Handling Defaulted Loans

There's been rumblings about Prosper's defaulted debt handling. As in, they hadn't been handling it. It's resulted in some vocal criticisms on the Prosper forums. Well, the gates have opened and the defaulted debt has started selling

Yesterday Prosper began a delinquent debt sale. This happens when loans are 4 months or more late and are sold to delinquent debt buyers…

Loans receive different amounts depending on the credit grade and other borrower information. From my standpoint (observer as I have no loans in the debt sale) it appears that the better prices are paid for higher credit grades and homeowners.

John Witchel has also posted a blog entry on their debt collection and sale process

Collections are not a new business. A key objective of the program is ensuring legal compliance. This determines the majority of what we can and can't do. (We can't go to someone's house unannounced, for example. We can't impound their car. We can't call their employer. We can't harass or threaten people. No company can.) As a result, the process we follow is virtually identical to every other collections process under the sun.

We will continue to improve collections in the coming months (like fraud I can't talk much about what we're planning) but hopefully we'll all start to see incremental improvement. What I can say is that we are well-aware of the critical importance of collections as a condition of Prosper success.

This is all useful stuff as it helps with modeling loan returns. I had originally modeled defaults as destroying the entire value of the loan. This was wildly conservative, but I had no information to guide a more realistic default valuation. Better default modeling allows the lender to better gauge risk and (possibly) accept a lower loan rate.