Thursday, March 6, 2008

Simple Receipe For 100% Funded Prosper Loan

As I had previously observed, Prosper seems to have more lenders chasing loans than there are borrowers to take the money for some classes of loans. One such class encompasses just about anything that's inside one of Prosper's standard portfolios. If a borrower wants to get funded, all they need to do is qualify for one of the portfolio slices (I count 21 slices spanning AA - D loans) and choose a starting interest rate above their appropriate slice's minimum bid rate, and they'll be 100% funded.

And this is without all the inconvenience of having to write a description, prepare a budget, have a plan for what to do with the money, or have much of an income. Someone could sign-up, verify their ID, write "I promese to paid it too u back", and they'll be fully funded. The only requirement is to have a sufficient credit score and be able to prove your income, should Prosper challenge the stated income. The second problem can be avoided by claiming 1 dollar a year in income a low income.

This is why I don't use the portfolio plans and why I think the portfolio plans will have degraded performance relative to the predicted performance. Manual bidders won't bid on the outliers who pull the slice's estimated return numbers down. Eventually, the statistics may even out, but it'll take more time, and the current portfolio users will get frustrated in the process. The size of this problem will be the guiding factor for how much of a performance delta can be expected.

Update: ZCommodore has noted that most slices have a DTI requirement, typically DTI <= 40% or DTI <= 70%. Income will have to be slightly more than $1, but $10k - $20k should do nicely. The downside to all this is that, at Prosper Days, Prosper indicated that they're less likely to verify small incomes because they find it very likely to be true.


LC said...

This is one of the reasons why I would not participate in Prosper's Portfolio Plans.

The set of loans Prosper analyzed to create the P.P. segments were handpicked (somewhat) by Lenders in the past based on the merits of each listing.

As you mentioned, now that the segments have been established any borrower that falls in one of the segments (based on select credit data alone)will get funding. I think that the borrowers that wouldn't have funded without the power of the P.P.'s will muddy up the performance of the credit segments they fall in.

(Meanwhile the reasonable listings falling in these segments will fund at rates lower than what the PP's have set as a minimum rate (PP users get outbid) leaving those using the PP's holding a higher concentration of baddies...)

The good part is that this should cause further refinement of these narrow credit segments. (I think the areas covered by the PP's are where lenders should be looking anyway, but in conjunction with careful analysis of the entire listing, which PP's can't do.)

The bad part? Well, I think users of the Portfolio Plans will not achieve returns they were expecting (at least for the time being).

Time will tell. I'll be watching very closely... :)

Anonymous said...

I think most of the portfolio plans have a minimum DTI so the $1 per year income idea won't work. Other than that, you're right on about the portfolio plan problem.


j9359 said...

What I find interesting is that most borrowers have not figured out that it pays to look over the portfolio plan standing orders before setting up a loan request. Simply setting the loan amount to something like $7,499 instead of $7,500 can make a big difference.
And I agree with LC, this isn't going to turn out well for folks who rely on PP's.