Post-Prosper Days Interview In WSJ

This is the first post-Prosper Days interview I've seen with Chris Larsen (which is not to say that there havn't been others, just that I havn't seen them). He's picking up several themes that were rolled out at Prosper days and taking them around. This includes benevolent greed:

The Wall Street Journal: How would you describe your business?

Chris Larsen: An eBay for money and credit. Borrowers can make listings and any American with $50 or more are free to bid. It's combining community banking with the high finance of Wall Street -- bringing together George Bailey with a little Gordon Gekko.

And stricter enforcement on fraud (ahem):

WSJ: What steps has Prosper taken to address concerns about fraud or identity theft?

Mr. Larsen: We have a 100% fraud ID theft guarantee. If there's a fraudulent borrower who gets through our screens, we'll buy that loan back. Beyond that, we're also very aggressively prosecuting people and we did have our first conviction.

They're good themes for talking to the press, so expect to hear more of them in the future.

Linkfest 2: The Search For More Money

Right after buying linkfest the t-shirt and linkfest the flame thrower, check out the latest from around the web (and if you have no clue what I'm referring too, catch up on your Mel Brooks movies):

Hyve Up has done a video interview with Chris Larsen. My translation of CEO speak: "Banks are the man. Damn the man! We're taking him down." Nothing about saving the Empire, though.

zcommodore has been on a posting streak:

• Uh, oh. Loan counts going down.
• Prosper is really, REALLY testing my patience
• Autofund, inquiries the biggest red flags
  

Tom at Prosper Lending Review has gone to that other place. Good deal for him, but reduced posts on Prosper for the rest of us.

I'm happy to announce I have joined the blogging team at Lending Club. Read my first post here

EasyProsperTips looks at keywords in funded loans:

I thought it would be interesting to take a look at the word choice in the Description of funded vs. non-funded listings to see if there is anything significant. It could possibly reveal trigger words that appeal to lenders (or repulse them). To obtain this word ranking, I queried all the completed and expired listings from 2/1/06 to 11/2/07 and counted the number of times each word appears. Words that were less than 5 characters were filtered out so that we can see some more interesting results.

Consumerist has their take on Prosper. The comments were especially entertaining to read:

I have been lending on Prosper for about a year. I have closed on 146 loans, and 5 are late at this time.

If you don't have any common sense, then you can lose a lot of money. That being said, I have made more than 10% over the past year, and as lenders scrutinize the borrowers a bit more it is getting tougher for loans to get filled, therefore lower default rates.

You have to be willing to sift through a lot of crap - and mix up your portfolio with some AA, A, and B credit ratings borrowers to diversify.

But, this has proven to be a great place to keep my housing fund until the housing market returns to some semblance of reality - in about 3 years, which is the length of these loans!

I'd buy the paper if mine was as entertaining as the Sydney Morning Herald:

IT IS like eBay for money.

If you're near a computer, and have got the fidgets, try punching www.prosper.com into your browser.

You will see a lot of Americans asking for money. No, it is not a chatroom for e-beggars. Nor a system of cyber-busking, with tech wizards wheeling out tricks in exchange for electronic shrapnel.

Here A Link, There A Link, Everywhere A Link-Link

Old McLinker had some links, E-I-E-I-O...

Visible Banking did a video interview with Chris Larsen right after his Finovate presentation. Was he careful not to talk about features that may or may not be appearing in the future? You be the judge.

Peer-to-Peer Lending Offers Solution for Strapped Consumers:

A YEAR AGO, Nicole Newberry was in a financial hole so deep that she had trouble making the minimum payments on her credit cards. Worse, the then 22-year-old had gotten tangled up in the predatory cycle of payday loans. Every two weeks, when she repaid the two loans she owed, she borrowed the money right back to pay for groceries and diapers for her two toddlers. Her predicament was cruelly simple: "Each month, I was making all these minimum payments and getting nowhere," she says.

Then a co-worker told her about Prosper.com, a peer-to-peer lending web site that facilitates loans between strangers. Consumers seeking a loan list the details of how much they need and why, while those with cash to spare scour the listings and make loans to the ones they choose. Generally, borrowers get lower interest rates than they would with a bank or credit card, while lenders can earn better returns than they would in a money market or savings account

CircleLending is now Virgin Money USA (also here, and here):

Ever since Virgin bought CircleLending for $50 million earlier this year (previous coverage here), I've been looking forward to its launch. We hoped they might launch at our FINOVATE conference two weeks ago, but we lost out to the Mortgage Banker's Association's 94th Annual Conference in Boston, where Sir Richard Branson delivered the opening keynote a few hours ago.

Fred93 ponders on Prosper's late borrower collection rates:

I've been charting Prosper's collections statistics ever since Prosper first made them avaiable. Prosper sends loans to a collection agency when they are 1 month late, and the outcome after the collection agency's efforts are charted below.

The big picture is that Prosper's collection results continue to be scandalously bad.

Prosper and Zopa: Looking into the World of Online Consumer-to-Consumer Lending:

When most people are short on cash and need a few hundred to a few thousand dollars, they walk down to the local bank and try to persuade the loan officer to give them a loan. If the consumer doesn’t meet the bank’s cookie-cutter standards for who can get a loan, they’re rejected and the person’s just out of luck. Those who do get loans are often stuck with unfavorable terms and the only person that wins in the situation is the bank. Now two companies are hoping to empower consumers by offering services which will allow consumers to provide loans to each other online.

Internet cuts middleman in borrowing, giving:

What if you needed to borrow a couple of thousand bucks to remodel your bathroom but didn't want to pay 26percent interest on a credit card?

What if you had $2,000 but wanted to earn more than 2 percent on your money that you would on a passbook savings account at a bank?

Such is the idea behind Prosper.com, a Web site designed to anonymously link borrowers and lenders. It is a new trend called "peer to peer lending." (Like the old Napster but with cash!) Of course, the best idea is not to borrow money at all (see also: Dave Ramsey). But if you have to, this is one interesting concept.

Notes From Prosper's Hawaii Meet & Greet

Prosper's CEO Chris Larsen participated in a meet & greet organized by Prosper member islandmele this last weekend. At the Honolulu, Hawaii gathering, Chris (noted as CL) did comment on Prosper and answer a few questions from folks. islandmele was kind enough to post her notes from the weekend. Here's the highlight reel as interpreted by me. Go read the original to get it straight from the islander's keyboard:

1. CL doesn't see profitability for several years. It'll take a 4x - 5x in volume to get there. If (and it's a big if) my estimates of Prosper's cash flow is accurate, that puts their burn rate in the $400 - $500k / month region. This is fair for a startup with a the size Prosper appears to have. The missing detail is how Prosper's expenses scale with loan volume, which I'm sure CL will never reveal.
   
2. Some of the features suggested at the Finovate conference should be rolling out shortly. My interpretation is that the new interface showing Prosper data derived default rates should be active in a few weeks. The Prosper data will be refreshed every 30 days (ish). The portfolio's will be some time afterwards.
   
3. They're trying hard to get the secondary market in place, but those darn government regulators keep getting in the way (don't they realize that Prosper works at the speed of the internet?!)
   
4. Prosper will be showing statistics related to whether friends and endorsements (with and without bids) are statistically significant.
5. Prosper is looking at raising the max interest rate to 36%. I suggest reading zcommodre's rebuttal if you're a big fan of this idea.
6. They brought in Doug Fuller to handle ID theft and fraud (on top of improving collections), and can't wait to lock up the bad guys.
   

Collections Follow-On Q&A With Doug Fuller

I'm almost starting to like the guy. Doug Fuller has responded via the forums to another 20 questions (ok, a few were softballs) asked in response to his original Q&A session. It's a good read and I've picked up a few of the best questions. I encourage you to follow the whole forum thread for reactions as some are equally insightful.

1. Would you be willing to list what you have seen wrong with Prosper collections at this point and if said weak areas will be corrected?

The two biggest weaknesses in our collections process have been “Agency Management” and the lack of legal (court) collection actions. The problem with Agency Management stems from the realities of a start-up. People are wearing lots of different hats to get the job done. Prior to my arrival, the person who ran the agency relationship is really a “credit and underwriting” expert with little collections experience.

As to the lack of a legal option, there are a number of novel challenges in implementing a legal option for Prosper, but it is clear that we need one and so I’m working through those issues as quickly as I can. I’m going to talk about the legal option in a later section of this Q & A.

2. When you talk about transparency, how transparent are you willing to go? When will the collections process be more transparent? How will we know when the collections process is more transparent? (This is not a trick question, or a joke. While your stated goal is to make collections more transparent, what I've seen in my nine months as a lender has been a move away from transparency. Will you or Prosper post changes in collection procedures, and what they mean in terms of lenders' bottom lines?)

As the first person-to-person credit marketplace, Prosper has to set up a system that is collection-aggressive, but is in compliance with the Fair Debt Collection Practices Act, which protects delinquent borrowers from things like publishing “deadbeat lists.” Collection transparency is more appropriate using aggregate information as opposed to loan level info.

When I talk about transparency, I mean that I am going to be very upfront with the lender community about the steps I am taking to improve collections, the reasons for taking those steps, when the change will be implemented, and when I expect to see results. I also intend to create additional reporting to help people understand what’s happening with collections – the information currently on the site is all “snapshot” data. I also want to create monthly summaries so it is possible to look back and see how many accounts were in collections at the end of August vs. the end of September, etc.

Here are the things I am working on right now:

A. Increased agency oversight – I have already visited both locations of PennCro and have implemented a bi-monthly strategy call. I’m expecting an increase in collections simply from the increased focus on our current agency.
B. I plan to implement a “pilot” legal program during the month of October (meaning first law suits should be filed in November).
C. I am looking to augment current phone channel collection efforts with some off-line collection letters.
D. I have been interviewing agencies as potential replacements to our current agencies, focusing on smaller agencies that I believe will give us more attention.
E. I am evaluating the pros and cons of bringing the collections activities in house. I expect to reach a decision on this by the end of November.

By the end of the year, I would hope to see a significant increase in the number of delinquent dollars collected.

...
6. Will Prosper change its TOS to include suits against delinquent borrowers as an option? Right now the TOS says junk debt sales at 4+ months.

In order to change our current agreements to allow for lawsuits, a number of challenges need to be met. I want Prosper account holders to know that we will sue them and if we sue, we will win. There are some challenges in this. These include:

A. It is not cheap to sue people. While they vary by state, filing and service fees average something over $200 per law suit across the country.
B. Additionally, given our size and novelty of our asset, no law firm is going to take our business on a contingency basis. At least initially you can assume that legal fees on going to be in the neighborhood of $1500 for a NONCONTESTED suit. If the defendant files an answer, that number goes up. A really nasty case could be $15K to $20K in legal fees.
C. There are so many new aspects to how Prosper works that there will have to be a “custom development” to create the pleadings for a Prosper lawsuit.

What I’m doing at this point is putting together a pilot legal program. I have identified a group of loans which have already defaulted or are on the verge of default. These loans will be included in our next debt sale. In order to gain the legal standing needed, I’m proposing that Prosper buy these loans for the same amount that the debt buyer would and use these as an initial test.

My thought is to do this with a group of loans from borrowers who are all in California, so we only have to deal with one state’s court system. I have a meeting scheduled for Wednesday with the managing partner of what I consider to be the best collections law firm in California. My hope is that we can formally place these loans with the law firm this month and have the first suits filed in November.

...
10. Do you have an especially dark corner in your heart for delinquent borrowers who are also active Prosper lenders?

Yes. I know we are now putting borrower-lender accounts on hold on a monthly basis and I hear we owe the community a thank you for bringing this problem forward.

Prosper Confirms Upcoming Lender Features

Earlier today I pointed to a Yahoo financial article that referred to several features that weren't currently available on the Prosper site. It turns out that these features were previewed by Prosper at the Finovate 2007 conference in NYC this last week and the Yahoo article was based on Prosper's presentation at the conference.

Prosper was kind enough to confirm the upcoming features were presented at the Finovate conference. The first major feature will show lenders the estimated default rate based on Prosper's default information (not Experian's) when lenders bid on on listings. The second major feature will allow lenders to assemble a loan portfolio to help control risk in their lending.

Prosper Andrew was kind enough to answer a few questions about the upcoming features.

Mike @ Prosperous Land: Will the estimated default rates be shown when lenders click on the "Bid" button in something similar to the current warning on E/HR loans?

Prosper Andrew: Yes, it will be shown on the bidding page, and will actually be shown on every single listing (unlike the current E/HR warning). So good listings (AA, 0 DQs, etc.) will have a very low estimated default rate, and very poor listings (HR, multiple DQs, etc.) will have a very high estimated default rate. As always, it will be up to the lender to decide whether the level of risk is appropriate to his or her lending strategy.

Mike @ Prosperous Land: Have you settled on which credit criteria will be used to bin the loans for analysis? I've noticed that the criteria can only be sliced so thin before there's not enough loans to do a good extrapolation.

Prosper Andrew: You’re on the right track with this, and yes, we’ve settled on the criteria. Basically, using public data, for each credit grade, we’ve determined which credit factors contribute most to risk, and used those to slice up the borrower population. There are about 50 slices across all 7 credit grades. Some grades have fewer slices (AA has 3, for example), and some have more.

Mike @ Prosperous Land: The Yahoo article suggested that you could base the criteria on whether they're a recent college graduate. Loan categories like "recent college grad" sound like self-reported information. Isn't that a bid dodgy?

Prosper Andrew: Yeah, this is probably just a misunderstanding on the Yahoo author’s part. We are only using quantitative data like credit grade, delinquencies, inquiries, and stuff like that.

Mike @ Prosperous Land: Will Prosper do automatic bidding based on the portfolio or will it provide guidance as to how a listing fits into the portfolio?

Prosper Andrew: It will be similar to the way standing orders work, where listings that meet the portfolio plan’s criteria get bids.

Mike @ Prosperous Land: The portfolio planner sounds similar to features provided by Lending Club's portfolio system. Are there features that differentiate Prosper's implementation?

Prosper Andrew: It’s fairly different, actually. LendingClub’s tool just lets you take your money, choose a risk level, and actually places your money at the very moment in what’s available now. Our tool will offer 4 pre-defined plans that offer different levels of risk and return, and will basically set you up with a standing order that places bids on listings that meet the plan over time. So your money could be bid immediately (like LC’s tool), or it could be placed over time as more listings that match the plan are created.

Mike @ Prosperous Land: When can we expect these features to roll out?

Prosper Andrew: it will be over the next few months. And we’ll roll these features out in phases, so you might see some functionality now, then more later.

Thanks to Prosper Andrew for taking time to clarify the new features.

Prosper Confirms New VP's Collections Experience

Prosper has published a Q&A with the new VP of Operations Doug Fuller (Prosper Forum, Rate Ladder, Prosper Lending Review). The introduction to the Q&A confirms him as the Doug Fuller with a hefty collections and efficiency oriented background. This is the same one whose resume surfaced in the forums a little bit ago.

From the Q & A, he's confirmed that he's quite aggressive on debtors who don't pay up:

Q: Well why don’t we just sue everybody?
A: The phrase “blood from a turnip” comes to mind. One of the ways that you can go broke in a big way is by suing people that will never be able to pay you at all. Simple math, it costs a lot of money to sue people.

Q: Okay, so you need to decide who to sue, then what?
A: Put quite simply, my philosophy is this – if you won’t pay, but can (or will in the future) be able to pay, I’m going to sue you. If I sue you I’m going to win.

Q: That sounds kind of arrogant, can you back it up?
A: Courts in seven states have recognized me as an expert at consumer debt litigation. At Credigy, if a case got really nasty, I would go testify live. I refuse to lose.

Q: Really? What’s your win/lose record?
A: In my last 18 months at Credigy, I testified live at 42 trials. My record was 41-1. By the way, I fired the law firm where we lost.

Friday Linkfest Junket

I've been having a linkfest every Friday. Why stop now?
And on we go...

TechDumpster has a rundown on the (hypothetical) Zopa versus Prosper match-up:

Although Zopa is the only service of its kind in the United Kingdom,
when they do finally make it to the United States, they are going to
have to go head to head with Prosper. Here’s a quick breakdown of
the main differences between Zopa and Prosper

Stephen Oaks Of Juita Group interviews Prosper CEO Chris Larson with a Q&A session:

Following the conversation, I thought a bit about my first impression of Chris. I can tell you first hand, the guy is a straight shooter who knows the lending business inside and out. What separates his company from the typical establishment is his love for the individual and community.

“Peer-to-peer borrowing/lending is the purest form of capitalism,” said Larsen.