Tuesday, October 9, 2007

Collections Follow-On Q&A With Doug Fuller

I'm almost starting to like the guy. Doug Fuller has responded via the forums to another 20 questions (ok, a few were softballs) asked in response to his original Q&A session. It's a good read and I've picked up a few of the best questions. I encourage you to follow the whole forum thread for reactions as some are equally insightful.

1. Would you be willing to list what you have seen wrong with Prosper collections at this point and if said weak areas will be corrected?

The two biggest weaknesses in our collections process have been “Agency Management” and the lack of legal (court) collection actions. The problem with Agency Management stems from the realities of a start-up. People are wearing lots of different hats to get the job done. Prior to my arrival, the person who ran the agency relationship is really a “credit and underwriting” expert with little collections experience.

As to the lack of a legal option, there are a number of novel challenges in implementing a legal option for Prosper, but it is clear that we need one and so I’m working through those issues as quickly as I can. I’m going to talk about the legal option in a later section of this Q & A.

2. When you talk about transparency, how transparent are you willing to go? When will the collections process be more transparent? How will we know when the collections process is more transparent? (This is not a trick question, or a joke. While your stated goal is to make collections more transparent, what I've seen in my nine months as a lender has been a move away from transparency. Will you or Prosper post changes in collection procedures, and what they mean in terms of lenders' bottom lines?)

As the first person-to-person credit marketplace, Prosper has to set up a system that is collection-aggressive, but is in compliance with the Fair Debt Collection Practices Act, which protects delinquent borrowers from things like publishing “deadbeat lists.” Collection transparency is more appropriate using aggregate information as opposed to loan level info.

When I talk about transparency, I mean that I am going to be very upfront with the lender community about the steps I am taking to improve collections, the reasons for taking those steps, when the change will be implemented, and when I expect to see results. I also intend to create additional reporting to help people understand what’s happening with collections – the information currently on the site is all “snapshot” data. I also want to create monthly summaries so it is possible to look back and see how many accounts were in collections at the end of August vs. the end of September, etc.

Here are the things I am working on right now:

A. Increased agency oversight – I have already visited both locations of PennCro and have implemented a bi-monthly strategy call. I’m expecting an increase in collections simply from the increased focus on our current agency.
B. I plan to implement a “pilot” legal program during the month of October (meaning first law suits should be filed in November).
C. I am looking to augment current phone channel collection efforts with some off-line collection letters.
D. I have been interviewing agencies as potential replacements to our current agencies, focusing on smaller agencies that I believe will give us more attention.
E. I am evaluating the pros and cons of bringing the collections activities in house. I expect to reach a decision on this by the end of November.

By the end of the year, I would hope to see a significant increase in the number of delinquent dollars collected.

6. Will Prosper change its TOS to include suits against delinquent borrowers as an option? Right now the TOS says junk debt sales at 4+ months.

In order to change our current agreements to allow for lawsuits, a number of challenges need to be met. I want Prosper account holders to know that we will sue them and if we sue, we will win. There are some challenges in this. These include:

A. It is not cheap to sue people. While they vary by state, filing and service fees average something over $200 per law suit across the country.
B. Additionally, given our size and novelty of our asset, no law firm is going to take our business on a contingency basis. At least initially you can assume that legal fees on going to be in the neighborhood of $1500 for a NONCONTESTED suit. If the defendant files an answer, that number goes up. A really nasty case could be $15K to $20K in legal fees.
C. There are so many new aspects to how Prosper works that there will have to be a “custom development” to create the pleadings for a Prosper lawsuit.

What I’m doing at this point is putting together a pilot legal program. I have identified a group of loans which have already defaulted or are on the verge of default. These loans will be included in our next debt sale. In order to gain the legal standing needed, I’m proposing that Prosper buy these loans for the same amount that the debt buyer would and use these as an initial test.

My thought is to do this with a group of loans from borrowers who are all in California, so we only have to deal with one state’s court system. I have a meeting scheduled for Wednesday with the managing partner of what I consider to be the best collections law firm in California. My hope is that we can formally place these loans with the law firm this month and have the first suits filed in November.

10. Do you have an especially dark corner in your heart for delinquent borrowers who are also active Prosper lenders?

Yes. I know we are now putting borrower-lender accounts on hold on a monthly basis and I hear we owe the community a thank you for bringing this problem forward.

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