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.

	Grade	Rate	Rank
Conservative Slice 2	AA	7.50%	1
Conservative Slice 1	AA	7.70%	2
Conservative Slice 3	AA	8.90%	3
Balanced Slice 5	C	10.45%	4
Balanced Slice 1	AA	10.65%	5
Conservative Slice 4	A	10.80%	6
Balanced Slice 2	AA	11.00%	7
Moderate Slice 1	A	12.40%	8
Moderate Slice 3	B	12.40%	9
Balanced Slice 3	A	12.70%	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?