. At one time a Prosper Moderator wrote to another lender on their forums, "If, as you have indicated, you don't trust Prosper to detect fraud when it exists or to remunerate you when we find it, then you should reconsider whether you want to lend on Prosper." I agree with that statement 100%!

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zarp

An excellent way to lose money.

1. The majority of borrowers applying on prosper have been denied credit elsewhere. Simply put: they cannot afford to repay their debts. People have ample chances to establish or gain credit (as any college freshman deluged with credit card offers will attest).

2. P2P Lending will only work IF the lender has an information advantage over commercial banks. I.E. if you are 100% sure that a borrower is a better risk than his credit score then it absolutely makes sense to lend that person money.

However, how can one get an information advantage over banks if one is lending to perfect strangers (over the internet, no less) AND one does not have access to their full credit histories.

If banks use a full complement of credit data scores for deciding the merits of a secured loan, how can the average Prosper lender ever hope to achieve comparable results?

3. Extremely low minimum bids results in lower lending diligence. Since many lenders cap their bids at $50, a sum they "can afford to lose", they are more willing to loan money to lower credit grades.

Anyone contemplating lending on Prosper should ask themselves the following questions:
a. Why is the borrower using prosper? Banks offer more products at better or comparable rates. Why would any creditworthy borrower be willing to subject themselves to the uncertainty and hassle of getting a loan on prosper unless banks have denied them credit.
b. Do you really trust a stranger to pay back your money? P2P lending requires the same degree of trust as indulging in unprotected sex. If one is unwilling to have unprotected sex with strangers from a nightclub, one should be equally unwilling to make UNSECURED loans to perfect strangers.

The only way I can see someone lending money on prosper is if someone knows the borrower personally. Otherwise, the only proven way to make money on prosper is to borrow and default. (Check their performance statistics yourself)

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Tsvetan

Note to the Street: has anyone thought of securitizing these loans?

James

I've been using Prosper for two years and while I don't have a large amount tied up in Prosper, I haven't had the problems of others on this board. As a banker, I think it's a revolutionary idea and a great way to avoid the middle-man (aka. the bank). A lot of people talk about lack of disclosure, but I've found that if you enough at the raw data of the Prosper portfolio, you can get a feel for the better types of loans. I currently am enjoying a 12.5% return and have only experienced one late payer (out of 100+ loans).

If you come into this program thinking going after the 20%+ loans or 25%+ DTI, you are going to get burned. If you come at it from a disciplined perspective, you'll do much better. As far as honesty of the individual goes, how's your Worldcom, Enron, or other SEC regulated stock doing? How about your investments in CDO's or CMBS's? There's inherent unknown risk in everything you invest in. That is why you diversify.

Finally, Prosper will change. With all the new entrants into this market (Richard Branson anyone?) they will either make improvements or they will fail. It's that easy.

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Wagoner

I joined Prosper as a lender about three months after the site went live. I was incredibly enthusiastic about the concept – I hate predatory lending and Prosper seemed like a great win-win, in which borrowers could be treated fairly and lenders could get a fair return. That potential is still there, but unfortunately Prosper itself has stumbled badly.

With warning that these comments are somewhat redundant: 1) Loan delinquencies and defaults are much higher than the industry average for unsecured loans. 2) Prosper has an abysmal collections record when loans do go late -- much, much worse than the industry average. 3) Prosper discourages discussion of both individual listings and its business practices. They recently deleted a forum with 40,000 posts, using the pretense that posters were impolite and that personal information was improperly disclosed. However, this fourm also contained vitally important statistical information on the operation of the marketplace. Now it's gone. 4) Prosper continually provides misleading data to media outlets regarding expected rate of return and delinquency rates.

I wish Prosper were a better company, because I want P2P lending to work. It's quite sad, really.

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