Prosper Changes Bidding Guidance & Portfolios Too

In addition to the large changes announced yesterday, Prosper swept a few changes in more quietly. Specifically, they tweaked with their portfolio slices and drastically increased the number of bins used for lender bidding guidance.

First, the portfolios. The conservative and balanced portfolios had the loan criteria tweaked. A quick comparison shows that the conservative portfolio had the minimum bid rate increased by 1% for slices 1 - 3 and the balanced portfolio had the minimum bid rate increased by 1% for slices 1 - 2. This tweak looks intended to raise the average ROI for the portfolio.

On the bidding guidance side, Prosper is now using 103 different categories to provide bidding guidance, up from the 67 established back in January. All 103 will be reproduced below for record keeping since Prosper doesn't maintain a history. The bidding guidance is getting sufficiently fine-grained that there will probably be little wiggle between a specific loan's anticipated performance and the nearest bin. Rats. Lenders looking for an edge will need to go searching elsewhere.

Segment	Credit grade	Criteria
1	AA	No automatic funding, loan amount <$5K, <=20% DTI
2	AA	No automatic funding, loan amount <$5K, >=20% DTI
3	AA	No automatic funding, loan amount $5K-$10K, <=20% DTI
4	AA	No automatic funding, loan amount $5K-$10K, 20-40% DTI
5	AA	No automatic funding, loan amount $5K-$10K, >=40% DTI
6	AA	No automatic funding, loan amount $10,001-$15K
7	AA	No automatic funding, loan amount $15,001-$25K, <=20% DTI
8	AA	No automatic funding, loan amount $15,001-$25K, >=20% DTI
9	AA	Automatic Funding Only, loan amount <=$10K, <=20% DTI
10	AA	Automatic Funding Only, loan amount <=$10K, >=20% DTI
11	AA	Automatic Funding Only, loan amount $10,001-$25K
12	AA	Borrowers with no extended credit data
13	A	No automatic funding, loan amount <$5K, 0 inquiries
14	A	No automatic funding, loan amount <$5K, 1+ inquiries, 0 now delinquent
15	A	No automatic funding, loan amount <$5K, 1+ inquiries, 1+ now delinquent
16	A	No automatic funding, loan amount $5K-$7,499, 0 now delinquent, 0 inquiries
17	A	No automatic funding, loan amount $5K-$7,499, 0 now delinquent, 1+ inquiries
18	A	No automatic funding, loan amount $5K-$7,499, 1+ now delinquent
19	A	No automatic funding, loan amount $7,500-$10,000
20	A	No automatic funding, loan amount $10,001-$15,000, <=20% DTI
21	A	No automatic funding, loan amount $10,001-$15,000, >=20% DTI
22	A	No automatic funding, loan amount $15,001-$25,000, <=20% DTI
23	A	No automatic funding, loan amount $15,001-$25,000, 20-40% DTI
24	A	No automatic funding, loan amount $15,001-$25,000, >=40% DTI
25	A	Automatic Funding Only, loan amount <$5K
26	A	Automatic Funding Only, loan amount $5K-$9,999
27	A	Automatic Funding Only, loan amount $10,000-$14,999
28	A	Automatic Funding Only, loan amount $15,000-$25,000
29	A	Borrowers with no extended credit data
30	B	No automatic funding, loan amount <$5K, <=40% DTI, 0-2 inquiries
31	B	No automatic funding, loan amount <$5K, <=40% DTI, 3+ inquiries
32	B	No automatic funding, loan amount <$5K, >=40% DTI
33	B	No automatic funding, loan amount $5K-$10K, <=20% DTI, 0-2 inquiries
34	B	No automatic funding, loan amount $5K-$10K, <=20% DTI, 3+ inquiries
35	B	No automatic funding, loan amount $5K-$10K, 20-40% DTI, 0 now delinquent, 0-2 inquiries
36	B	No automatic funding, loan amount $5K-$10K, 20-40% DTI, 0 now delinquent, 3+ inquiries
37	B	No automatic funding, loan amount $5K-$10K, 20-40% DTI, 1+ now delinquent
38	B	No automatic funding, loan amount $5K-$10K, >=40% DTI
39	B	No automatic funding, loan amount $10,001-$15K, 0 now delinquent
40	B	No automatic funding, loan amount $10,001-$15K, 1+ now delinquent
41	B	No automatic funding, loan amount $15,001-$25K, <=40% DTI, 0-1 inquiries
42	B	No automatic funding, loan amount $15,001-$25K, <=40% DTI, 2+ inquiries
43	B	No automatic funding, loan amount $15,001-$25K, >=40% DTI
44	B	Automatic Funding Only, loan amount <$5K
45	B	Automatic Funding Only, loan amount $5K-$15K, 0-1 inquiries
46	B	Automatic Funding Only, loan amount $5K-$15K, 2+ inquiries
47	B	Automatic Funding Only, loan amount $15,001-$25K
48	B	Borrowers with no extended credit data
49	C	No automatic funding, loan amount <=$5K, <=20% DTI, 0 inquiries
50	C	No automatic funding, loan amount <=$5K, <=20% DTI, 1+ inquiries, 0 now delinquent
51	C	No automatic funding, loan amount <=$5K, <=20% DTI, 1+ inquiries, 1+ now delinquent
52	C	No automatic funding, loan amount <=$5K, 20-40% DTI, 0 inquiries
53	C	No automatic funding, loan amount <=$5K, 20-40% DTI, 1+ inquiries
54	C	No automatic funding, loan amount <=$5K, >=40% DTI
55	C	No automatic funding, loan amount $5,001-$7,499, <=40% DTI, 0-2 now delinquent, 0-1 inquiries
56	C	No automatic funding, loan amount $5,001-$7,499, <=40% DTI, 0-2 now delinquent, 2+ inquiries
57	C	No automatic funding, loan amount $5,001-$7,499, <=40% DTI, 3+ now delinquent
58	C	No automatic funding, loan amount $5,001-$7,499, >=40% DTI
59	C	No automatic funding, loan amount $7.5K-$10K, 0-1 inquiries
60	C	No automatic funding, loan amount $7.5K-$10K, 2-5 inquiries
61	C	No automatic funding, loan amount $7.5K-$10K, 6+ inquiries
62	C	No automatic funding, loan amount $10,001-$15K, 0-4 inquiries
63	C	No automatic funding, loan amount $10,001-$15K, 5+ inquiries
64	C	No automatic funding, loan amount $15,001-$25K
65	C	Automatic Funding Only, loan amount <=$5K, 0 inquiries
66	C	Automatic Funding Only, loan amount <=$5K, 1+ inquiries
67	C	Automatic Funding Only, loan amount $5,001-$7,499
68	C	Automatic Funding Only, loan amount $7.5K-$14,999
69	C	Automatic Funding Only, loan amount $15K-$25K
70	C	Borrowers with no extended credit data
71	D	No automatic funding, loan amount <$3K, 0 now delinquent, 0-1 inquiries
72	D	No automatic funding, loan amount <$3K, 0 now delinquent, 2+ inquiries
73	D	No automatic funding, loan amount <$3K, 1+ now delinquent
74	D	No automatic funding, loan amount $3K-$7,499, 0 now delinquent, 0-2 inquiries
75	D	No automatic funding, loan amount $3K-$7,499, 0 now delinquent, 3+ inquiries
76	D	No automatic funding, loan amount $3K-$7,499, 1-2 now delinquent
77	D	No automatic funding, loan amount $3K-$7,499, 3+ now delinquent
78	D	No automatic funding, loan amount $7.5K-$10K, 0 now delinquent
79	D	No automatic funding, loan amount $7.5K-$10K, 1+ now delinquent
80	D	No automatic funding, loan amount $10,001-$25K
81	D	Automatic Funding Only, loan amount <=$3K
82	D	Automatic Funding Only, loan amount $3,001-$7.5K
83	D	Automatic Funding Only, loan amount $7,501-$25K
84	D	Borrowers with no extended credit data
85	E	No automatic funding, loan amount <$5K, 0 now delinquent
86	E	No automatic funding, loan amount <$5K, 1-2 now delinquent
87	E	No automatic funding, loan amount <$5K, 3+ now delinquent
88	E	No automatic funding, loan amount $5K+
89	E	Automatic funding only, loan amount <$5K, 0 now delinquent
90	E	Automatic funding only, loan amount <$5K, 1-2 now delinquent
91	E	Automatic funding only, loan amount <$5K, 3+ now delinquent
92	E	Automatic funding only, loan amount $5K+
93	E	Borrowers with no extended credit data
94	HR	No automatic funding, loan amount <$3K, 0-1 now delinquent, <=20% DTI
95	HR	No automatic funding, loan amount <$3K, 0-1 now delinquent, >=20% DTI
96	HR	No automatic funding, loan amount <$3K, 2+ now delinquent
97	HR	No automatic funding, loan amount $3K+, 0-2 now delinquent
98	HR	No automatic funding, loan amount $3K+, 3+ now delinquent
99	HR	Automatic funding only, loan amount <$3K, 0-2 now delinquent
100	HR	Automatic funding only, loan amount <$3K, 3+ now delinquent
101	HR	Automatic funding only, loan amount $3K+, 0 now delinquent
102	HR	Automatic funding only, loan amount $3K+, 1+ now delinquent
103	HR	Borrowers with no extended credit data

Update: LoanChimp also has a write-up on this

What Should My Target Prosper ROI Be?

With the Fed dropping interest rates like they're going out of style, it's an appropriate time to discuss what average annual return to expect from Prosper. The easiest way to look at it is to say "I'd like to get 10%". Unfortunately for us individuals, this is not how the finance world operates, and, in an bidding system like Prosper, this matters.

We're competing for borrowers who have alternatives like traditional banks. These banks set the rates borrowers pay based on the prime rate plus some fixed offset to compensate for an individual's credit risk. This effective indexes the bank's return to the prime rate, which is, in turn, indexed to the Fed Funds rate (that quickly dropping number). In this same vein, lender should index their expected return instead of always anticipating a certain return amount.

Ok, so what should lenders use as an index? I have often looked toward a number that corresponds to the risk-free rate of return I can get on my money. As in, how much can I get for no effort and virtually no risk? My index of choice for Prosper loans is my bank's 3-year CD, though this can be approximated by Bankrate's 3-year CD list. I then add a percentage, typically 5%, on top to provide additional cushion for the risk. This is my target average annual return on Prosper.

My long-time target was 10%, back when the economy was fine and CDs were 5%. And, despite some rather bonehead newbie bids, this was still achievable. Since that time, I've revised my target down to 8% as interest rates have fallen. I suspect that I'll be revising downward again real soon.

To use this number, I make sure that my estimated return for every bid exceeds my target average annual return. Happy bidding.

Chimp's Take On Portfolios and Guidance

LoanChimp has taken to writing about Prosper's statistics behind the portfolios and lender bidding guidance. They're good reads and worth understanding if you're interested in more than push-button lending. This is not to say that Prosper's advances here are bad - far from it. Generating statistics from actual loan data is a huge improvement over the Experian data. The problem is that this data is limited. Prosper has only been loaning for 2 years and is heavily weighted toward loans in the first year. Since Prosper issues 3 year loans, some heavy extrapolation is required to fill in the gaps. It is important to consider the limitations on the statistics you're working with.

First, LC looked at how the bidding guidance has changed over time:

Based on some very rough analysis *, the performance of the original credit segments simply fell apart since their creation. For example, the best performing segment, #1 (AA No Automatic Funding, 0-1 inquiries) went from a projected loss ** of -0.44% to -1.42%. Ouch!

I applaud Prosper for creating the bidding guidance and give them much credit for revising the guidance recently. This kind of stuff is really great for us lenders. But as we’ll see shortly, the latest guidance is falling apart too (although not as badly).

And second, he's turning his attention to the portfolio plans:

At the moment, there is no way for a Prosper lender to track the performance of the Portfolio Plans (PP) unless the lender is actually using them. One could use the performance page with criteria from the PP credit segments, but there is no way to filter out by interest rate - the results would include loans where the PP's were bid off.

Fortunately for us, a relatively new lender stated on the Prosper forum * that he created his/her entire lending portfolio with PP's, a combination of all four. I present to you: JohnSmith2k