Studying The Lending Market Summary

I've had a few days to ruminate over the Prosper's August lending market summary, and I've found a few items that are noteworthy. Specifically, their "Prosper Select" criteria and the top Prosper borrower states.

The Prosper Select criteria were listed in the fine print at the bottom of the release:

The Prosper Select Index return is the estimated average annual return on invested principal, based on actual delinquency performance to date. The Prosper Select Index includes AA - E credit grade loans for borrowers whose credit reports at the time of application indicated zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less. The annual return period reflects loans originated in the twelve month period ending one month prior to the observation date of August 31, 2007. Prime Select includes AA and A credit grade loans (credit scores of 720+). Near Prime Select includes B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime Select includes E credit grade loans (credit scores between 560 and 599).

The Prosper Select criteria was DTI less than 40%, 0 current defaults, and 0 to 3 credit inquiries. This was of mild interest until I noticed that the sub-prime category was returning 14.95%. Then I became really interested. The table below compares the Prosper Select ROI versus Prosper's overall ROI.

	AA	A	B	C	D	E
Prosper Select	9.05%	9.58%	9.86%	9.56%	13.77%	14.45%
Prosper In General	9.36%	7.79%	7.33%	4.84%	2.36%	-9.11%

That is a huge swing in ROI for the lower credit grades, implying an equally huge delta in default rates. There may be something to this whole Prosper Select thing.

As I had previously noted, Prosper doesn't have equal access to the lending markets in all states due to usury laws. I had ranked the 20 most populous states based on a quick estimation of Prosper's ability to service the market. They confirmed the jist of my post when they listed their top states:

Top Five Prosper Borrower States in August 2007

1. California
2. Georgia
3. Illinois
4. Ohio
5. Florida

I ranked California, Georgia, and Illinois as excellent loan opportunities with their maximum loan rate of 30%. Ohio was also ranked excellent but had a maximum loan rate of 25%, which appeared to be sufficient to slow it down. Florida, despite having twice the population of Georgia, was 5th on Prosper's list. I suspect that this is because of their maximum loan rate of 18% and only achieving a "good" rating. Any guesses why the "marginal" rated Texas (2.5x Georgia's population) and New York (2.1x Georgia's population) failed to make the top 5 list?