Using P2P Lending For Free Credit Reports

My Money Blog has published one of those slightly underhanded tactics that have been known to P2P lending nerds for a while.

Prosper person-to-person lending offers up another perk - a free credit score for prospective borrowers. If you’re a lender already, it’s not too difficult to become a borrower. I just had to verify my address and phone numbers, and they offered up my credit profile. You will need to provide your Social Security number, though.

That's right. If you start the process to borrow money via Prosper or Lending Club, you can get a free peak at your credit report. Prosper uses Experian while Lending Club uses TransUnion. That's two credit reporting agencies, and we'll note that Prosper will refresh the credit report after 30 days. While I might sometimes feel guilty about pointing out this "feature", it's been an open secret amongst Prosper users for a long while and I'm not a big fan of open secrets.

Update: If you want to get your credit report through places that actually intend to give it to you in all it's glory, check out Simple Dollar's post.

Tip To Borrowers - Prepayments Are Your Friend

Prosper Borrowers have the option to make payments above and beyond the Prosper calculated monthly payment, referred to as prepayments. Lenders have a wide variety of reactions to this practice, ranging from happiness that the loan is being paid back to annoyance that they didn't earn as much interest as was expected.

For borrowers, however, prepayments are nothing but a good thing. For borrowers who consolidate their >30% credit cards into a ~25% Prosper loan, paying just a little extra can save the borrower hundreds of dollars over the next three years. To be more substantial, a $10,000 Prosper loan at 22% has a monthly payment of about $382. Paying an extra $10 a month, or $393, will save the borrower $414 over the life of the loan and get the loan paid off two months early. If you're working hard to dig yourself out of debt, $400 is a big deal.

To get a handle on how effective prepayments are, play with an online loan calculator (like this one) to see what paying extra can do for your finances. And don't be discouraged if you can't regularly pay more. Even the occasional extra payment for $25 will help you save more in the long run.

Borrower Rate Guidance

With the latest Prosper site update, they added a borrower rate guidance. This feature helps borrowers pick an interest rate that will be successful in the auction process. Previously, Prosper would suggest rates based on where loans had funded at. Experience had shown, however, that listings that started with a relatively high interest rate would get bids and would eventually be bid down while those that started with lower interest rates would languish. Prosper added this feature to help more first listings be successful.

A screen shot, posted by big-al on prospers.org forums (reg required), is below:

Warm & Fuzzy Borrower Story

In the spirit of Thanksgiving, it's time for a warm fuzzy and someone giving thanks. It's good to remember that there are real people borrowing on Prosper and they are trying to better themselves. Here's one borrower's story:

I would like to give a little update on what happened in the past few months since I am not that much around in the forums anymore.
Naturally my credit score has improved immensely and I’m still paying off my remaining debts as best as I can.
I also received more available credit on my remaining credit cards which I am not using and this improved my score as well.

I did have some major expenses in the meantime, which depleted most of my savings, but I did not need to accumulate new debts !

To explain this a little further: due to my Prosper loan and the debt consolidation with it, I was able to save enough money
to pay for a new computer I needed, a new printer which broke, and I was also able to pay for
my daughter’s vacation with my family in Germany for the long summer break.

After she came back she needed new clothes for school, school supply and also a birthday present.
Guess the expenses never end, but this too was paid from money I had put away, without incurring new debt.

I was approved for a decent mortgage rate (6.5% from Wells Fargo) with a 100% financing and was on my way to purchase my first own house through a bankruptcy short sale, but after 3 months of waiting for the bank to finish their paperwork I withdrew my offer.
I changed my mind about the house purchase for now because of the still too unstable real estate market.

Some of you may remember that I took on a second job to improve my monthly income, and I am still working at both jobs!
Now, with all the miles I’m driving to commute between those 2 jobs, I actually needed to make the decision of purchasing
a new (used) car.
I think I got a great deal on a 7 months old car and was able to get this 100% financed through Riverside International Bank at 11.5%.

For the car interested readers: I found a 2007 Ford Fusion with 14.000 miles for $13.500 and still under fully factory warranty.

Some of you may think this is not such a great deal, but regarding my situation and where I was standing when I was relisting
and relisting here for a loan a few months back, I think I did a pretty good job at improving my financial standings.

As stated above, this is just another little update and a BIG THANK YOU to all my lenders
and the few friends I actually made here on this side!

Old Debt Never Dies

For those vindictive lenders, this is a chance to savor the schadenfreude (not that there are any in the Prosper lending community who would be vindictive. No, none at all). For borrowers, this is another indicator that bad debt can haunt you for a long time to come.

In a financial version of Night of the Living Dead, debts forgiven by bankruptcy courts are springing back to life to haunt consumers. Fueling these miniature horror stories is an unlikely market in which seemingly extinguished debts are avidly bought and sold.

The case of Van Rathavongsa illustrates how canceled debts regain vitality. The Raleigh (N.C.) factory worker pulled himself out from beneath a mountain of bills by means of a bankruptcy proceeding that wrapped up in 2002. One of the debts the judge canceled, or "discharged," was $9,523 Rathavongsa owed to Capital One Financial, the big credit-card company. But Capital One continued to report the factory worker's discharged debt to credit bureaus as a live balance, according to documents filed in U.S. Bankruptcy Court in Raleigh.

Prosper Adding To Collections Effort

RateLadder beat me to this (that'll teach me to being Thanksgiving sloth-hood early), but you're missing the rest of the story.

Mr Deluxe posted to the forums that while late on his loan, he had received a letter from Prosper:

OK- I will tell. My loan was recently under 30 days late (now current) I received several emails from Prosper, but the letter I got in today’s mail was very effective.

It was a letter from Prosper reminding me that 155 people contributed to my loan and they are not ‘big banks’ or ‘Warren Buffett’. The letter went on to say that lenders are people too, with jobs, families, bills, etc. and asked ‘how do you think they feel now that you are late.'

It was very well written and should open the eyes of borrowers that intentionally are late or default.

However, this has been a topic of conversation ever since Doug Fuller had come onto the scene. Lend2 had written a good summary of his group's borrowers' experience with collections. He took a more individual approach toward convincing borrowers that they were hurting real people:

However, it was an important lesson for me to realize that many of these people really do want to make good on their loans. Many are hard-working, good people like you and me, who have simply been backed into a corner by unfortunate circumstances.

The Prosper TOS says we can't aggressively try to collect on these loans. But there's nothing that says we can't make friends with a few late borrowers. So why not reach out to a few late borrowers and introduce yourself? Tell them about your work, family, etc. and show that you are a real person. Explain why you loan money on Prosper. Offer to answer questions about Prosper and remind them about the points I mentioned above (i.e. ability to make a small payment directly through the Prosper site, most of which will flow through to the lenders).

In addition, this off-line contact before handing over to collections was mentioned by Doug Fuller when he came on board (and answered some questions).

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?)

...
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.
...


16. What's Doug Fuller going to do about collections at Prosper? As far as I can tell, these are the items (after sifting through the hyperbole etc): widen the time span of collection calls, stop calling disconnected numbers, call more often, tell callers they're hurting "average Joes", scare late borrowers with lawsuits, find a different collection agency or bring the operation in-house if the above items aren't accomplished.

That’s a pretty good summary of my plan.

The letters have been a long time coming and will hopefully be useful in improving Prosper's collections. And that ... is the rest of the story.

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.

Can Borrowers Eat On $100 A Month?

There's been a running discussion on whether borrowers who claim that they spend almost nothing on month on food (see here, here, and here for recent random examples) are full of it. The credibility threshold seems to be around $100 / person. One of the examples claims $200 for a family of four. Is this doable?

The first thing to consider is that other personal finance bloggers seem to believe it's possible, though not very fun.

So, yes it is possible to eat without spending a fortune. Again, my food budget was radical by necessity, but the principles would still work today. I think $15/wk might not be enough now, but I think $20/wk would work, and I know that $30/wk would be fairly easy for a single person. For reference: $15/wk per person = $65/month for one and $260/month for a family of four. $30/wk per person = $130/month for one and $520/month for a family of four (which is about what my family spends on food now, and we don’t eat anywhere near the way I did back in the ’90s).

I would also add that a few politicians tried living on $3 a day for a week to help get in touch with the foodstamp experience. They didn't find it very much fun either.

What can you eat for $3 a day? Mostly carbohydrates. Oakland Democratic Rep. Barbara Lee's diet consisted primarily of crackers, a loaf of whole-wheat bread, tortillas, and brown rice. Assemblyman Mark Leno, D-San Francisco, filled up on 19-cent banana-and-peanut butter sandwiches. Rep. James McGovern, D-Mass., said he would've killed for a candy bar or a cup of coffee. "I've had enough lentils for three years. For us, this is an exercise that ends Tuesday. For millions of people, this is their life," he said.

The budgets used by the Congress-critters and the blogger above work out to $80 - $100 / month. This implies that if someone claims $100 / person or less, scrutinize their listing if you're otherwise interested or just move on. In these cases, I usually question the borrower as to how they've achieved their food budget.

I've only found one good answer in all my questioning, however. Consider this listing. Employees (or owners) of restaurants do get huge breaks on food and may often eat free at their establishments. That's not a free pass, but a mitigating circumstance that makes it plausible to only spend $100 a month.

Some other good links for your own evaluation:

• Ask the Readers: Tips and Tricks to Save on Food?
• How to Eat on a Shoestring
• Cheap Eats blog
  

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.

Loans From Groups Declining

zcommodore has been monitoring the number of group loans funded vs non-group loans funded in response to Prosper's change in group rewards. A few weeks ago he noted that the ratio was swinging to non-groups:

Back in May/June when I first started checking, the number of "no group" listings at any point in time was around 60%*. After the removal of match rewards in early June along with a few changes relating to the removal of directions on Prosper encouraging borrowers to join groups, I noticed the number was hovering right around 70-72%. This morning, a little over a week after Prosper's change to remove group leader fees, I see the number of no-group listings has risen to 77%.

His latest calculation has things swinging further:

The number of listings, percentagewise, that are now not in a group has increased significantly since then. When the change was first implemented, roughly 70% of all listings were "no group". This morning, I checked again and it had risen to 82%.

Anecdotally, I've been finding the listings to be of lower quality. Correlation or causation - you be the judge.

Group Rewards And Unintended Consequences

In an e-mail to group leaders (see RateLadder and Prosper Lending Review), Prosper announced their intention to discontinue all group leader rewards and move to a referral-only reward structure. The prevailing attitude on the lender side can be summed up with this Prosper forum post:

No group has added any value whatsoever.

Repeat it with me: No group has added any value...oh, well at least to lenders. And we are in the lender forum, right? You are a borrower.

I don't mean to cut on you but it gets crazy to keep allowing these untrue opinions go unchallenged. And I'm sure half a dozen folks will pounce on me (as a poster) and defend you (as a person), but...so what? I'm still right. No group has added any value to lenders. And I don't care if other borrowers want to have threads called "Group Groups" or whatever. Go ahead. But that talk is for borrowers -- in here we are discussing the lender side of things.

My first reaction was "Oh %@#$". I understand the frustration, but I believe Prosper lending system will soon learn the law of unintended consequences. There were some groups that pumped and dumped their loans and provided no value. As a counter example, I always found listings from some groups (No Bulls, Have Money Will Bid, Bald Eagle Loans as examples) to be of much higher quality than average. These group leaders were using the group rewards to justify their time spent aiding borrowers, and that some borrowers do take a fair amount of time when group leaders verify utility and pay stubs. It's a value-add that I'm happy to bid on.

My expectation is that the strong, energetic group leaders will exit, reducing the listing quality in the process. Bald Eagle posted in the forums:

So, thank you Prosper. It has been a good run...

I will contact each of my current group members and give them my direct contact info. I hope to keep contact with them outside of Prosper and I believe in each and every one of them.

To the rest of the Prosper faithful, Adios!

I don't think this is what Prosper intended, but it will be a consequence of the change in policy and, should it go through, lenders will need to adjust to it. Be patient, and be ready to ask borrowers lots and lots of questions.

Update: Some comments from zcommodore, one of the blogging group leaders:

As a group leader who charges fees, I must say I don't really mind. I had originally intended to take no fees all along but a few people convinced me to charge for my services since I was spending a lot of time on it and they suggested that it would be reasonable to charge something so I did. I still waived fees whenever I had a borrower who was rate-capped but it never seemed to make a lot of difference since they never got funded anyway.

Update 2: I'll post other responses here as they show up.

• Lending Stats Blog: "I think this is a huge step in the right direction..."
• Prosper's Group Leader Forum thread
• Wise Clerk: "While some group leaders did a good job screening and vetting borrower applications and the group leader could be seen as a compensation for time invested; the majority of lenders seems to see the removal of group fees as a step in the right direction."

Borrower Loan Status Reporting

One of the things that came out of Prosper's latest upgrade (see this linkfest for details) was increased information about a borrower's previous loans. I stumbled on a listing for a multi-loaner and found the interface very useful. I got a screenshot of this random listing (for an unreferenced borrower with all the credit info erased to protect the innocent).



This was a good example. Several useful bits of information are shown. The borrower took out a loan in Jan, 07 (denoted by the small dollar sign icon under the credit history section) and has improved their credit grade by one step (E->D) as (noted by the much larger icon and green area under the Credit History). The payment history for the previous loan is shown. What's missing is an indicator that the first loan was paid off. This information is available elsewhere, but it would be time saving for lenders to see it directly instead of hunting for it.

Overall, a welcome upgrade.

More On Rate Changes

Ok, I've had time to compare the Google cached version of the state rates page versus the most recent and here's the goods

State	Old Rates	New Rates
Alaska	$1k - $25k: 10.25%	$1k - $25k: 16%
Arizona	$1k - $25k: 24%	$1k - $10k: 24% $10k - $25k: 30%
Arkansas	$1k - $25k: $10.25%	$1k - $25k: 11.25% APR
California	$2.5k - $25k: 30%	$1k - $2.5k: 19.2% $2.5k - $25k: 30%
Delaware	$1k - $25k: 10.25%	$1k - $25k: 11.25% APR
Kentucky	$1k - $25k: 8.25%	$1k - $15k: 10.25% APR $15k - $25k: 30%
Lousiana	$1k - $25k: 21%	$1k - $25k: 12%
Maine	$1k - $25k: 18%	$1k - $4k: 24% APR $4k - $25k: 18% APR
Massachusetts	$6k - $25k: 23%	$1k - $6k: 12% APR $6k - $25k: 20% APR
Minnesota	$1k - $25k: 8%	$1k - $2.5k: 19.2% $2.5k - $25k: 30%
Mississippi	$1k - $25k: 10%	$1k - $25k: 30% (Business Only)
Missouri	$1k - $25k: 30%	$1k - $7.5k: 30%
New Hampshire	$10k - $25k: 30%	$1k - $10k: 10% APR $10k - $25k: 30%
North Carolina	$1k - $25k: 16%	$1k - $25k: 30% (Business Only)
North Dakota	$1k - $25k: 30%	None!!
Ohio	$1k - $25k: 8%	$1k - $25k: 25% APR
Tennessee	$1k - $25k: 10.5%	$1k - $25k: 12.25% APR
Texas	$1k - $25k: 30%	$1k - $25k: 10% APR (Business up to 18%)

Big winners for Lenders: Alaska, Arizona, California, Kentucky, Maine, Minnesota, Mississippi, New Hampshire, North Carolina, Ohio.

Big losers: Louisiana, Massachusetts, Missouri, North Dakota, Texas.

Texas is a big blow, but I think the increased opportunities in Ohio, California, Kentucky, and Minnesota will more than compensate. For the "business only" additions to some states, it's a net good, but an obscure one. Getting states like Mississippi and North Carolina above AA/A/B credit territory and restricting it to "business" lending is a net-gain for lenders as it allows C/D/E loans to get a fair shake at funding. Like it or not, these ratings put up a lot of volume and, for the C/D space anyway, compensate the lender for their troubles.