Prosper Blogger Explosion

As I had previously observed, the shutdown of the old forums has pushed some of the more vocal Prosper members (and some ex-members either by choice or by force) into alternate forums of communication. The upside of this is a new wave of Prosper related blogs that bring new insights into the conversation and are written by some of the first Prosper lenders. Some are only updated sporadically, but they're all worth at least a quick look.

• Fred93's blog (not really new, just under appreciated)
• Tokyo Joe's blog
• LC's Warm n Fuzzy Prosper Blog (chimp movies included)
• Traveler505's blog - new home of his MNH (my new hobby) reports
• j9359 and his my prosper experience

If I missed anyone, post in the comments.

Prosper Approaching Nuclear War

Lawsuits are like nuclear weapons, it's the option of last resort and pretty much assures either destruction of MASSIVE damage to all sides involved. When lawsuits fly the only winners will be the lawyers. ("Churla", Slashdot member).

Even though I've grown tired of covering Prosper's continual information warfare with its community, the war is spilling onto my blog. If you're unaware (and don't follow the prospers.org forums), Prosper's intellectual property lawyers have sent a legal nasty-gram to the owner of prosperreport.com for cybersquatting and trademark infringement. The individual happened to be an active member on the prospers.org forums, and this tactic, predictably, pissed a whole bunch of otherwise grumpy people off.

It is here where I have to point out that I do consider lawyers the business equivalent of nuclear weapons. They tend to leave destruction and in their wake and no one tends to "win"; the winners just lose less. Lawyers have their place, but only in a mutually assured destruction sense. I had been hoping that some kind of reconciliation could be found between the disgruntled ex-forum posters who now haunt prospers.org and Prosper's employees and management. The use of lawyers have deflated such idealistic pipe-smoking.

The site owner has now retained council through the Public Citizen Litigation Group and drafted a reply. Normally legal replies are rather boring affairs, but this specific lawyer really seemed to be enjoying himself. If you are at all interesting in intellectual property law, it's an entertaining read (there are days where I feel like such a geek). The reply also contains a most amusing footnote.

When we spoke, you suggested that my client should adopt the domain name "prospersucks.com." That name would be inappropriate, because it is not an accurate depiction either of his web site or of his views about Prosper Marketplace. My client does not believe that your client "sucks." In fact, he is a member of the Prosper community who has made numerous loans to other Prosper members. His concern is about flaws in your client's collection processes, and, even more importantly, about your client's attempts to conceal those flaws from members who seek to have the flaws corrected for the better protection of all members. His web site does not seek to tear down Prosper, but rather to promote transparency about Prosper which he believes is essential to the proper functioning of the Prosper community. Moreover, the domain names Prospersucks.com, prospersucks.org and prospersucks.net are currently registered (albeit by somebody who is not using them in any manner related to Prosper). In any event, the lesson of Taubman, Bosley, TMI, Lamparello, and many similar cases that we have litigated for Internet speakers is that accurate domain names need not couple trademarks with vulgarities in order to be protected.

Even beyond this, I do hope that Prosper takes the reply's observation about the Streisand effect seriously. This has happened to Prosper and will continue to happen to them until they learn to walk softly (big stick or not).

Finally, your client may hope that by filing suit it will send a message to critics that the use of the Internet for uncensored comment on its activities will be costly. But its decision to file suit over this domain name may be even more costly for your client. Our experience with the other domain name cases that we have litigated is that the litigation itself brought more attention to the criticisms than they would otherwise have received. For example, a Google search for "prosper" does not bring up our client's site on the first page, or even the first several pages, of search results. If your client makes the mistake of filing the lawsuit that you threaten, that may well change. Indeed, although your client has become known to some Internet users, it is not well-known to the general public. I scarcely think it would be in your client's interest if the first thing that the general public learned about your client is that it is so afraid of open discussion that it needs to sue to stop easy access to that discussion.

Cushie06's Christmas Wish

Fred93 reposted an entry submitted to the Prosper blog that was reject. Normally I would let it stand there, but too many people have the same hope. Here is Cushie06's Christmas wish for Prosper:

If I could wish for just one thing this holiday season when it comes to Prosper.com it would be redacting any changes that lead to the appearance of censorship.

It is my opinion that the appearance of censorship on the part of Prosper.com and its management will be the downfall of Prosper. PMI needs to remember that this is a place where lenders invest their hard earned dollars and where borrowers ask for same. Everything that is done needs to be above board and honest to a fault. This appearance of censorship started when Prosper erased, completely erased, the old forums and installed a new one.

I have kept track and nine out of my last ten posts to the new forums did not meet approval and were not posted. Add to that that Prosper is sending out letters from attorneys to various members, banning anyone who mentions an outside website on Prosper.com, and erasing profiles that do the same and it looks like Prosper operates under a police state.

I want nothing more than for Prosper to succeed and it is my most fervent wish that I can work within Prosper to affect change.

As it stands now until or unless Prosper takes some action to remember who their customers are I won't be borrowing or lending again. That's a sad statement for me to make and I hope Prosper realizes I'm not the only one who feels this way. Many of us feel that Prosper has squandered not only the goodwill we once had but also the tremendous talents of their lender and borrower base are the customers who have been with them since the beginning. We all share one common goal: to see Prosper succeed and become the premier site for P2P lending. We hope Prosper shares this goal with us.

The Linkfest Clause

Merry Christmas to one and all. We're an equal-opportunity blog, however, and would like to also extend a happy Hanukkah, Kwanzaa, Winter Solstice, and Festivus to you too! And have a joyous Boxing Day too.

My Experience As An HR Borrower

It is possible for a high risk borrower to get a loan on Prosper successfully. Don’t expect overnight money. This is a process that takes time, energy, patience, and the understanding that you are taking real money from real strangers. So many borrowers at Prosper default without ever making a payment that it is staggering. My Prosper payments have come first and carry more weight with me because they came from real people just like me and you that are looking to invest their money, get a return, and make a real difference in the lives of ordinary people.

Prosper Nominated for Crunchie Award

Prosper was nominated for a Crunchie in the category of Best Business Model.

The Crunchies is a collaboration project between GigaOm, Read/WriteWeb, VentureBeat, and TechCrunch.

USA Today: Peer to Peer Lending Hits Its Stride

As the global credit squeeze leads banks to tighten their lending, a niche industry is emerging as the eBay of consumer loans: peer-to-peer lenders.

With peer-to-peer lending, individuals, some of them with little or no collateral, seek loans from ordinary people looking to lend. Lenders compete with each other to make loans, often resulting in lower rates for borrowers — averaging 10% to 16% — than are available on unsecured bank loans.

Business Wire: Will a Stranger Lend You $25,000?

Prosper, based in San Francisco, is one of a tiny but growing number of for-profit online social lending marketplaces in the U.S., which some entrepreneurs are looking to as alternatives to bank loans. (The original concept of making small loans available to people with no collateral in the developing world started in the 1970s and has been growing steadily more popular, sparking praise (BusinessWeek.com, 10/13/06), controversy (BusinessWeek.com, 12/13/07), and nonprofit successes like Kiva (BusinessWeek Small Biz, 7/31/06).) As the credit crunch (BusinessWeek Small Biz, October/November, 2007) makes getting a loan even harder for small business owners, for-profit social lending could play a bigger role in financing small enterprises in the U.S. Most sites reported that between 20% to 30% of loans are for businesses; it is the second most common reason borrowers listed, after refinancing debt.

NewWire Investor: A Look Back at Prosper’s Second Year

Prosper, the online lending company that began the peer-to-peer lending revolution in the U.S., will mark its second year of lending Feb. 21. Prosper’s unique take on lending was followed by Lending Club, CommunityLend, Smava and iGrin, among others. Like any new company, Prosper’s first year has seen significant changes to the business model and a lot of small tweaks to the system.

One of the most notable aspects of Prosper’s business model is its groups feature. Borrowers may join a single group based on a common interest such as nationality, local community, religious affiliation or an affinity for PCs over Macs. Groups have reputations based on how well their members’ loans have done and each member borrower can help or hurt that group’s reputation.

The Age: Internet subtracts banks from lending equation

The Internet is directly connecting investors and borrowers, letting them take banks out of the lending equation and put their money where their hearts and dreams are.

People have lent each other more than 100 million US dollars through Prosper.com since it launched in February of 2006 and the US website has partnered with SBI Holdings to expand into Japan.

Tip To Borrowers - Prepayments Are Your Friend

Prosper Borrowers have the option to make payments above and beyond the Prosper calculated monthly payment, referred to as prepayments. Lenders have a wide variety of reactions to this practice, ranging from happiness that the loan is being paid back to annoyance that they didn't earn as much interest as was expected.

For borrowers, however, prepayments are nothing but a good thing. For borrowers who consolidate their >30% credit cards into a ~25% Prosper loan, paying just a little extra can save the borrower hundreds of dollars over the next three years. To be more substantial, a $10,000 Prosper loan at 22% has a monthly payment of about $382. Paying an extra $10 a month, or $393, will save the borrower $414 over the life of the loan and get the loan paid off two months early. If you're working hard to dig yourself out of debt, $400 is a big deal.

To get a handle on how effective prepayments are, play with an online loan calculator (like this one) to see what paying extra can do for your finances. And don't be discouraged if you can't regularly pay more. Even the occasional extra payment for $25 will help you save more in the long run.

Unannounced Feature In Prosper's Latest Upgrade

In addition to the previously announced features in Prosper's Tuesday night upgrade-a-thon, I think a few marketing tricks came along for the ride. After placing a bid this morning, I got a subtle reminder of their referral program.

While I'll have to admit that this could've been added in an earlier upgrade, I don't remember it. It looks like Prosper's pushing pretty hard to pick up new lenders by referrals. How long will they be able to resist ads?

Pre-Holiday Prosper Upgrade

Prosper finished a 5 hour upgrade session last night and has deployed a few new features in what is probably the last upgrade for the year (no doubt followed by chugging some spiked eggnog and getting out of dodge). I found three lender-centric changes that caught my attention.

First, Prosper tweaked with the lender statistics reporting page to adjust the Active Loan Summary section as was hinted at on the Prosper forums. It did not resolve all the accounting ambiguities for incoming payments, but it's better than it was.

Second, Prosper sped up their marketplace performance search page (to make the quants happy, they say). I spend a gratuitous amount of time here, so I appreciate this upgrade.

RateLadder has also covered the upgrade.

New And Shiny Collections Statistics

I had proposed a new way to look at collections progress back in early December. This method took to snapshots of Prosper's nightly data export, one month apart, and looked at how the lone status changed over time. I took my first snapshot on December 1, but by some fluke of luck, it turns out that I had the Nov 1 download laying around a second computer, so now we get an early look. The underlying assumption is that if a loan's state does not get worse (as in, going from 1 month late to two months late), some payment must've occurred. So, into the data.

	Total	Got Better	The Same	Got Worse
Payoff in progress	28	26 92.8%	0 0.0%	2 7.1%
Current	11697	154 1.3%	11238 96.0%	305 2.6%
Late	252	66 26.1%	40 15.8%	146 57.9%
1 month late	326	42 12.8%	24 7.3%	260 79.7%
2 months late	263	13 4.9%	9 3.4%	241 91.6%
3 months late	231	5 2.1%	9 3.8%	217 93.9%
4+ months late	618	6 0.9%	607 98.2%	5 0.8%

The interesting figures are that between Nov 1 and Dec 1, it looks like 20.3% of "1 Month Late" loans, 8.4% of "2 Month Late" loans, and 6.1% of "3 Month Late" loans had some kind of payment activity that kept things from falling further behind. The blood from a turnip category ("4+ Months Late") had 1% improve, though this is hardly definitive because payments that do not bring the borrower to 3 months late or better are not visible. I am hesitant to infer things from the "Late" category because it is not on a clean month to month boundary.

These statistics imply better collection performance than the official Penncro numbers that Prosper publishes, but a one month snapshot is insufficient to rule out a statistical anomaly.

Some other notes from the statistics include the 5 "4+ Late Loans" got worse by folks entering bankruptcy and 1 "1 Month Late" loan that was repurchased.

Prosper Replies On Prospers.org Scrubbing

I did get an reply from inside Prosper regarding the prospers.org scrubbing. One of Prosper's big concerns with the .org relates to security. Until I read this, I did not truly appreciate how fanatical they were about personal and security. In retrospect, I should not have been surprised based on my dealings with other financial institutions, but I had not considered this level of detail before. This portion of the e-mail chain is reproduced verbatim with permission:

Prospers.org is a critical security risk to all members.

Prospers.org actively encourages users to map their Prosper screen name to their email. This in itself is a serious security breach.

Prospers.org then requires a password. Given human nature, it is likely that some unsuspecting users would use the same password on Prospers.org as they do on Prosper. This in effect gives whoever runs Prospers.org a growing database of logins in which they could access Prosper members' bank account information, transfer money, place bids, etc.

As if this weren't serious enough, Prospers.org's login is not encrypted. This means every time anyone (including those with admin access) login to Prospers.org their username and password is passed over the internet in clear text allowing any hacker with a packet sniffer to acquire this information.

Based on this, it is highly advised that every member who has ever registered with Prospers.org change their password immediately.

If you think they're too paranoid, please tell me that you're not running IT for my bank.

Update: In addition to posting a lengthy rebuttal to prospers.org's danger to security, Ferrix, the prospers.org maintainer, has confirmed the security state of their forums

In addition to my other comments rebutting PMI's analysis of .org site security, is this nugget (thanks Mark12547)

Our forum software's login form hashes the password on the client browser before sending it to the server. This means that there is no sniffing vulnerability, even without SSL login.

By the way, as of yesterday night we have SSL protection for the login data anyway, too.

Prosper Scrubbing References To Prospers.org

I was going to let the moderation of blog comments go by without additional note. There was no reason to expect anything different over the new forum policies. I was even going to let the Wikipedia bruhaha go without much of a stink. Every company's marketing department tries this. Most quit when they realize that they'll get caught. No harm, no foul.

However, Prosper has now cracked down on all the member profiles that reference off-site Prosper resources. A large number of Prosper users have received a message traced to John Witchel, Prosper CTO, similar to this:

This email is in response to a confirmed policy violation on your member page.

Content published purely for advertising or promotional purposes will be promptly removed, and your account will be suspended. Repeated occurrences may result in termination of your registration with Prosper. This content has been removed.

Continued violation of Prosper's policies will result in suspension or termination of your Prosper account. Please abide by Prosper's policies.

What was the violation, you ask? Many of the users had "prospers.org" listed in their profiles because they post under the same username there and found it worthwhile to note it. Even worse, a few daring souls only had ".org" in their profiles, the most blatant promotional reference to a large fraction of the internet that I've ever seen. The whole process seems inexplicable.

Yet this is just the latest salvo in a protracted information war between Prosper and it's 580k members. Prosper members (especially lenders) want direct and open communication between each other, unfiltered by Prosper. And at each step, Prosper has applied increasing layers of censorship to curb the communication. In some cases, like limiting borrower personal information, it was justified. In situations like the most recent, the rational is opaque to those affected.

In every step of this cat and mouse game, it has been 580k Prosper members again 50 Prosper employees. You moderated the old forum and members moved to prospers.org. Members were using off-Prosper links in posts on the old forum to get around the moderation and you changed to the new forum. Members reply by putting up Google Ads for the prospers.org forums. With every move you make, the community intensifies its efforts and the restrictions you apply move the message further out of your reach.

Any success in censorship you do have appears to be a Pyhrric victory. Prosper stopped discussion about prospers.org on your forum and in your profiles, but you have alienated your customers and pushed the front further out. Are you going to battle via Google Ads and all the random blogs and newspapers too? How will your 50 employees be able to control what 580k members talk about when, as John Gilmore observed, the internet treats censorship as damage and routes around it? In such a battle, the best you can hope for is a stalemate, with the increasingly sterile and barren community as the primary victim for censorship.

Both sides seem weary, and the only way out is to increase understanding. Anything less, and both sides lose. You read our blogs, our forums posts, and our customer feedback e-mails so you know what the crowds are thinking. So I ask (dare I say beg?) you Prosper, please help us understand your thinking. You're not acting like the threat to the power elite that you claim, but instead acting like the old guard. You look to be adopting techniques used by the power elites and are building a large cathedral in the process. Please, explain what you're thinking to us as partners instead of bank customers, for we are all tired of banking customer service. There is a community out here waiting to understand why you found the increasingly harsh censorship necessary and hoping that there's a way out of the protracted stand-off.

Chatty "Prosper" User On Forums

I have no definitive proof, but it seems that the Prosper forums have loosened up some from the initial crackdown. Links to non-Prosper websites (that's right, those tubes aren't just a fad) are being allowed and it's not all goodness and light. Although I suspect that all posts are still being checked before they go live, there doesn't seem to be the same level of filtering as before. More curiously, the official "Prosper" answer person seems quite chatty (the writing and level of platform technical understanding makes me think Prosper Andrew is taking his turn as Q&A guy, unless it's someone new), and has dropped several hints on even better statistics reporting features.

A per-users ROI calculation
LoanChimp asked about improved income reporting

When will this show a Year-to-Date figure?

2008 is coming up soon, which will be my 3rd year here. While the nice and big (actually not too big) number is nice to see, a YTD figure would be much more meaningful.

(or perhaps even show both YTD and a cumulative figure)

"Prosper" replied:

Hi LoanChimp,

We are working on creating a meaningful ROI tool for individual lenders. It may still be a while yet, but thank you for the feedback, and we understand the desire to have this type of measurement on your account.

Best regards,

Prosper

Improved Loan Statistics Filtering
Again, LoanChimp asking questions:

Performance page does not allow to filter by the number of loans (i.e. 2nd loans).

"Prosper" replies:

Technically, this isn't a bug (it's working as designed), but for technical performance reasons we've prevented the marketplace performance page from filtering on some of the credit criteria (like 2nd loans) that are available in advanced search. We will be adding those (and other filters) over the following months as we beef up the code behind the performance page.

Best regards,

Prosper

We Linkfest, You Decide

That's right. Fair and balanced linking. After editorial review. And my personal slant. And the bribes (I'm fair and balanced in my bribe taking, though).

zommodore ponders Prosper's growth (round 1 and round 2 - round 2 shown):

As you can see from the various graphs available on these 3rd party websites, Prosper is growing. My concern is that Prosper is not growing fast enough to satisfy the sources of the venture capital Prosper is using to conduct business and their funds will dry up such that Prosper has to cease operations.

RateLadder turns on the statistics machine:

• Small Loans Less Risk, Large Loans More Risk
• Prosper Interest Rates On the Rise
• Current Delinquency Count for Prosper Loans
• Prosper Debt Sale Percentages

Lazy Man Debates With Free Money Finance:

Now that I’ve firmly established the bias I have for Prosper and peer-to-peer lending in general, I’d like to highlight the other side of the story. Free Money Finance decides that investing in Prosper isn’t for him. Here are the reasons he’s highlighted: ...

I’ve read these reasons before and on the surface they make a very convincing argument. However, when dig under the surface some of these are not 100% true for all Prosper loans.

Dallas Morning News - Person-to-person lending is networking its way up

Congress' heavy scrutiny of the credit card industry last week is indicative of how heavily in debt many consumers are and how they're struggling to pay it off.

A growing source of funds for consumers to pay off credit card debt is so-called person-to-person, or peer-to-peer, lending

TheStreet.com - Lend Your Money, Turn a Profit

Your bank profits off money sitting in your savings account by lending it out at a higher rate than it returns to you. So why not eliminate the middleman and lend your money to others yourself?

That's the proposition offered by financial Web sites ranging from Prosper.com and LendingClub.com to Zopa.com, which launched its U.S. site last week.

Borrower Rate Guidance

With the latest Prosper site update, they added a borrower rate guidance. This feature helps borrowers pick an interest rate that will be successful in the auction process. Previously, Prosper would suggest rates based on where loans had funded at. Experience had shown, however, that listings that started with a relatively high interest rate would get bids and would eventually be bid down while those that started with lower interest rates would languish. Prosper added this feature to help more first listings be successful.

A screen shot, posted by big-al on prospers.org forums (reg required), is below:

Prosper's November Market Summary

On Tuesday, Prosper released their November market summary reporting on their marketplace statistics for the month of November. This followed the usual format, and this time there's a few things I want to call out. First, the estimated annual return for the Prosper Select Index seems to be collapsing. Comparing the November statistics against the October numbers reveals a notable drop in estimated return.

	November	October	Change
Prime	8.86%	9.09%	-0.23%
Near-Prime	9.40%	9.35%	+0.05%
Sub-Prime	8.68%	10.45%	-1.77%

I'm attributing the large drop in the sub-prime space to the previous market summaries highlighting that there were better returns there. People bid hard on those loans in the Prosper Select Index and that drove down the ROI, but it's hard to directly infer that since Prosper didn't publish their Prosper Select return estimation methodology in the press release.

I also want to note that, despite Fed interest rates still dropping, the average Prosper Select loan rate increased in the Prime and Sub-prime spaces (0.72% and 2.00% respectively). After last month's commentary, I was preparing to argue against this conclusion with a statistical furor rarely seen outside of an accounting class, but I think I'll let this do all the talking for now. I hope Chris noticed this contra-indicator and that we can avoid further inferences of statistical correlation between the Fed funds rate and Prosper's average lender rate.

In addition, this month's commentary was written by Kirk Inglis, Prosper's CFO. It was good to get a different flavor. Kirk highlighted the bidding guidance tool and second loans to borrowers. I suspect Chris' commentary equivalent went into the Prosper blog's opening post.

Lending Club Lifts Loan Limits Nationwide - Prosper Next?

I was so fixated on the community wars that I completely missed Lending Club securing the ability to lend nation wide without interest rate restrictions. From the increasingly ill-named Prosper Lending Review:

Lending Club has finally eliminated all this confusion – they are available to borrowers in all states and are not bound by state interest rate limits any more. In the official announcement, Lending Club CEO Renaud Laplanche said, “We went National today, 6 months after the launch of our Facebook application and 3 months after the limited opening of our public website at http://www.lendingclub.com/.” He estimates that this will open up their platform to an additional 108 million borrowers.

I have seen theories that they partnered with a national bank (which does not have loan restrictions) to get around the state caps. Therefore, Lending Club rounds up the borrower, asks the bank the make the loan, buys the loan from the bank, and then the lenders buy the loan from Lending Club. Or something like that. Everything clear now?

Of course, this'll place Prosper at a competitive disadvantage in the high quality borrower market. When will Prosper follow down this road?

Update: Those national bank partner theories were not just theories. RateLadder had the dirt:

Is Lending Club regulated?
Lending Club has partnered with WebBank, a FDIC-insured, state-chartered Industrial Bank organized under the laws of the State of Utah to originate the loans in a consistent manner across all 50 states. Lending Club loans are regulated under WebBank’s Industrial Loan Charter.

Prosper Updates On Loan Payment Fee Discrepency

Back in October, traveler505 observed that Prosper was pulling group and servicing fees from loan payments made for late loans and that this was against the terms of the lender agreement. Prosper followed up a few weeks later and noted that they were going to get things fixed up the way they should be. With no further word, and no fixes, folks have continued to press for the resolution to happen and Prosper has replied via the forums:

Our apologies for the delay in getting information out to lenders about this: Prosper has every intention of living up to the legal agreement that was in effect when the loans were issued. The engineering changes required for the refund to go into effect are complex and we want to make sure we get them right. Lenders should see their refunds in the first quarter of 2008.

Thank you.

Prosper

Update: Removed that '*DONE --' from the title. You just caught your friendly, neighborhood blogger being sloppy because he was running late for a class this morning.

The Forum Devil You Know

When Prosper put up the new forums, they added a requirement that posts be pre-approved before they become visible. This had the (predictable) consequence of annoying the frequent posters who enjoy the banter of carrying on near real-time conversations on the forums. A number of these folks have negative opinions and went looking for an outlet. Enter the New York Times. Freakonomics author and upcoming Prosper Days keynote speaker Stephen Dubner has a blog on the NY Times website, and the disgruntled posters decided to visit when he posted on Prosper. The blog comments are indicative of their presence.

Prosper knew where it's unhappy users were (their forums) before changing the status quo. It wasn't sunshine and goodness for Prosper, but it wasn't hard to find them and they stayed where you could see them. With the new forums, the agitators have scattered, and bad public relations can be found in their wake as a reminder that the Streisand effect is real.

Sometimes the devil you know is better than the devil you don't.

Prosper Collections Chasing Payday Payout

Several prosper lenders had spotted an anomaly on Nov 30. Lots of lenders had late loans suddenly show payments in transit at the same time. zcommodore tracked down the explaination.

Prosper has done analysis that shows ACH withdraws are more successful on paydays. Therefore, Proser has initiated ACH withdraws from some late borrowers accounts to begin processing on 11/30/07. New actions taken by Prosper will never result in negative actions to our lenders.

Prosper has been ratcheting up efforts to improve the collections process since the arrival of the new VP of operations. The new payment timing comes on top of other efforts like testing a new collections agency, working with Penncro, the current collection agency, to improve collections, and appeals to the borrowers.

Zopa's Unveiling A Big Let Down

Everyone's commenting on Zopa's US launch, so I feel the need to get my two cents in. If you've somehow missed it, just skim the blog headlines:

• RateLadder: Zopa Launches in United States
• WiseClerk: First impressions of the Zopa US site
• PLP: Zopa Promises to be Different
• NetBanker: Zopa Launches U.S. Loan Marketplace Monday Night
• Lazy Man And Money: Zopa Launch Imminent

For lenders, this is a huge non-event. You can invest your money in ... a CD. Zopa didn't want to loose that P2P street cred, so lenders can give up some of your 5.1% interest to help a borrower along.

It's very difficult to see Zopa's US offering as anything beyond a chewing gum, duck tape, and bailing wire operation. On the lender side, Zopa is competing with banks and will not attract big investment money. I think Lazy Man said it best:

So there is the rub. Investing in Zopa is very much like buying a bank CD. The only advantage vs a bank CD that I can see from a lending standpoint is that the lender can lend money to a specific borrower. This may be psychologically nice, but it’s never been the biggest selling point in peer-to-peer lending for me. If I really knew the person I was helping outside of Zopa that would be of value to me. However, helping a strangers is nothing new. Ten years ago when I bought a CD from my credit union, what do you think they did? They used that money to lend out to other people. I don’t see how this that different.

Zopa was supposed to bring some fresh competition to the US market and shake things up a little, but didn't bring much to the table. Lots of sizzle, but where's the steak?

National Lampoon's Christmas Linkfest

All I have to say is "SQUIRREL!!!"

fred93 posted an update on Prosper's default rates and he wasn't too keen on how they're calculated:

One problem with the 2.7% number is found in the choice of numerator. The numerator in this fraction includes only loans that have been declared "default" by Prosper. Prosper ages highly delinquent loans quite some time before declaring them "default". Loans are subject to default at 4 months late, but Prosper holds such loans until a quarterly disposal, and only declares them default once they have passed the quarterly event. Loans >4 months late would be in the default state except for the fact that they are waiting for the quarterly auction. Today Prosper shows $2,864,899 of loans in the "default" state, and $3,694,261 in the "4+ months late" state. More loans are in this suspended waiting-for-the-auction state than have so far completed the process and been declared "default"! If the quarterly auction had been held yesterday, the calculation of Larsen's ratio would have come out 6.4% instead of 2.7%.

Free Money Finance - Is Prosper.com a Good Way to Earn Money?

Either way, it doesn't look like something I'm interested in for investment purposes. Yeah, there's the "read people's stories, get involved, and help them out" angle associated with Prosper, but I'm ignoring that. I'm looking at it as an investment and whether or not it's a good option for me. And to be a good option, I needs to beat my main investment of choice: index funds. But it doesn't.

New Study Shows Person-to-Person Lending Helping Consumers Tackle Debt

According to Javelin, consumers are primarily turning to person-to-person lending because of the potential savings on an interest rate or profit on a loan. However, different consumer groups showed different motivations for engaging in person-to-person lending. Among all surveyed consumers (n=2200), helping someone who might not otherwise be able to obtain a loan and avoiding the use of credit cards were key factors. For higher income consumers, participating in an online lending community was a top reason.

RateLadder - Prosper Community:

What happened to the Prosper community? The new Prosper forums are difficult to use… Where did the community go?
...
Also, many (most?) of the old forum regulars are at Pro$pers.org forum. With the recent official prosper forum change it appears that more & more users are switching to Prospers.org. I personally haven’t used this forum very often, but I think there is value here, largely because the discussion is unmoderated, and a wide variety of opinions are freely expressed.

Digging For Gold Around Prosper's Portfolios

This was a guest post on Prosper's new blog.

When Prosper created their portfolio plans, they added a tool to help new lenders enter the marketplace. It assembles a portfolio of loans whose only objective is to track the average loan return in the specific market slices, much like index funds have done with the stock market. Want to play it conservative, you buy a S&P 500 Index. Feeling aggressive? Try the EAEF Foreign Stock Index. If a lender is interested in tracking the loan market, new lenders can establish portfolios without the learning curve of manual bidding.

Those of us who take a managed fund approach to our lending by using manual bids will have to be careful because the portfolio plans will change the bidding environment. If the portfolios are widely adopted, we should expect loans within the portfolio's umbrella to be in higher demand. Higher demand for certain loans will result in lower interest rates for those loans, lowering the possible return on investment. A similar effect has been found when the S&P 500 adds a new stock to the portfolio.

At the same time, it creates opportunities to find nuggets that are outside of Prosper's four portfolio plans. This is risky territory (otherwise it would be inside the portfolios), but risk is a problem for lenders when they're not paid appropriately to take on the risk. Careful efforts to mitigate risk can drive down the net defaults and appropriate bidding can compensate for the remaining risk. For example, non-autofunded C grade loans with 0 delinquencies and 2 to 3 inquiries are more dangerous than those with the balanced portfolio preferred 0 or 1 inquiries (-9.05% vs. -5.02% net defaults respectively). If you take those 2 to 3 inquiry loans and further constrain bidding based on other risk factors like DTI and loan amount (DTI less than 20%, amount less than $10k), it's possible to find listings that have better net defaults (-3.97%) than those found in the portfolio criteria.

This was just one of many opportunities. Prosper doesn't add these more finely tailored criteria to the portfolios because there aren't enough listings to support the volume of loans portfolios demand. For individuals willing to dig deep around the periphery however, it's a veritable gold mine.

Update: I'm pretty sure that the "C" credit grade standing order criteria shifted slightly since I wrote this. When I did my research, Prosper did not have DTI < 70% and the employment status criteria in the standing order. Why, oh why can't I wait until the last minute like all the other procrastinators?

Anecdotal Stories Of Improving Collections

There have been some anecdotal reports that Prosper is making minor headway in improving their loan collections. It's very preliminary and sketchy, but it leaves open the possibility of progress.

First, a few members of the prospers.org forums have noticed that loans transferred to the new test collection agency have shown some life (reg required). Two loans in this group that were 4+ months are showing double-daggers (if you're unfamiliar with the term, it refers to icons that Prosper uses to indicate that incoming payments have not yet fully posted - double daggers or twin daggers indicate that a transfer has been initiated). This is encouraging since 4+ month old loans have always appeared to be lost causes. Since the sample set is unknown, it's hard to tell how effective this new agency is, but at least a few lenders have benefited from the attempt.

Second, the Penncro collection rates have been trending upward slightly. From LendingStat's blog:

Prosper said a few months back that they were going to tackle collections and try to improve collection rates (Prosper Tackles Collections). It now appears that Prosper has been keeping their end of the bargain. Penncro collection rates have now improved across all credit grades from around 12% in August to 14% in November.

In both cases, it's hard to get the full picture because there's no hard numbers (the plural of anecdote is not statistics), but the anecdotes are positive. Hopefully the quarterly collections report will arrive and fill in the details and provide a few statistics.

The Cathedral of the Bizarre

I had originally replied to Prosper's blog post by leaving a comment (which was deleted by moderators - grrrr it's there now. Take a deep breath, Mike, and relax), but found that there was more to pontificate on and kept going.

In Prosper's blog post Money and Merit: Web 2.0’s Threat to the Power Elite, Chris Larson invokes Eric Raymond's The Cathedral and the Bazaar and draws allusions to Prosper being the bazaar that will challenge the banking world's ruling elite. I find this quite ironic since, by the essay's definition, Prosper's marketplace would still be a cathedral. This is not meant as a slur since it's a practical requirement for most financial marketplaces, but there is still a ruling elite embodied in the corporate Prosper. Prosper has control of the marketplace and only Prosper can make changes. These changes are periodically deployed to the users who can submit feedback to Prosper, but the users are not empowered to directly alter the marketplace itself or observe it's innermost workings.

The critical element of the Raymond's work was that the bazaar approach empowers users when they can fully understand and then directly change the workings of the system in question, in this case, the Prosper marketplace. This model has been deployed successfully in the software world, with Linux and Firefox being two stellar examples, because full and open transparency do not topple the software development process. This is an impractical possibility in the financial realm because of legal restrictions and users expectation of some level of privacy. Prosper's lenders and borrowers are the equivalent to the masses that require the elites to make the final transaction.

This is not to dismiss the opportunities that Prosper has provided. Prosper has empowered it's marketplace users with options and information that are unprecedentedly in the financial world. They have shifted the opaque process of connecting lending and borrowers, greatly improving the financial cathedral by effectively reducing the size of the alter and expanding the seating for the community. But it is bizarre to deny that we're not in a cathedral.

To approximate the bazaar (we must accept that the legal and privacy restriction will prevent the complete transformation), it is necessary to continually spurn the previous financial thinking and abdicate power to the community, willingly shrinking the cathedral and relinquishing central control. How far will Prosper go to knock down the walls of their cathedral?

Sizable Prosper Upgrade, Including Prosper Blog

Prosper dropped a rather sizable upgrade last night, including the Prosper blog as I revealed was coming soon. The full list can be found on the Prosper forums (login required - grrrr), but two items caught my interest.

First, Prosper will now be providing rate guidance for borrowers. This is beneficial since it will help borrowers avoid the frustration associated with low-balling their initial interest rate. Hopefully, there'll be no more D grade borrowers trying to get 10% loans (unless they are up against the state rate limit).

We know that it is hard for borrowers to choose appropriate starting interest rates for their auctions. For example, the average rate for AA borrowers for loans between $1-5k is currently 7.81%. So a borrower might be tempted to start the bidding at 7.5 or 8.0%. The borrower who starts the bidding at 8% might get funded at 8%. But a borrower who starts the bidding at 10% or even 12% might get bid down to around 7%!

This release includes some changes that help borrowers choose a more appropriate (i.e., higher) starting interest rate, and should help them understand that setting a higher starting rate may result in a lower loan rate than they expected.

Also, Prosper is expanding the marketplace data that can be downloaded for statistical analysis. They're adding loan history information, so it's possible to construct more accurate ROI analysis than was previously possible.

There is now a new lender-only data file (you must be signed in as a lender to download it). It is a supplement to the public data file, and contains 2 additional objects: 1) the CreditProfile object which links members and listings with their credit data, including the extended credit; 2) the LoanPerformance object is a history of the ledger of a loan, including a row for every transaction that affects the loan’s balance.

These are very useful changes for lenders, and kudos to Prosper for this upgrade.

Hiccup In Portfolio ROI Estimation

Prosper refreshed the statistics for the bidding and portfolio ROI in the last day or so. The new statistics are for loans underwritten between June 1, 2006 and Sept 30, 2007 as viewed from Oct 31, 2007. Prosper Andrew has suggested that it takes several days for all of the ACH transactions to settle out in the statistics, which I'm guessing is why they don't use Nov 30 as the observation date.

This a good thing. It's an indication that Prosper is working to keep the statistics relevant and up to date. The one downside for this update is that it hiccuped on the conservative portfolio:

It looks like one of the standing orders that make up the portfolio had a hiccup and it polluted the calculation.

Update: Appears fixed as of 1:30 PM CST

Official Prosper Blog Coming Soon

It started with an eagle eyed lender on the prosper.org forum spotting an interesting tid-bid in a Prosper job posting on the San Francisco Craigslist employment area. Prosper is looking for a temp to fill in for a while, and running the Prosper Company Blog (noted as forthcoming) was one of the job responsibilities.

Prosper has now confirmed to me that they will be launching an official blog in the near future. This does have interesting implications for how they intend to communicate to their users, but the proof of the pudding is in the eating.

I'll note that the software recently deployed for the new forums, Community Server, also has a blog component to it, so we can probably expect this platform to be running the blog as well.

Revisiting Group Rewards

After my initial reaction to Prosper removing group rewards, I spent some time understanding the (near) collective wisdom that group rewards needed to go. I've hit acceptance. The positive group leaders could not overcome the market-distorting effects of the pump and dump and the community payment.

Here's how the pump and dump worked. A group leader would take smaller loans with high interest rates and bid a large sum (25% - 50%) at the initial interest rate. Other lenders, noticing a loan about to fund, would bid. As more lenders bid, the group leader's bid would be pushed off the loan, leaving the group leader with a funded loan to his group and no skin in the game. Why did lenders pile onto the loan? It was because the group had a 5 star rating.

But why did the group have a 5 start rating? It was because of community payments. The community payments were originally intended to allow a friend to help out a borrower, but were used for statistics manipulation. The group leader would prop up his group's rating by making community payments for those loans that ran late. The group rewards provided sufficient income to the group leader to maintain this system for several months. Those familiar with pyramid schemes will recognize that eventually the pyramid will fall apart - the community payments cannot be maintained with the group rewards as defaults increase as more loans are funded. When everything falls apart, however, the group leader still gets group rewards on those loans that didn't go belly up, usually with little or no money lost on their part.

At some level, the system was perpetuated because Prosper did not account for community payments in the star rating system and community payments were difficult to observe for lenders. But, even if existing lenders could learn to navigate the dangerous waters, a constant stream of new lenders were entering the marketplace. The current system was damaging to the marketplace and had to change. I still believe that it was painful to lose the good group leaders who made working with borrowers their full time job, but Prosper made the right choice to preserve the integrity of the marketplace.

New Attempt At Observing Collections Progress

My previous attempt at getting a handle on how collections are proceeding on Prosper following the arrival of the new VP of operations didn't go so well. I did not have a grasp on how successful collections impact the reported loan status. Time to try again.

At the beginning of each month, I'll download the raw Prosper loan data. It'll be processed to determine loans that increased in their lateness (going from 1 month late to 2 months late, for example), and those that showed signs of some monies being collected (held or improved position). The first dataset was picked up on Dec 1, with this being the baseline for all future statistics tracking.

I'm going through the trouble to fill in the gaps with the collection agency statistics. The statistics report how well the collection agencies are performing, but do not discuss borrowers paying directly through Prosper (perhaps because they got a letter) to get the account current. I also find that it has less ambiguity than the statistics that Prosper reports.

The Quietly Changing State Interest Rate Limits

While reviewing Prosper's state lending limits to see if everyone had bumped up to 36%, I noticed that some of the values had drifted a bit from the last officially announced state limit change back in May. At the time, I did not capture all the rates (only the new ones), so I do not have a complete picture. Prosper, being the wily data hiders that they are, have blocked Google and the Way Back Machine from caching the page, so I can only work with the data that I have.

There are some changes of note based on the limited information available, however. And, to get around that data hiding goodness, I've listed all the state information for future reference.

State	Current Rates	Old Rates
Alabama	$2k - $25k @ 36%
Alaska	$1k - $25k @ 16%
Arizona	$1k - $10k @ 24% $10k - $25k @ 36%
Arkansas	$1k - $25k @ 10.25% APR	$1k - $25k @ 11.25% APR
California	$1k - $2.5k @ 19.2% $2.5k - $25k @ 36%
Colorado	$1k - $25k @ 21% APR
Connecticut	$1k - $25k @ 12% APR
Delaware	$1k - $25k @ 10.25% APR	$1k - $25k @ 11.25% APR
DC	$1k - $25k @ 6% APR
Florida	$1k - $25k @ 18% APR
Georgia	$3k - $25k @ 36%
Hawaii	$1k - $25k @ 12% APR
Idaho	$1k - $25k @ 36%
Illinois	$1k - $25k @ 36%
Indiana	$1k - $25k @ 21% APR
Iowa	$1k - $25k @ 21% APR
Kansas	$1k - $10k @ 21% APR
Kentucky	$1k - $15k @ 9.25% APR $15k - $25k @ 36%	$1k - $15k @ 10.25% APR $15k - $25k @ 30%
Lousiana	$1k - $25k @ 12% APR
Maine	$1k - $4k @ 24% APR $4k - $25k @ 18% APR
Maryland	$6k - $25k @ 24% APR
Massachusetts	$1k - $6k @ 12% APR $6k - $25k @ 20% APR
Michigan	$1k - $25k @ 25%
Minnesota	$1k - $2.5k @ 19.2% $2.5k - $25k @ 36%
Mississippi	$1k - $25k @ 36% (Business Only)	$1k - $25k @ 30% (Business Only)
Missouri	$1k - $7.5k @ 36%
Montana	$1k - $25k @ 36%
Nebraska	$1k - $25k @ 16%
Nevada	-None-
New Hampshire	$1k - $10k @ 10% APR $10k - $25k @ 36%
New Jersey	$1k - $25k @ 16% APR
New Mexico	$2.5k - $25k @ 36%
New York	$1k - $25k @ 16%
North Carolina	$1k - $25k @ 36% (Business Only)	$1k - $25k @ 30% (Business Only)
North Dakota	$1k - $25k @ 36%	None
Ohio	$1k - $25k @ 25%
Oklahoma	$1k - $25k @ 21%
Oregon	$1k - $25k @ 36%
Pennsylvania	$1k - $25k @ 6%
Rhode Island	-None-
South Carolina	$1k - $25k @ 12% APR
South Dakota	-None-
Tennessee	$1k - $25k @ 11.75% APR	$1k - $25k @ 12.25% APR
Texas	$1k - $25k @ 10% APR $1k - $25k @ 18% (business)
Utah	$1k - $25k @ 36%
Vermont	$1k - $4k @ 18% APR
Virginia	$1k - $25k @ 12%
Washington	$1k - $25k @ 25%
West Virginia	$1k - $25k @ 18% APR
Wisconsin	$1k - $25k @ 18% APR
Wyoming	$1k - $25k @ 21% APR

Arkansas, Delaware, Kentucky, and Tennessee had minor decreases in their rates. These are not large moves and should have a minor effect on loan volumes. Mississippi and North Carolina had their business only restrictions removed which is a big deal since these states have a 36% rate cap. (Update: As Prosper Andrew pointed out, I can't read). Also on the benefit side is a pickup of North Dakota, though this is of limited practical benefit. There are not many people in North Dakota.

There's also an interesting note on DC (District Of Columbia). Even though Prosper now has the license to issue loans up to 24% APR, they're not doing it yet. I'll be watching this.

Update: Prosper Andrew has pointed out in the comments that I can't read, the states with the 1% shift tie their rates to the fed rate, and that DC has some weird regulations that aren't quite compatible with Prosper's business model.

We Wish You A Merry Linkfest

Unlike many stores, I at least had the decency to avoid Christmas references until after Thanksgiving. Now onto the giftwrapped, linky goodness.

My MicroFinance - Zzzzz… Zopa.com

Have you ever been promised something, then that day comes and you don’t get exactly what you were told you were getting (kind of like Christmas morning)? Well, that is how I feel about Zopa.com. I remember hearing and cheering this idea on back in the Fall of 2006… Hmmm, quick check of the calendar indicates it’s now Fall of 2007 and Zopa.com is just, finally, going to open shop in the US of A next week.

So why am I not excited? Well, several horrifying changes have been made to the US platform vs. the UK parent.

Netbanker - Congestion at the Starting Gate? Three New U.S. P2P Lenders Set to Launch: Zopa, GlobeFunder, and Loanio

Less that two years after the first P2P launched in the U.S., it looks like we'll soon have at least five companies chasing this new market, six if you include Virgin Money.

AP - Consumers Eye Social Lending On The Web

Nash and Fisher are members of Prosper.com, the U.S. leader in a growing trend known as peer-to-peer lending, which facilitates loans between complete strangers.

Social lending has been around since the days when needy families turned to the richest man in town, but the Web is breathing new life into the practice. Loans on Prosper and Facebook's LendingClub have risen to $100 million this year from $27 million in 2006, according to Online Banking Report. By 2010, the report forecasts $1 billion in peer-to-peer loan originations.

Prosper Press Release - Prosper Crosses $100 Million Threshold -- Freakonomics Author to Keynote Prosper Days

America’s largest people-to-people lending marketplace, today announced that over $100 million in loans have funded in the Prosper marketplace. Prosper also announced that Stephen Dubner, author of Freakonomics, will keynote at its second annual Prosper Days community conference to be held in San Francisco on February 25^th and 26^th, 2008.