Prosper Marketplace

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Prosper Marketplace, Inc.
Type	Private
Founded	California, USA
Headquarters	San Francisco, USA
Key people	Chris Larsen, John Witchel
Industry	Credit (finance)
Products	Personal loan marketplace
Website	www.prosper.com

Prosper Marketplace, Inc. is a San Francisco, California-based company that operates Prosper.com, an online auction website where individuals can buy loans and request to borrow money. Borrowers set the maximum interest rate they wish to pay^[1], and loan buyers, called "lenders," bid on specific loans by committing a portion of the principal and setting the minimum interest rate they wish to receive on a particular loan^[2]. Prosper manages the reverse dutch auction, assembling bids with the lowest interest rates in order to fund the loan.

Prosper verifies selected borrowers' identity and personal data before funding loans^[3] and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.

Prosper publishes performance statistics on the website; these are available to the public at large.^[4] All transactions are in US dollars; lenders and borrowers must be US residents.

Prosper opened to the public on February 5, 2006. Prosper was founded by Chris Larsen, who also founded E-loan, and John Witchel and is backed by Accel Partners, Benchmark Capital, Fidelity Ventures, Omidyar Network, DAG Ventures and Meritech Capital Partners.

In April 2008, Prosper aligned with the Utah-charted Web Bank. Previously, Prosper operated under individual lending licenses issued by various states, and was subject to each state's maximum interest rate laws. By afiliating with Web Bank, Prosper borrowers nationwide (except in Texas and South Dakota) can offer a maximum interest rate of 36%, which lenders can then bid down.

1 Credit grades
2 Business model
- 2.1 Liquidity of purchased loans
3 Criticisms
4 See also
5 References
6 External links

[edit] Credit grades

Prosper rates prospective borrowers for creditworthiness by assigning a "credit grade" based on the borrower's Experian's Scorex PLUS credit score. Prosper credit grades are (starting with the highest) AA, A, B, C, D, E, and HR (high risk). Lenders considering a bid on the borrower's loan listing have access to the borrower's credit grade, along with summary credit data from the prospective borrower's credit history, including number of current delinquencies, amount currently delinquent, delinquencies in the past 7 years, and other data.

Equivalent credit scores for Prosper credit grades are:

Grade:	AA	A	B	C	D	E	HR
Score:	760+	720-759	680-719	640-679	600-639	560-599	520-559

In addition to credit data, lenders also see the borrower's group membership, if any, friendships with other Prosper members, endorsement from those friends, past listings and prior Prosper loans. Both borrowers and lenders are anonymous (identified only by screen names) to protect their privacy.

[edit] Business model

Prosper has a transaction-based business model, in which the company collects revenue by taking a fee on its customers' transactions. Borrowers who receive a loan pay an origination fee of 1-3% depending on the borrower's credit grade, and lenders pay a 1% annual servicing fee.

[edit] Liquidity of purchased loans

There is no secondary market for Prosper loans, and lenders have no access to funds invested in loans until borrowers repay. Lenders must wait until $25 accumulates in their account before they can withdraw funds. To overcome this limit, lenders may transfer money into the system, bringing the balance to $25 or more, so that they may initiate a withdrawal.

[edit] Criticisms

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[edit] Interest on deposits, transfer speed

Prosper does not pay interest on idle funds due to rules associated with pooled accounts^[5]. Persons transferring money to Prosper wait 4 business days before transferred funds can be bid^[6], and then from 1 day to 2 weeks for the auctions to complete and loans to be funded for interest income to begin accrual. A lender's cash balance in his or her Prosper account can be transferred at any time to a linked external checking or savings account^[7].

In response to customer complaints, Prosper began allowing "instant transfers" of amounts between $500 and $10,000 for established lenders with a loan portfolio of at least 5 times the amount of the transfer.^[8] Prosper has begun a new campaign which allows individual lenders with a facebook account to install a Prosper.com lender application within their facebook profile. This will enable instant transfer of amounts between $50 and 90% of the lenders total account value. ^[9]

[edit] Loan performance and collections

Prosper's performance statistics report that Prosper has originated 16,470 loans from its inception through November 30, 2007. As of April 28, 2008, 1,450 (8.8%) have defaulted (declared bankruptcy or been sold for pennies on the dollar to a junk debt buyer). Another 1,151 (7%) are 4+ months late; historically, almost all of these will default. Thus, 15.8% of all loans originated through November 30, 2007, either have defaulted or will shortly do so. Another 737 (4.5%) of these loans are at least 1 (but less than 4) months late; historically, most of these will default. In total, 20.3% of all Prosper loans originated through November 30, 2007 are 1 month late or worse.^[10]

As a group, E and HR borrowers have resulted in negative return on investment for Prosper lenders: -8.1% for E borrowers and –24.1% for HR borrowers, looking at all Prosper loans originated before November 30, 2007. The returns on the other credit grades have been 0.6% for C borrowers, 2.1% for B borrowers, 5.68% for A borrowers and 6.72% for AA borrowers. ^[11]

Lenders and group leaders who contact late borrowers requesting payment will be banned from the site, as Prosper asserts that most lack the necessary knowledge of collections law to make appropriate collections contact.^[12]

As of April 28, 2008, the median estimated return on investment ("ROI") for Prosper lenders with more than 20 loans and an average loan age greater than 6 months is 5.64%.^[13] -- after taking into account Prosper's servicing fee charged to lenders (1% annual fee on all loans).^[14] The top 10% of all such lenders have an ROI of at least 10.31%. The bottom 10% of all such lenders have an ROI of -1.26%. 13.6% of all such lenders have a negative ROI.

[edit] Trademark dispute

Prosper sent a cease and desist letter to a third-party commentary website, Prosper Report, for using the word "prosper" in its domain name. On December 24th, 2007, Public Citizen Litigation Group responded on behalf of Prosper Report.^[15]