Interesting Way To Get Prosper Money Back

This Prosper lender had found a creative way to liquidate all the loans he's holding: take out a loan against them.

Purpose of loan:
This loan will be used to pay off my current Prosper Lending Account. I no longer have the time to manage this, and would like to use my lending funds towards something else at this time.

Cash balance: $26.78
Value of loans: + $14,959.08
Payments in transit: $155.16
Winning bids: $394.33
Winning bids pending review: $300.00
Total account value: = $15,835.34

My financial situation:
I am a good candidate for this loan because I have the means to pay for this loan regardless of my portfolio, and have never missed a payment, or ever been late. I have an 830 FICO and pride myself on my perfect credit.

I worked for the world's largest investment bank, and recently moved to a startup because I have the means and free time. Prosper was fun for the past year, but being on the trading desk on Wall Street, enjoy a little more excitement out of my investments.

Presumably, he'll pay off his Prosper loan using the funds from his lending as they roll in. He does seem adept at picking loans with a LendingStats ROI of >10%, so it's not unreasonable.

Prosper's March Marketplace Summary

Two days ago, Prosper released their March Marketplace Summary (also on Business Wire). As always, the most interesting part is Chris Larsen's marketplace commentary:

As we have previously reported, Prosper’s mix of “well priced” loans – loans with an attractive risk-return tradeoff – has dramatically changed from the same period last year with approximately a 200% increase in the percentage of “well priced” loans and a six-fold decrease in “low priced” loans – loans with an unattractive risk-return tradeoff. Part of this positive trend is attributable to the introduction of portfolio plans and performance guidance from the Prosper Marketplace – changes introduced last October. These changes continue to drive better overall performance of the market.

In March we saw further evidence of this with portfolio plan performance improving. For example, the Conservative portfolio plan – one of four model portfolio plans Prosper has provided as templates that can be used by lenders – consists of five credit slices. Looking at all the credit slices across all four plans, 18 of 21 slices improved or remained constant. This is quite positive considering the continuing credit crunch occurring in so many traditional financial markets and should lead to both better rates for borrowers and better performance for lenders.

We are also seeing a healthy start of custom portfolio plans, which lenders can create from scratch or modify from an existing Prosper model plan. These plans can be easily shared with friends or family. In March, approximately 1,800 custom plans were created that spawned over 18,000 bids.

Let me sum up Inigo Montoya style:

• People are funding loans at interest rates where they will have a reasonable chance of making money and are backing off funding loans where they don't have a reasonable chance of making money.
  
• The statistics are getting stable for the portfolio plans. Before, the default rates were worse than we predicted. Now, not so much.
  
• People are using the custom portfolio plans, to the tune of around $1M in bids.
  

In other words, Prosper-derived statistics are a GOOD THING (TM), as is lender bidding guidance. Beyond this, there are lots of statistics which, if you're interested, you can attack.

Lending Club Halts New Lenders. Prosper Next?

Lending Club has announced that they're not allowing lenders to invest in loans until they get a few things sorted out with the government (I'm assuming the SEC):

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.

Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

Lending Club will continue to fund borrower loans using their own money, a most interesting example of being confident that their platform is sound enough to put their own money in. All eyes are now on Prosper. Prosper got started with the SEC back in October last year, but has been quiet since.

Update 3: The PLP link had an interview with Chris Larsen talking about how they went after the regulatory framework from the get-go. Prosper is acting like they believe they're in the clear.



That's enough updates for now.

Update 2: Just go over to Personal Lending Portfolio. They've got all the good goods.

Update: Why did I go and take yesterday off. Some more digging gives:

• Prospers.org Forum Talk
  
• Peer Lend
• NetBanker
• Tech Crunch
  

The NetBanker article had an official comment from Prosper:

Person-to-person lending is an increasingly popular way for individuals to borrow and lend money at attractive interest rates. Understandably it must be done in a secure and trusted way. While we’re not in position to comment on another company’s regulatory stance, Prosper believes that the way we have structured the Prosper marketplace is in compliance with applicable state and federal laws. Currently Prosper has over 650,000 members, and more than $130 million in loans have funded through the Prosper marketplace.

Tech Crunch added:

Since Lending Club both loans and borrows money from users, instead of connecting them directly, it’s not a pure P2P service. While the legality of its lending practices is not in question, its borrowing practices could be interpreted as the sale of securities, which requires a license Lending Club doesn’t appear to have.

This suspicion has been reinforced by Veronica McGregor, an attorney with the law firm Perkins Coie. She says that “it looks like they are getting themselves a license to buy and sell securities.”

Prosper Listing Word Analysis

Word analysis has gone in and out of vogue among Prosper lenders. Right now, it's in vogue here at Prosperous Land. The premise is that you can get hints about the quality of a listing based on words that appear in the listing description. I've been messing with it to try and get a statistically significant edge (proving it provides an edge, now there's a dicey proposition), but some interesting things pop out when you mess with the datasets enough.

I have used the 2602 repaid loans and 2387 defaulted, bankrupt, or 4+ month late loans for my number crunching, as of the April 1 dataset. For each word, I look at the ratio of appearances in good loans versus the appearances in bad loans to find those words that are good indicators of loan quality. The top ten good and bad ones that have appeared in at least 100 listings are below:

Word	Appeared In Good Loan	Appeared In Bad Loan
reinvest	95	10
aa	120	14
investments	104	16
lend	114	26
investing	82	27
lending	142	50
borrower	100	37
invest	124	48
side	120	50
investment	227	99
prove	44	144
catch	34	113
file	24	82
mother	78	270
establish	25	89
behind	67	241
lost	33	131
explanation	33	132
priority	27	119
payday	43	276

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.

Figuring Prosper's Maximum Allowable Loan Rate

I often get confused when I look at a state like New Jersey that has a 16% interest rate cap due to state laws but then see listings where the maximum interest rate is 12.84%. This makes no sense in any practical universe, so what's going on? The answer, my friends, is a confluence of Prosper's payment choices and government regulation (see, it doesn't have to make sense).

The Bank Draft

Prosper allows lenders to choose between 2 loan payment methods: bank draft and electronic funds transfer (ETF). The ETF method is quick and painless, and free. Prosper charges 1% for the bank draft method, however. And, because a borrower can swap between the two methods on a whim at any time during the loan, Prosper must make sure that, should a borrower choose to use the bank draft method during a loan, their effective interest rate will never exceed the state maximum. So, take 1% off the state rate limit.

Government Regulation and APR

Some state government require interest rate limits to be based on the effective Annual Percentage Rate (APR) instead of the simple interest rate. This came about because lenders were adding huge fees while keeping the interest rate low (sure, we'll make you a loan at 6%, after 10% in origination fees and closing costs). Lenders are required to account for those origination fees in their APR calculation, and it breaks down like this. I have "C" credit and want to get a $10,000 loan in New Jersey for 12.84%. Because "C" credit grades have a 3% closing fee, Prosper won't pay me $10,000, they only pay me $9,700, with the other $300 staying with them as a closing fee, and a monthly payment of $336.17. The state of New Jersey sees it differently. They see a monthly payment of $336.17 on a loan of $9,700. It would take an interest rate of about 14.98% to get that. 14.98% is considered the the APR rate.

So now, lets put it all together. You'll notice that there's a little bit of slop in the math, but at 0.02%, it is a rounding error. If you're worried about the 0.02%, you've got bigger things to worry about.

16.00%	State Legal APY Limit
-1.00%	Bank Draft Margin
-2.14%	Closing Costs Adjustment
-0.02%	Slop In The Math
12.84%	Maximum Allowable Rate

Of course, this calculation will vary from state to state. Some set interest rate limits, others set APR limits, and I'm sure a few have even goofier methods of limiting loan shark lender rates.