Thursday, September 6, 2007

Group Rewards And Unintended Consequences

In an e-mail to group leaders (see RateLadder and Prosper Lending Review), Prosper announced their intention to discontinue all group leader rewards and move to a referral-only reward structure. The prevailing attitude on the lender side can be summed up with this Prosper forum post:

No group has added any value whatsoever.

Repeat it with me: No group has added any value...oh, well at least to lenders. And we are in the lender forum, right? You are a borrower.

I don't mean to cut on you but it gets crazy to keep allowing these untrue opinions go unchallenged. And I'm sure half a dozen folks will pounce on me (as a poster) and defend you (as a person), what? I'm still right. No group has added any value to lenders. And I don't care if other borrowers want to have threads called "Group Groups" or whatever. Go ahead. But that talk is for borrowers -- in here we are discussing the lender side of things.

My first reaction was "Oh %@#$". I understand the frustration, but I believe Prosper lending system will soon learn the law of unintended consequences. There were some groups that pumped and dumped their loans and provided no value. As a counter example, I always found listings from some groups (No Bulls, Have Money Will Bid, Bald Eagle Loans as examples) to be of much higher quality than average. These group leaders were using the group rewards to justify their time spent aiding borrowers, and that some borrowers do take a fair amount of time when group leaders verify utility and pay stubs. It's a value-add that I'm happy to bid on.

My expectation is that the strong, energetic group leaders will exit, reducing the listing quality in the process. Bald Eagle posted in the forums:

So, thank you Prosper. It has been a good run...

I will contact each of my current group members and give them my direct contact info. I hope to keep contact with them outside of Prosper and I believe in each and every one of them.

To the rest of the Prosper faithful, Adios!

I don't think this is what Prosper intended, but it will be a consequence of the change in policy and, should it go through, lenders will need to adjust to it. Be patient, and be ready to ask borrowers lots and lots of questions.

Update: Some comments from zcommodore, one of the blogging group leaders:

As a group leader who charges fees, I must say I don't really mind. I had originally intended to take no fees all along but a few people convinced me to charge for my services since I was spending a lot of time on it and they suggested that it would be reasonable to charge something so I did. I still waived fees whenever I had a borrower who was rate-capped but it never seemed to make a lot of difference since they never got funded anyway.

Update 2: I'll post other responses here as they show up.
  • Lending Stats Blog: "I think this is a huge step in the right direction..."
  • Prosper's Group Leader Forum thread
  • Wise Clerk: "While some group leaders did a good job screening and vetting borrower applications and the group leader could be seen as a compensation for time invested; the majority of lenders seems to see the removal of group fees as a step in the right direction."

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