Prosper Marketplace

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Prosper Loans Marketplace, Inc.

Type	Private
Founded	California, USA
Headquarters	San Francisco, USA
Key people	Chris Larsen
Industry	Credit (finance)
Products	Personal loan marketplace
Website	www.prosper.com

Prosper Loans Marketplace, Inc. is a San Francisco, California-based company in the emerging peer-to-peer lending industry. The company operates Prosper.com, an online auction website where individuals can buy loans and request to borrow money. Borrowers set the maximum interest rate they wish to pay,^[1] and loan buyers, called "lenders," bid on specific loans by committing a portion of the principal and setting the minimum interest rate they wish to receive on a particular loan.^[2] Prosper manages the reverse dutch auction, assembling bids with the lowest interest rates in order to fund the loan.

Prosper verifies selected borrowers' identity and personal data before funding loans^[3] and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.

Prosper publishes performance statistics on the website; these are available to the public at large.^[4] All transactions are in US dollars; lenders and borrowers must be US residents.

Prosper opened to the public on February 5, 2006. Prosper was founded by Chris Larsen, who also founded E-loan, and John Witchel and is backed by Accel Partners, Benchmark Capital, Fidelity Ventures, Omidyar Network, DAG Ventures and Meritech Capital Partners.

In April 2008, Prosper aligned with the Utah-charted Web Bank. Previously, Prosper operated under individual lending licenses issued by various states, and was subject to each state's maximum interest rate laws. By affiliating with Web Bank, Prosper borrowers nationwide (except in Texas and South Dakota) can offer a maximum interest rate of 36%, which lenders can then bid down.

On December 1, 2008, Prosper Loans Marketplace Inc. entered into a settlement with state securities regulators over sales of unregistered securities.^[5]

Contents 1 Credit grades 2 Business model 2.1 Liquidity of purchased loans 2.2 Cease and desist order 3 Relaunch of Prosper 4 Criticisms 4.1 False Court Filings 4.2 Loan performance 4.3 Trademark dispute 4.4 Delayed Debt Sale 4.5 Deletion of Official Forums 4.6 Adverse Selection 4.7 Interest on deposits, transfer speed 5 See also 6 References 7 External links

[edit] Credit grades

Prosper rates prospective borrowers for creditworthiness by assigning a "credit grade" based on the borrower's Experian Scorex PLUS credit score. Prosper credit grades are (starting with the highest) AA, A, B, C, D, E, and HR (high risk). Lenders considering a bid on the borrower's loan listing have access to the borrower's credit grade, along with summary credit data from the prospective borrower's Experian credit history, including number of current delinquencies, amount currently delinquent, delinquencies in the past 7 years, and other data.

Equivalent credit scores for Prosper credit grades are:

Grade:	AA	A	B	C	D	E	HR
Score:	760+	720-759	680-719	640-679	600-639	560-599	520-559

In addition to credit data, lenders also see the borrower's group membership, if any, friendships with other Prosper members, endorsement from those friends, past listings and prior Prosper loans. Both borrowers and lenders are anonymous (identified only by screen names) to protect their privacy.

[edit] Business model

Prosper has a transaction-based business model, in which the company collects revenue by taking a fee on its customers' transactions. Borrowers who receive a loan pay an origination fee of 1-3% depending on the borrower's credit grade, and lenders pay a 1% annual servicing fee. Prosper's initial product is an unsecured 3-year loan for up to $25,000.

[edit] Liquidity of purchased loans

Lenders are a party to the loan for the full 3 year term. As the borrower repays over the life of the loan, the payments accumulate in the lender's Prosper account. This money may then be bid into new loans, or transferred to the lender's bank account at any time. However, if the account balance is below the $25 minimum, the lender must transfer the entire balance at once. There is currently no secondary market for Prosper loans, and lenders have no access to funds invested in loans until borrowers repay. However, in October 2008, Prosper announced plans to create a secondary market through an SEC filling.

[edit] Cease and desist order

On November 24, 2008, the SEC found Prosper.com to be in violation of the Securities Act of 1933. As a result of these findings, the SEC has imposed a cease and desist order on Prosper.^[6]

[edit] Relaunch of Prosper

On April 28, 2009, Prosper.com reopened their website for lending and borrowing. After the relaunch, bidding on loans was restricted to residents of the U.S. state of California.^[7]

On May 9, 2009, Prosper.com was closed down again.

[edit] Criticisms

[edit] False Court Filings

In May 2008, Prosper made a filing with a United States bankruptcy court in which it denied ever having originated a loan to a man who was declaring bankruptcy. Prosper claimed, instead, that it merely acted as an agent of the man to obtain small loans originating from many lenders. This filing is directly contrary to Prosper's statements in its legal agreements (Lender Registration Agreement) which state that Prosper itself would originate all loans and then sell pieces of them to the system's "lenders". ^[8]

[edit] Loan performance

As of August 2008, approximately 18.5% of all money loaned on Prosper from inception (February 2006) through June 2008 are in some form of delinquency. Also, more than 35% of all loans that originated in February 2007 are in some form of delinquency. ^[8]

[edit] Trademark dispute

Prosper sent a cease and desist letter to a third-party commentary website, Prosper Report, for using the word "prosper" in its domain name. On Dec. 24, 2007, Public Citizen Litigation Group responded on behalf of Prosper Report.^[9]

[edit] Delayed Debt Sale

On May 2, 2008, Prosper announced on its "official blog" the delay of selling some $6 million of defaulted loans to junk debt buyers, which has been put on halt indefinitely. Debt Sale Update ^[8]

[edit] Deletion of Official Forums

Lenders have criticized Prosper for the deletion of all content on its own official forums which contained a large amount of data, analysis, and lender/borrower interaction. ^[8]

[edit] Adverse Selection

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Finance blogger Jim Bruene predicted, in a blog post when Prosper first opened to the public and before any data about actual results became available, that Prosper's business model would result in adverse selection. He suggested that the market-clearing rates on Prosper would turn out to be higher than the ones offered by lending institutions, which he hypothesized would result in filtering out borrowers intending to pay back the loan and leaving non-credit worthy borrowers willing to agree to above-market rates.^{[10][unreliable source?]}

[edit] Interest on deposits, transfer speed

This section may contain unpublished synthesis of published material that conveys ideas not attributable to the original sources. See the talk page for details. (June 2008)

Prosper does not pay interest on idle funds due to rules associated with pooled accounts.^[11] Persons transferring money to Prosper wait four business days before transferred funds can be bid,^[12] and then from one day to two weeks for the auctions to complete and loans to be funded for interest income to begin accrual. A lender's cash balance in his or her Prosper account can be transferred at any time to a linked external checking or savings account.^[13]

In response to customer complaints, Prosper began allowing "instant transfers" of amounts between $500 and $20,000 for established lenders with at least one active loan.^[14] Prosper has begun a new campaign which allows individual lenders with a facebook account to install a Prosper.com lender application within their facebook profile. This will enable instant transfer of amounts between $50 and $20,000.^[15]

[edit] See also

• Peer-to-peer lending

[edit] References

This article includes a list of references, related reading or external links, but its sources remain unclear because it lacks inline citations. Please improve this article by introducing more precise citations where appropriate. (August 2008)

• Where Either a Borrower Or a Lender Can Be Wall Street Journal on Peer-to-Peer Lending
• Wall Street Journal Q&A with Prosper Co-Founder: 'Bringing Together George Bailey and Gordon Gekko'
• "Prosper: The eBay of Loans?". Business Week Online. http://www.businessweek.com/technology/content/feb2006/tc20060213_147523.htm. 
• "The Joys of Selfish Giving". USA Today. http://blogs.usatoday.com/oped/2006/12/the_joys_of_sel.html. 
• "A Loan at Home". Time Magazine. http://www.time.com/time/magazine/article/0,9171,1601863,00.html. 
• "Options Grow for Investors to Lend Online". Wallstreet Journal Online. http://online.wsj.com/article/SB118472295685669845.html. 
• "Peer to peer lending offers Solution for Strapped Customers". Smartmoney. http://www.smartmoney.com/consumer/index.cfm?story=20071015. 
• Prosper Marketplace, Inc.. "Prosper Etiquette". https://www.prosper.com/help/topics/start-etiquette.aspx. 
• The Motley Fool/ Chuck Saletta. "Avoid This Company Like the Plague". http://www.fool.com/investing/value/2008/08/29/avoid-this-company-like-the-plague.aspx. 

[edit] External links

• Official Site
• An independent non-affiliated discussion site for Prosper borrowers and lenders
• Links to various third-party statistics and other sites
• An independent non-affiliated site which contains a searchable cache of Prosper's original Official Forums before its deletion