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?

What A Difference A Month Makes

February was not Prosper's best month, with hitting a low for loan dollars originated. This shortfall was easily anticipated by the lower number of active listings (~1700) Prosper had during mid February. A fair amount of favorable press and Prosper Days appears to have jump started their originations. Prosper has about 2500 active listings as of this moment (9:01 am CST - your mileage may vary) and is on track for another $7.1M month. In other words, they were successful at hitting a critical March milestone of attracting more borrowers. Prosper has a large uptick in active borrowers, approaching almost 7k this month thus far compared to 6.3k in February.

I did a quick survey of the portfolio plan criteria, and it appears that lenders are still pouring more money into the portfolio plans than there are borrowers to fund. There aren't any loans inside the portfolio slices that I checked that aren't fully funded and at the minimum portfolio bid. It's a good place for Prosper to be operating. Now, if AmSher could pull up those collections statistics...

So Why The Weak February Loan Numbers?

After a strong showing in January, Prosper's monthly loan totals have dropped to about $5.7 $5.9 million. With this disappointing return, I started digging through the loan activity to find some likely culprits. I think Prosper is having problems delivering borrowers. As anyone who's tried to bid in the last month can attest, there's brutal competition in the auctions. It feels like there's lots of money chasing too few loans. Fortunately, there's some statistical backup.

First, Lending Stats tracks membership growth as well as active membership and February was not a good month for finding borrowers. February showed 5.04k active borrowers versus 8.29k in January, and Prosper only added 3.97k new borrowers in February versus 8.01k in January. Those are huge drops in borrower numbers, making me wonder how they managed to hit $5.7 M.

Second, Prosper has emphasized portfolios to lenders, and all evidence is that any loan that fits into a portfolio slice is getting snapped up and fully funded in less than a day. Just looking at the 6 slices in the Balanced portfolio (the Feb 27 version), there is not one loan that meets the portfolio criteria that isn't already 100% funded and at the minimum portfolio interest rate.

Slice 1	Credit grade: AA Debt to income ratio: ≤40% Loan amount: ≤$9,999.99 Automatic funding: Only Now delinquent: 0 delinquent accounts	Loan Search
Slice 2	Credit grade: AA Debt to income ratio: ≤40% Loan amount: $15,000.00+ Automatic funding: Exclude Now delinquent: 0 delinquent accounts Public records: 0 in last 10y Inquiries in last 6m: 0-1 inquiries	Loan Search
Slice 3	Credit grade: A Debt to income ratio: ≤40% Loan amount: $7,500.00-$14,999.99 Automatic funding: Exclude Now delinquent: 0 delinquent accounts Inquiries in last 6m: 0-1 inquiries	Loan Search
Slice 4	Credit grade: B Loan amount: ≤$7,499.99 Automatic funding: Exclude Now delinquent: 0 delinquent accounts Inquiries in last 6m: 0-2 inquiries	Loan Search
Slice 5	Credit grade: C Debt to income ratio: ≤40% Loan amount: ≤$7,499.99 Automatic funding: Exclude Now delinquent: 0-2 delinquent accounts Inquiries in last 6m: 0 inquiries	Loan Search
Slice 6	Credit grade: C Debt to income ratio: ≤40% Loan amount: ≤$7,499.99 Automatic funding: Exclude Now delinquent: 0 delinquent accounts Inquiries in last 6m: 1-2 inquiries	Loan Search

I am concerned that Prosper's recent hike in the origination fees pushed away otherwise solid borrowers. Prosper's income is up, but it's hard going for their lenders. Therefore, Prosper's March mission, if they choose to accept it, is to bring in the borrowers.

Note: There have been some hiccups in the Prosper XML data which have probably prevented Lending Stats from updating it's Loan Funded statistics. Their loan amount numbers are a few days old. The same could be said about their active borrowers numbers, but it would take a statistically improbable rush of new borrowers to change my conclusions.

Update: Prosper's final Feb numbers came in at $5.9M. Better than my original swag of $5.7M, but well short of January.

Prosper's November Income

This is part of my continual effort to calculate Prosper's corporate income. The criteria have been adjusted to account for the varying lender service fee that Prosper has charged over time. If you may recall, at one point Prosper charged 0.5% to service all loans. On Feb 12, 2007, they shifted to 1% for B - HR loans and on Oct 30, 2007 they changed AA to 0.0% and A to 1.0%. I had previously used 0.5% for AA - A, and 1.0% for B - HR. (Bloggers note: yes, I'm running behind. I'll have December's income sooner or later).

And with that, into November First, origination income:

Credit Grade	Loans Originated	Borrower Fee	Income
AA	$1,345,959	1.0%	$13,459
A	$1,399,375	1.0%	$13,993
B	$1,599,181	1.0%	$15,991
C	$1,200,586	1.0%	$12,005
D	$578,809	1.0%	$5,788
E	$149.684	2.0%	$2,993
HR	$156,647	2.0%	$3,132
Total			$67,365

And now loan servicing income:

Credit Grade	Outstanding Loans	Lender Fee	Income
AA	$10,454,327	0.5%*	$4355
A	$11,928,813	0.5%*	$4,970
B	$14,499,621	1.0%*	$10,392
C	$16,345,721	1.0%*	$11,764
D	$12,344,656	1.0%*	$8,685
E	$5,996,014	1.0%*	$3,766
HR	$4,171,570	1.0%*	$2,696
Total			$46,631

The sum total is $114k for November. As I mentioned before, the changed methodology will reduce the income compared to the methodology used in previous months. You're welcome to make comparisons with October, but take it with a grain of salt.

Update: Prosper recently announced that they're changing the origination fees. This should have a rather dramatic increase on revenue. Most curious.

Prosper's October Income

Following up on last month's post documenting how Prosper makes money, I plan to keep looking at their monthly income monthly to see how they're progressing as a business. This will be the last time I can use my simplified method for accounting for servicing income. Prosper adjusted the servicing charge for A and AA loans in their latest large feature upgrade (1% and 0%, respectively), so I'll be getting more sophisticated in my analysis for December. Since this occurred at the very end of October (30th to be exact), I'm punting on thinking hard until the December update.

Onto October, then. First, origination income:

Credit Grade	Loans Originated	Borrower Fee	Income
AA	$984,695	1.0%	$9,847
A	$1,374,538	1.0%	$13,745
B	$1,137,145	1.0%	$11,371
C	$1,647,101	1.0%	$16,471
D	$796,758	1.0%	$7,968
E	$235,999	2.0%	$4,720
HR	$198,252	2.0%	$3,965
Total			$68,087

And now loan servicing income:

Credit Grade	Outstanding Loans	Lender Fee	Income
AA	$9,843,853	0.5%*	$4,102
A	$10,878,195	0.5%*	$4,533
B	$13,877,583	1.0%	$11,565
C	$15,328,463	1.0%	$12,774
D	$12,046,296	1.0%	$10,039
E	$5,967,380	1.0%	$4,973
HR	$4,122,801	1.0%	$3,436
Total			$46,317

The sum total is $119.5k for October, a healthy bump over September's $107.6k and near parity over $118.0k in August. September got hammered by the group reward rearrangement, so I'm taking this as an early indication that things have settled from that change.

	October	September	Delta
Origination Income	$68,088	$58,463	+16.5%
Servicing Income	$51,419	$49,137	+4.6%
Total	$119,507	$107,601	+11.1%

Prosper has been on a media blitz with Chris Larsen popping up like bluebonnets at spring in Texas, so expect more attention flowing inward. This will contrast with us heading into the holiday season and lots of days where people won't be lending or borrowing.

I'll go on record now that I'm expecting a huge spike in listings come January 1 when, after waking up from the New Years shenanigans, lots of people will suddenly go "Dookie! I spent that much?!" New Years resolutions involving debt will flow like New Years Eve party champagne.

Prosper's September Revenue

Following up on last month's post documenting how Prosper makes money, I plan to keep looking at their monthly income monthly to see how they're progressing as a business. Into this month's totals. First, origination income:

Credit Grade	Loans Originated	Borrower Fee	Income
AA	$782,614	1.0%	$7,826
A	$868,698	1.0%	$8,686
B	$1,361,803	1.0%	$1,361
C	$1,138,437	1.0%	$1,138
D	$868,388	1.0%	$8,683
E	$273,831	2.0%	$5,476
HR	$139,390	2.0%	$2,787
Total			$58,463

And now loan servicing income:

Credit Grade	Outstanding Loans	Lender Fee	Income
AA	$9,278,081	0.5%	$3,865
A	$10,291,849	0.5%	$4,288
B	$12,751,822	1.0%	$10,626
C	$14,612,751	1.0%	$12,177
D	$11,625,228	1.0%	$9,687
E	$5,979,788	1.0%	$4,983
HR	$4,210,321	1.0%	$3,508
Total			$46,317

The sum total is $107.6k for September, a 8.8% decrease over $118.0k in August. Comparing September to August shows a significant decline in new loans originated, with all credit grades showing a significant dollar declines except for B which was nominally flat (+.1%). September did only have 30 days instead of 31, which should account for about 3% of the loan origination decline, but overall this was not an impressive month.

	September	August	Delta
Origination Income	$58,463	$71,669	-18.4%
Servicing Income	$49,137	$46,317	+6.1%
Total	$107,601	$117,986	-8.8%

How Prosper Gets Paid

In addition to all the intricacies of being a lending on Prosper, I also think it's helpful to understand how Prosper makes it's money. After all, Prosper requires cash to pay it's employees and stay in business, and it's in the lender's best interest for Prosper to keep it's doors open. And, to make things more fun, they give us all the statistics necessary to determine their corporate income.

Prosper lists their fees on the website. They classify them as borrower fees (closing costs) and lender fees (servicing fees). The borrower fees are very similar to the origination fee on a mortgage, where the borrower pays a percentage of the loan amount to the lending company to cover the cost of establishing the loan. Borrower fees are 1% for AA-D loans and 2% for E-HR loans. The servicing fees pay for the ongoing cost of collecting the loan payment every month, dividing up the payment to all the lenders, and actions (if any) Prosper takes to collect on late loans. It is collected as a percentage, 0.5% annually for AA-A and 1% annually for B-HR, of the outstanding loan balance and comes out of the lender's share of the earned interest.

It is possible to calculate Prosper's monthly income based on the readily available loan statistics. To get the borrower fees, sum up all the loans that originated during the month and multiply by the borrower fee rate. The lender fees are more complicated to get perfectly accurate, but a close approximation can be reached by looking at the outstanding loan balances at the beginning of a month and multiplying by the lender fee rate. The fees collected for August are shown below:

Credit Grade	Loans Originated	Borrower Fee	Income
AA	$968,636	1.0%	$9,686
A	$1,152,488	1.0%	$11,524
B	$1,359,403	1.0%	$13,594
C	$1,515,016	1.0%	$15,150
D	$1,026,399	1.0%	$10,263
E	$350,048	2.0%	$7,000
HR	$222,459	2.0%	$4,449
Total			$71,669

Credit Grade	Outstanding Loans	Lender Fee	Income
AA	$8,704,322	0.5%	$3,626
A	$9,384,795	0.5%	$3,910
B	$11,663,318	1.0%	$9,719
C	$13,652,744	1.0%	$11,377
D	$11,107,363	1.0%	$9,256
E	$5,878,197	1.0%	$4,898
HR	$4,234,272	1.0%	$3,528
Total			$46,317

That's right, Prosper made around $118k in August.