Prosper Fixes Lender Agreement Violation

About two weeks ago, traveler505 noticed that Prosper hasn't distributing funds from borrower payments properly (or in compliance with their loan handling agreement). Prosper Shira has followed up with the explanation.

Thank you for unearthing this error: a classic example of how the Prosper community helps us improve the site and our operations on an ongoing basis. You are correct: there is a discrepancy between our legal agreements and the way we collect servicing fees.

As compensation for its loan servicing activities, Prosper currently charges Lenders a servicing fee. Prosper’s servicing fee is deducted from monthly payments as they are received. Prosper collects its servicing fee on all payments received on loans, regardless of when the payments are received, and regardless of the amount of the payment received. This is the way loan servicing fees are customarily charged on consumer credit transactions, and it is the way Prosper has always collected its servicing fee.

You brought to our attention that certain language in the Lender Registration Agreement (LRA) was inconsistent with the manner in which Prosper has been collecting its servicing fee on loans. The following language appeared in the Servicing Compensation paragraph of Section 5 of the LRA:

“With respect to each Note you purchase from Prosper, the Servicing Fee is payable only upon Prosper’s receipt of the full monthly payment from the borrower on such loan no later than thirty (30) days after the due date of the payment.”

This language does not reflect Prosper’s actual method of charging loan servicing fees, because Prosper collects its servicing fee on payments without regard to the amount and timing of the payment received. For example, servicing fees are charged on a full or partial loan payment received more than 30 days following the due date of a payment.

The discrepancy between this language in the LRA and Prosper’s actual practice was an unintended drafting error on Prosper’s part, and is being corrected in the LRA. Going forward, loan servicing fees will continue to be charged on all payments received on promissory notes, regardless of the amount and timing of the payment received. However, we will give appropriate credits to lenders who are impacted by this error.

Lenders who were charged servicing fees in a manner inconsistent with the language quoted above will receive an appropriate credit in their funding account. Prosper is reviewing its loan records in order to determine which lenders are affected by the error, and the amount of the credit. We apologize for this inadvertent error and appreciate your patience in allowing us to rectify it.

Thank you again for helping us improve operations, Traveler505, we appreciate your diligence.

Update: I do want to note that after Prosper credit's those loans that were not handled properly, they have indicated that loans that were funded under the old lender agreement will continue to be serviced under the terms of the old agreement. New loans will be issued under the new terms.