March Prosper.com Collections Update

This is part of my ongoing series monitoring collections efficiency (February's report for comparison). For a reminder on the methodology, I took a snapshot of all of Prosper's loans on March 3 (yes, I'm a doofus and missed March 1) and compared their current status against those same loans on April 1. Presumably, loans that don't get further behind have some kind of money extracted in the collections process (not so valid on this run - see below). The statistics are below.

	Total	Got Better	Stayed The Same	Got Worse
Payoff in progress	48	48 100.0%	0 0.0%	0 0.0%
Current	13772	214 1.5%	13243 96.1%	315 2.2%
Late	203	54 26.6%	42 20.6%	107 52.7%
1 month late	281	34 12.0%	35 12.4%	212 75.4%
2 months late	273	11 4.0%	23 8.4%	239 87.5%
3 months late	254	4 1.5%	25 9.8%	225 88.5%
4+ months late	740	8 1.0%	723 97.7%	9 1.2%
Defaulted (Delinquency)	1421	0 0.0%	1355 95.3%	66 4.6%

The Signs Of Collections (SOC) statistics are below. Signs of collections percentage is calculated as the percentage of the loans that either improved or stayed the same.

Month	1 Month	2 Months	3 Months
March '08	24.4%	12.4%	11.3%
February '08	13.7%	9.3%	4.7%
January '08	20.6%	12.8%	8.0%
December '08	23.0%	2.8%	3.8%

Since I screwed up and didn't get the data until March 3rd, this report may look overly favorable on collections success. This is because Prosper calculates loan lateness based on the date in a month (and not 30 / 60 / 90 days) and loans that came due between the 1st of April and 3rd of April will not be properly counted. This inflates the numbers for loans that stayed the same, though statistically, this should only shave about 3-4% of the loans in the stayed the same category. Removing that 3-4% would place March on similar footing to January.

The "4+ months late" category is very hard to quantify percentage wise. The default sales make month over month comparison very difficult, so I'm not going to try. There were 62 loans that left the "Default (Delinquency)" which are presumably part of Prosper's collections-by-lawsuit effort. This has created a statistical tracking problem because they are now marked as Repurchased. Repurchased has typically been for loans that were reacquired by Prosper due to fraud. Most statistics reporting sites like Lending Stats do not count repurchased loans for ROI calculation purposes, even though it isn't appropriate in this case.

Color Me Stunned

RateLadder posted late last night that Prosper has been e-mailing lenders regarding their new foray into collections via legal judgments. They have provided a process by which lenders may opt-in to the legal proceedings.

The purpose of this email is to inform you of your right to choose what action you would like to take with regard to the accounts of the legal collection test currently underway.

Of the original 74 loans in the legal test, 68 remain (6 loans have fallen out due to such things as curing or bankruptcy filings). In order to present the strongest case, our law firm believes that it is best for Prosper to be the official owner of the loan when suit is filed. As such, we have developed the following process to accomplish this:

...

You may choose to accept the $33.11 (the “debt sale amount”) for your loans now or to receive a pro-rata share of the net recoveries of this legal test pool. The pro-rata share would be based on the gross amount due on your Notes divided by the gross amount due to all lenders who choose to be in the test, calculated as of January 23, 2008 (the “Pool Commencement Date”), i.e., the date after which lenders must respond to this notification indicate whether they wish to participate in the test on a pro-rata basis. Based on the gross amounts due as of $325.26 if all lenders chose to remain in the test, your share would be 4.4211%.

This has been some time in coming. Doug Fuller has been preaching legal action since he started, and more recently RateLadder posted on the "New Collection Agency" results. This is all solid work, and kudos to Mr. Fuller for shepherding this along.

I also want to send a general kudos to Prosper's management for proactively contacting lenders about their plans. In the past, Prosper has taken more of a forgiveness instead of permission attitude toward their lender interactions. I am heartened to see that they're doing things entirely above board, within their legal framework, and allowing lenders the options to participate in their tests.

Linkfest In Exile

Why is it that all kinds of news start happening when I'm having to scrounge around for both time and a wireless connection (and CES starts tomorrow - it was nice having all this free time). So, I'm gonna knock this out and go have breakfast.

Prosper Raises Borrower Origination Fees (Prosper Blog)

Effective today, Prosper has increased the origination fee for borrowers. The rationale behind this increase is to enable us to better cover our administrative costs and bring our fees more in line with the market. We have endeavored to continue to keep the fees very straightforward for our borrowers.

Doug Fuller delivers the first of the long promised collections updates. Feels a little light on answering questions people want to know, but I'll take it as a good start.

One of the many activities aimed at improving collections undertaken in the last couple of months was the testing and implementation of an “Early Delinquency” letter series. Although borrowers were already receiving reminder emails and phone calls during the early delinquency period (1 -30 days past due), we thought it worth seeing if an actual letter might drive additional payments. We conducted an initial test in mid-October where half of the early delinquency population was sent a letter and half was not. Measured by the number of manual payments initiated, the results were good. In the three weeks after the letter was mailed 57% more recipients initiated a manual payment (41% vs 26%).

Prosper Pays Up With Style - Refunds to Lenders and Group Leaders

Also, because Prosper was clearly in error the application of all of the above payments in question, and our error involves a time delay between when Prosper should have made payments to lenders, Prosper will pay interest at California’s legal rate of 7% on all amounts due to the affected lenders or GLs, from the date the payment should have been made. Interest will be paid in all 3 situations mentioned above.

Alternative Lending Sites Often Have Good Deals; Each Has Its Own Twist

Prosper is the most laissez faire of the peer lenders: It allows almost anyone to borrow and lend on its site, after it checks that person's credit and verifies his or her identity. At Prosper, borrowers with the worst credit scores could be stuck with rates as high as 30%, if they're funded at all. Consumers with great credit might be able to receive rates of 7%.

"We think it defeats the purpose if you have to know people" to borrow and lend money, says Chris Larsen, Prosper's CEO. "It's kind of like on eBay. If you can only sell products to family and friends, we think that doesn't lead to the best prices."

Prosper Approaching Nuclear War

Lawsuits are like nuclear weapons, it's the option of last resort and pretty much assures either destruction of MASSIVE damage to all sides involved. When lawsuits fly the only winners will be the lawyers. ("Churla", Slashdot member).

Even though I've grown tired of covering Prosper's continual information warfare with its community, the war is spilling onto my blog. If you're unaware (and don't follow the prospers.org forums), Prosper's intellectual property lawyers have sent a legal nasty-gram to the owner of prosperreport.com for cybersquatting and trademark infringement. The individual happened to be an active member on the prospers.org forums, and this tactic, predictably, pissed a whole bunch of otherwise grumpy people off.

It is here where I have to point out that I do consider lawyers the business equivalent of nuclear weapons. They tend to leave destruction and in their wake and no one tends to "win"; the winners just lose less. Lawyers have their place, but only in a mutually assured destruction sense. I had been hoping that some kind of reconciliation could be found between the disgruntled ex-forum posters who now haunt prospers.org and Prosper's employees and management. The use of lawyers have deflated such idealistic pipe-smoking.

The site owner has now retained council through the Public Citizen Litigation Group and drafted a reply. Normally legal replies are rather boring affairs, but this specific lawyer really seemed to be enjoying himself. If you are at all interesting in intellectual property law, it's an entertaining read (there are days where I feel like such a geek). The reply also contains a most amusing footnote.

When we spoke, you suggested that my client should adopt the domain name "prospersucks.com." That name would be inappropriate, because it is not an accurate depiction either of his web site or of his views about Prosper Marketplace. My client does not believe that your client "sucks." In fact, he is a member of the Prosper community who has made numerous loans to other Prosper members. His concern is about flaws in your client's collection processes, and, even more importantly, about your client's attempts to conceal those flaws from members who seek to have the flaws corrected for the better protection of all members. His web site does not seek to tear down Prosper, but rather to promote transparency about Prosper which he believes is essential to the proper functioning of the Prosper community. Moreover, the domain names Prospersucks.com, prospersucks.org and prospersucks.net are currently registered (albeit by somebody who is not using them in any manner related to Prosper). In any event, the lesson of Taubman, Bosley, TMI, Lamparello, and many similar cases that we have litigated for Internet speakers is that accurate domain names need not couple trademarks with vulgarities in order to be protected.

Even beyond this, I do hope that Prosper takes the reply's observation about the Streisand effect seriously. This has happened to Prosper and will continue to happen to them until they learn to walk softly (big stick or not).

Finally, your client may hope that by filing suit it will send a message to critics that the use of the Internet for uncensored comment on its activities will be costly. But its decision to file suit over this domain name may be even more costly for your client. Our experience with the other domain name cases that we have litigated is that the litigation itself brought more attention to the criticisms than they would otherwise have received. For example, a Google search for "prosper" does not bring up our client's site on the first page, or even the first several pages, of search results. If your client makes the mistake of filing the lawsuit that you threaten, that may well change. Indeed, although your client has become known to some Internet users, it is not well-known to the general public. I scarcely think it would be in your client's interest if the first thing that the general public learned about your client is that it is so afraid of open discussion that it needs to sue to stop easy access to that discussion.

Prosper Updates On Loan Payment Fee Discrepency

Back in October, traveler505 observed that Prosper was pulling group and servicing fees from loan payments made for late loans and that this was against the terms of the lender agreement. Prosper followed up a few weeks later and noted that they were going to get things fixed up the way they should be. With no further word, and no fixes, folks have continued to press for the resolution to happen and Prosper has replied via the forums:

Our apologies for the delay in getting information out to lenders about this: Prosper has every intention of living up to the legal agreement that was in effect when the loans were issued. The engineering changes required for the refund to go into effect are complex and we want to make sure we get them right. Lenders should see their refunds in the first quarter of 2008.

Thank you.

Prosper

Update: Removed that '*DONE --' from the title. You just caught your friendly, neighborhood blogger being sloppy because he was running late for a class this morning.

Borrowers Allowed To Refinance Loans After all

Prosper Shira has popped up and clarified that the previous interpretations were wrong and that borrowers can refinance their loans and that the agreement will be made more clear in the future. Points to Prosper for getting this one straightened out quickly.

Prosper’s Borrower Registration Agreement (BRA) now permits additional loans under certain circumstances, but also provides that “You may not obtain a Loan from the Prosper marketplace to pay off an existing Prosper Loan.” (BRA, Section 3.) This restriction is in the BRA to clarify that Prosper will not “net out” loan proceeds to borrowers seeking an additional loan. Prosper treats each loan separately, so that, for example, a borrower with a $5,000 existing Prosper loan seeking an $8,000 second Prosper loan will receive $8,000 in loan proceeds from Prosper, rather than $3,000. If the borrower wants to pay off the existing loan, it is up to them to initiate the prepayment of the existing loan.

We now recognize that the language of this restriction unduly interferes with borrowers seeking additional loans, so we will be deleting the “You may not obtain a Loan from the Prosper marketplace to pay off an existing Prosper Loan” restriction from the BRA language in a future release. In the meantime, on currently-active listings for additional loans, Prosper will waive this restriction and allow a borrower to request and obtain a second loan, even if the borrower stated that he or she was going to use the proceeds of the loan to pay off an existing Prosper loan.

In summary, borrowers and lenders can disregard the restriction, so that all listings for additional loans will be considered valid (subject to usual pre-funding review) whether or not the borrower indicates that the loan is to be used to pay off the borrower’s existing Prosper loan.

Prosper Violating The Lender Registration Agreement Again

As had been previously noted, Prosper is testing out a new collections agency. The fly in the ointment is that HollowOak spotted that it's kinda, sorta, maybe against the lender registration agreement.

I know this is a touchy subject area, but are Prosper (again) violating the lender agreement? Lenders signed up on a loan on condition that it be handed over to a named agency as laid down in the site policies and T&Cs. can Prosper now unilaterally assign the loan to a different agency?

Oh, yes, that legalistic lender registration agreement:

When a payment becomes thirty (30) days past due, Prosper will assign the loan account to the collection agency you selected at the time of registration. If there are multiple Lenders on a loan to a borrower, and one or more of the other Lenders selects a collection agency different from the one you selected, you agree that Prosper will use the selected collection agency common to the Lender or Lenders who have the greatest ownership interest in the loan. In the event of a tie among the Lenders as to their choice of a collection agency, the agency will be selected at random by Prosper.

There's nothing in there about Prosper changing the collections company. I have little doubt that Prosper is attempting this test with the best of intentions (improving collections), but I have even less doubt about their response should a lender decide to arbitrarily operate outside the lender agreement on a similar scale. They have come down quite hard on some lenders in the past.

This was bad form, especially with so many options available to Prosper like contacting the lenders to ask for a change or purchasing the bad loans during the next debt sale.

Prosper Fixes Lender Agreement Violation

About two weeks ago, traveler505 noticed that Prosper hasn't distributing funds from borrower payments properly (or in compliance with their loan handling agreement). Prosper Shira has followed up with the explanation.

Thank you for unearthing this error: a classic example of how the Prosper community helps us improve the site and our operations on an ongoing basis. You are correct: there is a discrepancy between our legal agreements and the way we collect servicing fees.

As compensation for its loan servicing activities, Prosper currently charges Lenders a servicing fee. Prosper’s servicing fee is deducted from monthly payments as they are received. Prosper collects its servicing fee on all payments received on loans, regardless of when the payments are received, and regardless of the amount of the payment received. This is the way loan servicing fees are customarily charged on consumer credit transactions, and it is the way Prosper has always collected its servicing fee.

You brought to our attention that certain language in the Lender Registration Agreement (LRA) was inconsistent with the manner in which Prosper has been collecting its servicing fee on loans. The following language appeared in the Servicing Compensation paragraph of Section 5 of the LRA:

“With respect to each Note you purchase from Prosper, the Servicing Fee is payable only upon Prosper’s receipt of the full monthly payment from the borrower on such loan no later than thirty (30) days after the due date of the payment.”

This language does not reflect Prosper’s actual method of charging loan servicing fees, because Prosper collects its servicing fee on payments without regard to the amount and timing of the payment received. For example, servicing fees are charged on a full or partial loan payment received more than 30 days following the due date of a payment.

The discrepancy between this language in the LRA and Prosper’s actual practice was an unintended drafting error on Prosper’s part, and is being corrected in the LRA. Going forward, loan servicing fees will continue to be charged on all payments received on promissory notes, regardless of the amount and timing of the payment received. However, we will give appropriate credits to lenders who are impacted by this error.

Lenders who were charged servicing fees in a manner inconsistent with the language quoted above will receive an appropriate credit in their funding account. Prosper is reviewing its loan records in order to determine which lenders are affected by the error, and the amount of the credit. We apologize for this inadvertent error and appreciate your patience in allowing us to rectify it.

Thank you again for helping us improve operations, Traveler505, we appreciate your diligence.

Update: I do want to note that after Prosper credit's those loans that were not handled properly, they have indicated that loans that were funded under the old lender agreement will continue to be serviced under the terms of the old agreement. New loans will be issued under the new terms.