Monday, April 14, 2008

Time For Prosper To Drop The Bank Draft Fee?

Update: Darn it Prosper. Obsoleting my post less than 24 hours after I finished writing it. I'll keep it around for posterity.

A while back, I noted that almost all portfolio-worthy loans are funding and this is driving Prosper's loan creation engine. A survey through a few portfolio criteria confirms this to still be true. For Prosper to extend and increase their loan volume, it's critical to get more loans into the various standard portfolio categories. Prosper is limited by the various state usury limits and their own internal policies like reserving 1% for the Bank Draft fee. Prosper has few choices but grinding through state and federal regulations to issue loans at rates above the current state limits, but they do have control over the bank draft fee, and it may be time for it to go.

Let's start by taking a look at the 21 slices that make up Prosper's 4 portfolio plans. These were last modified by Prosper on Feb 27. The various slices were ranked according the minimum interest rate that the portfolio would bid.


GradeRate Rank
Conservative Slice 2AA7.50%1
Conservative Slice 1AA7.70%2
Conservative Slice 3AA8.90%3
Balanced Slice 5 C10.45%4
Balanced Slice 1 AA10.65%5
Conservative Slice 4A10.80%6
Balanced Slice 2AA11.00%7
Moderate Slice 1 A12.40%8
Moderate Slice 3B 12.40%9
Balanced Slice 3A12.70%10
Balanced Slice 4 B 14.20%11
Moderate Slice 5 C 15.15%12
Balanced Slice 6 C 15.15%13
Moderate Slice 6 D 15.50%14
Aggressive Slice 5 D 15.50%15
Moderate Slice 4 B 15.75%16
Aggressive Slice 1 B 17.30%17
Moderate Slice 2 A 18.00%18
Aggressive Slice 2 B 19.10%19
Aggressive Slice 4 C 19.45%20
Aggressive Slice 3 C 21.25%21
There are three notable groups of loans in this table. Slices 4 - 7 cover an interest rate spread of 0.65%, slices 8 - 10 cover an interest rate spread of 0.3%, and slices 12 - 16 cover a 0.6% interest rate spread. Small movements in interest rates through these ranges will disproportionally affect loans that will fund in a state.

To understand how the state interest rate limits are hurting Prosper's ability to provide loans that fit into the Portfolios, I calculated the actual maximum Prosper loan interest rate for 22 lowest states loan rates for AA - D loans and these are shown below. Some states have different rates for different loan amounts and is noted on the table.
State AA A B C D
Pennsylvania 5.00% 5.00% 5.00% 5.00% 5.00%
Kentucky (under $15k) 5.82% 5.13% 5.13% 4.45% 4.45%
Arkansas 6.81% 6.12% 6.12% 5.44% 5.44%
Delaware 6.81% 6.12% 6.12% 5.44% 5.44%
Texas 8.31% 7.61% 7.61% 6.92% 6.92%
New Hampshire (under $10k)
8.31% 7.61% 7.61% 6.92% 6.92%
Tennessee 8.74% 8.04% 8.04% 7.34% 7.34%
South Carolina 10.30% 9.60% 9.60% 8.89% 8.89%
Massachusetts (under $6k) 10.30% 9.60% 9.60% 8.89% 8.89%
Hawaii 10.30% 9.60% 9.60% 8.89% 8.89%
Louisiana 10.30% 9.60% 9.60% 8.89% 8.89%
Virginia 11.00% 11.00% 11.00% 11.00% 11.00%
Connecticut 10.30% 9.60% 9.60% 8.89% 8.89%
Nebraska 15.00% 15.00% 15.00% 15.00% 15.00%
New Jersey 14.28% 13.56% 13.56% 12.84% 12.84%
New York 14.28% 13.56% 13.56% 12.84% 12.84%
Alaska 15.00% 15.00% 15.00% 15.00% 15.00%
West Virginia 16.27% 15.55% 15.55% 14.82% 14.82%
Wisconsin 16.27% 15.55% 15.55% 14.82% 14.82%
Vermont (under $4k) 16.27% 15.55% 15.55% 14.82% 14.82%
Florida 16.27% 15.55% 15.55% 14.82% 14.82%
Maine 16.27% 15.55% 15.55% 14.82% 14.82%
From here, I matched up the state maximum interest rates versus the various portfolio slices. In this match-up, I looked at how many slices could play in a various state as things are now as well as if Prosper somehow gave up the 1% bank draft fee. The results are below.
States
Portfolio Use
Without Bankdraft
Pennsylvania, Kentucky
Can't Play
Can't Play
Arkansas, Delaware
Can't Play
Slices 1-2, AA's In
Texas, New Hampshire, Tennessee
Slices 1-2
Slices 1-3, More AA's
South Carolina, Massachusetts, Hawaii
Louisiana, Connecticut
Slices 1-3
Slices 1-3, 5
More AA's In
Virginia
Ranks 1-7
No Change
New Jersey, New York
Slices 1-10
Slices 1-11, More B's
Alaska, Nebraska
Slices 1-11
Slices 1-17,
More B's, C's, and D's
West Virginia, Wisconsin, Vermont
Florida, Maine,
Slices 1-11
Slices 1-16
More B's, C's, and D's
I find the results rather notable. Arkansas, Delaware, Texas, New Hampshire, Tennessee, South Carolina, Massachusetts, Hawaii, Louisiana, and Connecticut would all increase the amount of AA loans that would slip into portfolio territory. This would be a boon for Prosper's "Prime Select" territory, and even though AA loans make a fraction of the total loans, that's a fraction of 55 million people represented by these states. New York and New Jersey allowing more B loans provides a bit of leverage because they're highly populous states, with 28 million residents combined. The crown jewels are Alaska, Nebraska, West Virginia, Wisconsin, Vermont, Florida, and Maine. These states managed to cross through the large group of slices that cover rates of 15.15% to 15.75%. Losing the bank draft fee opens up the field for a large increase in the potential pool of portfolio-worthy B, C, and D credit grade loans in states representing 30 million people.

So, that 1% fee is causing Prosper to leave a lot of portfolio-worthy loans on the table. Will they be able to resist expanding their available market?

2 comments:

P2P-Banking.com said...

Mike,

what a pity you spend all the time researching the post and then Prosper raises the limits big way.

Will be interesting to see if volume does increase quickly with the new max

tom said...

Yup, looks like you got your wish.

I had just explained to someone on a forum about the different rates for borrowers when Prosper made the change. I had to go back about 12 hours later and take back everything I said.