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.

The Next Forum Revolt Brewing Over Fraud

It's looking like the next big forum uproar will be over Prosper's actions in the forums to stamp down the revelation of personally identifiable information (PII). Where does this information mostly come up? Why, when lenders go hunting for fraud. This has coalesed around a posting by Prosper Shira reinforcing Prosper's current PII position:

Members have done a terrific job helping Prosper identify and prosecute fraud and we appreciate your desire to alert fellow members on suspected fraud. After reviewing the numerous discussions about fraud and personally identifiable information (PII) occurring on forums over the past few weeks, I’d like to take an opportunity to communicate directly with you about this important subject.

The best way to alert Prosper to suspected fraud is to click the “report this listing” link located on every Prosper listing. Your reports go into a priority queue that is monitored daily by Prosper’s trust and safety team and every report is taken very seriously.

Prosper has the right to cancel any listing at any time, and if we find the reported listing is fraudulent we will exercise that right. Our investigations may take several business days to complete, and an open listing under investigation could become fully funded on the site by the time it is cancelled. When a listing is cancelled, we send a cancellation email to the bidding lenders informing them of the cancellation. Sometimes reported listings are cancelled for reasons other than fraud. If a listing is cancelled due to fraud, the borrower will be banned from Prosper.

If you choose to post your suspicions about a specific listing or member on the forums, please do not include a member’s personally identifiable information (PII) or links to any website that reveal the member’s PII. Even when a listing or member appears to be fraudulent, Prosper has an obligation to protect our members’ personally identifiable information on our forums. If you have PII information linking a member to fraud, please include it in your report to Prosper, and not on the forums. Creating posts revealing PII on the forum will result in a seven-day suspension for the poster for first time offenses. Members with repeated offenses will be banned from the forums and could have their Prosper registration terminated.

To further protect a member’s identity, Prosper cannot share specifics back to those who report fraud or on the forum talking about what action, if any, was taken. However, you have given us great suggestions about how to improve our communications both back to the original reporters and forum participants. In the next few site releases, we will update our onsite and outbound messaging as well as forum policies to reflect your suggestions.

There's some very good posts from Ira, 112233, and others, but xraider seemed to sum it all up:

Shira, why is Prosper seeking to take all-important fraud detection away from those who do it best? Prosper already relies on lenders to report suspicious listings, and it looks like Prosper is trying to defang lenders' ability to (1) detect fraud (as Ira said, it is a collaborative effort); and (2) having detected fraud, warn others about it.

Prosper, more and more, appears to be a safe harbor for scamming borrowers. Is Prosper going to do anything to give lenders any assurances that with watered-down fraud protection we can have some certainty that we're lending to people who really will pay us back?

Also, what is the justification for preventing lenders from sharing publicly-available information? Prosper has eliminated the use of names, email addresses and telephone numbers in listings, taking that tool from lenders. Now Prosper is saying that if, somehow, lenders find fraud through other means (such as FaceBook, or MySpace, or eBay) that information should not be shared? Why not? If it's publicly available, there is no privacy to protect.

I would love to know Prosper's reasoning for banning the sharing of publicly available information.

Implied Call Option In Prosper Loans

Tanta over at Calculated Risk has gone off an obscure topic for mortgages, but it has relevance for Prosper lenders and borrowers. She had previously touched on the idea of an embedded option in a previous post, but really rounds it out here. From her A Clockwork Mortgage post:

... so suffice it to say that the main issue is the imbedded options in mortgage loans. In options theory terms, a mortgage gives the borrower a put (the right to default or "send jingle mail") and call (the right to prepay the mortgage with proceeds of a refinance or any other funds). Although both options have costs--especially if you have a prepayment penalty on your loan--those costs can end up being much lower than the cost of keeping your current mortgage. Because the "strike price" of these options is so heavily dependent on local and national economic conditions, interest rate levels, and home price changes, it is notoriously difficult to predict for any given borrower over any given stated loan maturity.

The lender, on the other hand, is "long a bond, short an option." Mortgages cannot be called or accelerated by the lender, except in case of default. No lender can make you refinance ... On the other hand, if market rates drop, you may exercise your right to prepay, which means that the lender loses your old higher-rate mortgage and must reinvest its funds at new, lower market rates.

Tanta compares the borrower's ability to prepay a loan to there being a call option built into the loan. The borrower can exercise the option to pay down their loan ahead of schedule any time they want. In typical options markets, the seller of the option (the lender) is usually compensated by the option buyer (the borrower) for the option.

I've brought this all up because Prosper allows prepayments and it's an interesting mathematical way to view prepayment risk. There is an intrinsic value to the prepayment option, and it's value should be captured. Because of this, I'll be adding a prepayment risk factor to my Prosper loan value modeling.

Prosper VP To Toughen Up On Late Payments?

I completely missed this. Fortunately, Lending Stats didn't. From their September e-mail only newsletter:

Prosper Tackles Collections

Prosper is pleased to introduce our new VP of Operations, Doug Fuller. Doug brings 25 years of experience to the Prosper team and will be instrumental in helping our team crack down on delinquencies and ramp up our collections efforts. We are excited to have Doug on board; he will help us to continually make Prosper a safer and more reliable marketplace for all users. Doug is a huge asset to the Prosper team and we look forward to updating you on his systemic improvements in Prosper operations.

Some enterprising Googlers on the forums found a possible candidate and a possible resume. IF (and that is a big if at the moment) this is the right guy, he has some interesting default handling credentials. I'm cautiously optimistic.

First Select Corporation/Providian Financial, 1999 to 2002
Senior Vice President FSC – Corporate Analytics & Process Management
Responsibilities:

• Overall responsibility for the development and refinement of First Select's collections strategy as well as the processes and infrastructure necessary to support that strategy.
• Development, implementation and monitoring of decision models.
• Development team for Recovery Data Warehouse.
  
• Development and implementation of new Recovery Management System.

Accomplishments:

• Led joint development process with Ontario Systems to create “next generation” collections and recovery system. Included automated workflow, embedded decision rules, integrated process test and evaluation capabilities, and self-documentation of account history. All committed dates met or exceeded. 1.3 Million accounts transferred with no loss of production time. First week productivity improvement of 37% for outbound phone reps.
• Design and implementation of Phone Channel Call Prioritization and scheduling system. Results in a 3x increase in “Promises to Pay” per outbound dialer hour. At the same time, resulted in a 30% reduction in outbound calls placed.
• Development of Portfolio Pricing model and methodology as well as “Process Yield Model” to forecast and monitor account movement and revenue production through process.
• Design and implementation of Recovery Data Warehouse. Received assignment after previous attempt costing more than $2MM and 24 months effort was declared a failure. Prototype live in less than 10 weeks. Production Model live three months later. All committed dates and budgets met or improved.

Linkfest

It's Friday and I've had a long week at the day job (hence, few posts), so now I'm just lazy. Let the linkfest begin...

Lending Club comes out:

This is it. The great moment we have been working towards: expanding Lending Club beyond Facebook and making it available to anyone out there looking for better rates. We continue to enhance and support our Lending Club application in Facebook, but now, users don’t have to be in Facebook to use our site.

As part of our public launch, we are unveiling new features that will benefit the whole p2p lending community, whether you are a Facebook user or not.

Prosper Lending Review spots a Newsweek article on Prosper:

I find it interesting that peer to peer loans are compared against credit cards instead of banks or home equity loans. Matt wrote a good article back in July about when it makes sense to borrow from Prosper - Why would a borrower use Prosper instead of a traditional bank? He did not consider credit cards in his analysis but my gut tells me that credit cards are only going to beat banks or Prosper if you have a promotional rate. Generally credit cards are not a good place to carry a large balance. In fact, my personal recommendation is to never carry a balance on credit cards.

Press Piece - Borrowers ask cyber-friends to fund debts, dreams:

Never lend money to a friend, the old saying goes, but what about lending to a stranger a few keystrokes away?

The emergence of online communities has prompted some people needing funds to pay off debt or pursue their dreams to turn to cyber-friends to help them, rekindling people-to-people lending and investment opportunities that sidestep banks.

zcommodore looks at the percentage of funded listings in groups:

Periodically, I check how many listings there are on Prosper (2220 last check a few minutes ago) and how many are not in a group. Then I get out my calculator to find out the percent of "no group" listings relative to all available listings.

Studying The Lending Market Summary

I've had a few days to ruminate over the Prosper's August lending market summary, and I've found a few items that are noteworthy. Specifically, their "Prosper Select" criteria and the top Prosper borrower states.

The Prosper Select criteria were listed in the fine print at the bottom of the release:

The Prosper Select Index return is the estimated average annual return on invested principal, based on actual delinquency performance to date. The Prosper Select Index includes AA - E credit grade loans for borrowers whose credit reports at the time of application indicated zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less. The annual return period reflects loans originated in the twelve month period ending one month prior to the observation date of August 31, 2007. Prime Select includes AA and A credit grade loans (credit scores of 720+). Near Prime Select includes B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime Select includes E credit grade loans (credit scores between 560 and 599).

The Prosper Select criteria was DTI less than 40%, 0 current defaults, and 0 to 3 credit inquiries. This was of mild interest until I noticed that the sub-prime category was returning 14.95%. Then I became really interested. The table below compares the Prosper Select ROI versus Prosper's overall ROI.

	AA	A	B	C	D	E
Prosper Select	9.05%	9.58%	9.86%	9.56%	13.77%	14.45%
Prosper In General	9.36%	7.79%	7.33%	4.84%	2.36%	-9.11%

That is a huge swing in ROI for the lower credit grades, implying an equally huge delta in default rates. There may be something to this whole Prosper Select thing.

As I had previously noted, Prosper doesn't have equal access to the lending markets in all states due to usury laws. I had ranked the 20 most populous states based on a quick estimation of Prosper's ability to service the market. They confirmed the jist of my post when they listed their top states:

Top Five Prosper Borrower States in August 2007

1. California
2. Georgia
3. Illinois
4. Ohio
5. Florida

I ranked California, Georgia, and Illinois as excellent loan opportunities with their maximum loan rate of 30%. Ohio was also ranked excellent but had a maximum loan rate of 25%, which appeared to be sufficient to slow it down. Florida, despite having twice the population of Georgia, was 5th on Prosper's list. I suspect that this is because of their maximum loan rate of 18% and only achieving a "good" rating. Any guesses why the "marginal" rated Texas (2.5x Georgia's population) and New York (2.1x Georgia's population) failed to make the top 5 list?