| Type | Private |
|---|---|
| Industry | Credit (finance) |
| Founded | California, USA |
| Headquarters | San Francisco, USA |
| Key people | Chris Larsen |
| Products | Personal loan marketplace |
| Website | www.prosper.com |
Prosper Loans Marketplace, Inc. is a San Francisco, California-based company in the emerging peer-to-peer lending industry. The company operates Prosper.com, a website where individuals can buy loans and request to borrow money. For most of its history, Prosper acted as an eBay-style online auction marketplace, with lenders and borrowers ultimately determining loan rates using a Dutch auction-like system.[1] Effective December 19, 2010, Prosper filed a new Prospectus with the SEC, changing its business model to use pre-set rates determined solely by Prosper based on a formula evaluating each prospective borrower's credit risk.[2][3] Under the new approach, lenders no longer determine the loan rate. Instead, they choose whether or not to invest at the offered rate, under a business model similar to the one developed by rival peer-to-peer lender Lending Club.
Prosper verifies selected borrowers' identity and personal data before funding loans[4] and manages loan repayment. These unsecured loans are fully amortized over a period of one, three, or five years, with no pre-payment penalties. 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.[5] 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, TomorrowVentures and Meritech Capital Partners.
In April 2008, Prosper aligned with the Utah-charted WebBank. Previously, Prosper operated under individual lending licenses issued by various states, and was subject to each state's maximum interest rate laws.
On December 1, 2008, Prosper Loans Marketplace Inc. entered into a settlement with state securities regulators over sales of unregistered securities.[6]
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Prosper has provided an increasing amount of information about prospective borrowers over time, while also making various changes to its credit policy.
Prior to its 2008 shutdown and 2009 SEC registration, the company provided "Credit Grades" and other credit information about its prospective lenders. Following the SEC registration, the company created a new model that determined "Prosper Ratings" instead. Additionally, new prospective borrowers were required to have an Experian Scorex PLUS credit score of at least 640, while returning borrowers only needed a score of 600 to request a loan.[7]
Since its SEC registration in 2009, Prosper has provided a proprietary "Prosper Rating" for prospective borrowers based on the company's estimation of that borrower's "estimated loss rate". According to the company, that figure is "determined by two scores: (1) the credit score, obtained from an official credit reporting agency, and (2) the Prosper Score, figured in-house based on the Prosper population." Prosper Ratings, from lowest-risk to highest-risk, are labeled AA, A, B, C, D, E, and HR ("High Risk").[8]
| Prosper Rating: | AA | A | B | C | D | E | HR |
| Estimated Average Annual Loss Rate: | 0.00%-1.99% | 2.00%-3.99% | 4.00%-5.99% | 6.00%-8.99% | 9.00%-11.99% | 12.00%-14.99% | 15.00%+ |
Lenders considering a bid on the borrower's loan listing also have access to summary credit data from the prospective borrower's Experian credit history, including number of current delinquencies, amount currently delinquent, delinquencies in the past 7 years, and other data.
Prior to its SEC registration, Prosper rated prospective borrowers for creditworthiness by assigning a "Credit Grade" based on the borrower's Experian Scorex PLUS credit score. Credit Grades ranged from AA (lowest risk), A, B, C, D, E, and HR (highest risk).
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.
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 0.5%-4.5% depending on the borrower's Prosper Rating, and lenders pay a 1% annual servicing fee. Prosper's standard product is an unsecured 3-year loan for up to $25,000.
Lenders are a party to the loan for the full term, be it one, three, or five years. As the borrower repays over the life of the loan, the payments accumulate in the lender's Prosper account. This money may then be invested into new loans, or transferred back to the lender's bank account at any time. However, if the account balance is below the $25 minimum, the lender must transfer the entire balance at once.
Originally there was no secondary market for Prosper loans, but in October 2008 Prosper announced plans to create a secondary market through an SEC filing. That secondary market was developed with Folio Investing, and sales on the platform incur a 1% servicing fee payable by the seller.
On November 24, 2008, the SEC found Prosper.com to be in violation of the Securities Act of 1933. As a result of these findings, the SEC imposed a cease and desist order on Prosper.[9]
On November 26, 2008, a class action lawsuit was filed against Prosper in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all loan note purchasers in Prosper's online lending platform from January 1, 2006 through October 14, 2008 and alleges that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit seeks class certification, damages, the right of rescission and the award of attorneys’ fees.
Prosper's insurer, Greenwhich Insurance Company, refused to pay for defense expenses, claiming the matters involved were not covered by the insurance policy. On December 14, 2010, Judge Richard A. Kramer of California Superior Court issued a tentative decision ruling for Prosper on this limited issue and holding that Greenwhich is obligated to defend Prosper in the class-action suit and to reimburse Prosper's litigation expenses so far. Although the decision did not rule on the lawsuit itself or address whether Prosper might be entitled to insurance coverage in the event any of the lawsuit's claims proved meritorious, it relieved Prosper of significant legal expenses in the interim.[10]
On April 28, 2009, Prosper.com reopened their website for lending and borrowing without having obtained SEC registration. After the relaunch, bidding on loans was restricted to residents of the U.S. state of California.[11]
On May 9, 2009, Prosper.com was closed down again by the SEC.
On July 10, 2009, Prosper's registration statement with the SEC was declared effective,[12] and the marketplace resumed lending on July 13, 2009.[13]
As of October 28, 2009, Prosper lenders and loan purchasers can reside in 28 U.S. States and the District of Columbia.[14] Businesses with licenses in any of those states can also lend money and purchase loans. Residents of three states (Iowa, Maine, and North Dakota) are not permitted to borrow on Prosper.[15]
According to the Prospectus issued to investors on July 13, 2009, Prosper notes since relaunch are obligations of Prosper Marketplace and not of the original borrower. Prosper promises to pay the noteholder funds it receives from the underlying borrower. Noteholders of Prosper notes are considered unsecured creditors of Prosper Marketplace with limited recourse against it. The Prospectus states that in the event Prosper becomes insolvent or declares bankruptcy, investors in Prosper notes may lose all or part of their investment even if the underlying borrower continues to pay. Investors' recourse in the event borrower-supplied information proves incorrect for any reason is also "extremely" limited.[16]
As of May 2011, the Better Business Bureau rates Prosper as a B+ with 25 complaints filed in the last 36 months, of which 21 are classified as "resolved" and 4 as "administratively closed".[17]
As of August 2008, approximately 18.5% of all money loaned on Prosper from inception (February 2006) through June 2008 were in some form of delinquency. Also, more than 35% of all loans that originated in February 2007 were in some form of delinquency.[18][19]
As of January 24, 2010, Prosper reported that 22.45% of all money lent since inception had been charged off and an additional 2.51% was delinquent but not yet charged off. Charge-off rates by credit score category ranged from 11.57% of money lent to borrowers with a credit score of 760 or higher to 44.30% of money lent to borrowers with a credit score below 600.[20] Eric's Credit Community reported generally consistent delinquency results, with a 24-month delinquency rate by credit grade for loans originated after January 1, 2006 ranging from 11.8% for 'AA' loans to 61.6% for 'HR' loans.[21] The charge-off rates in many cases exceeded the interest received on the loan categories, resulting in a negative return. Erics reported that the median return to Prosper investors was negative 2.00% and the mean return negative 2.28.[22] More than half of all Prosper investors lost money, and some lost a substantial portion of their investment.
In the 4 years between inception (Feb 2006) and March 9, 2010, an average of over 2,000 Prosper loans were charged off per year. .[23] However, in the 1 year since relaunch, with higher credit requirements (Aug 1, 2009 to Aug 11, 2010) there have been only 58 loans charged off. .[24] However, that number more than doubled by November 18, 2010.[25]
Also, after Prosper's relaunch in July 2009,[26] and implementing stricter credit guidelines for borrowers [27] Prosper's default loan rate has been significantly reduced.
After the July 2009 relaunch, the percentage of all loans that are 6+ months old, and are 1+ month late, have dropped to less than 4%.[28] As of Aug 11, 2010, the 4 months that match these criteria are the lowest percentage of late payments Prosper has seen since inception.[29]
Since its 2009 relaunch, Prosper's loan originations and income have remained limited, and expenses have substantially outpaced income. In its Form 10-Q filed with the SEC for the third quarter of 2010, Prosper reported ordinary income of $0.8M and ordinary expenses of $7.9M, resulting (with minor adjustments) in a net loss of $7.5M and a net cash outflow of $7.3M for the first nine months of 2010. Although a new Series D funding round of $14.7M in April 2010[30] replenished Prosper's coffers, these operating losses cut into its funding rapidly, leaving Prosper with $6.55M in cash as of September 30, 2010, less than it had lost during 2010's first 9 months.[31] As Prosper's Form 10-Q noted, "The Company is dependent upon raising additional capital or debt financing to fund its current operating plan. Failure to obtain sufficient debt and equity financings and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect Prosper’s ability to achieve its business objectives and continue as a going concern. There can be no assurances as to the availability or terms upon which the required financing and capital might be available." [31] Prosper management reported that "However, we believe that our current cash position is sufficient to meet our current liquidity needs." Nonetheless, Bloomberg BusinessWeek reported on November 11, 2010 that Prosper was seeking additional funding.[32]
Prosper received an additional funding infusion in a Series E round on June 3, 2011. According to Prosper's SEC filing, the company raised $17.15 million by selling additional shares at an average of approximately $0.738/share. Series E investors included Draper Fisher Jurvetson, Crosslink Capital, Accel Partners, Agilus Ventures and TomorrowVentures 2010 Fund, LLC. .[33] The Series E share price was similar to the price of its Series D round in April 2010, but less than a tenth the price of the Series C round in 2007.
In May 2008, Prosper made a filing with a United States bankruptcy court in which it denied ever having originated a loan to a man who was declaring bankruptcy. Prosper claimed, instead, that it merely acted as an agent of the man to obtain small loans originating from many lenders. According to Motley Fool, this filing was directly contrary to Prosper's statements in its legal agreements (Lender Registration Agreement) which state that Prosper itself would originate all loans and then sell pieces of them to the system's "lenders".[18]
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 Dec. 24, 2007, Public Citizen Litigation Group responded on behalf of Prosper Report.[34]
On May 2, 2008, Prosper announced on its "official blog" the delay of selling some $6 million of defaulted loans to junk debt buyers, which has been put on halt indefinitely. Debt Sale Update [18]
Lenders[35] have criticized Prosper for the deletion of all content on its own official forums which contained a large amount of data, analysis, and lender/borrower interaction.[18][36]