Ten things that will change your future from the Sydney Morning Herald
"PEER-TO-PEER LENDING Whether you're distributing music or books, auctioning off unwanted household items, wanting to bet on a horse race or looking for a soulmate, the internet can put you in touch with someone who is interested in what you have or are.
Kiva takes that idea and applies it to the established concept of microfinance - making small loans to the working poor to help them establish or expand businesses.
So, instead of giving a donation to an organisation such as Oxfam to distribute, peer-to-peer lending lets you invest small amounts directly in a particular entrepreneur - such as Mohamad Marah in Kabala, Sierra Leone. With his $US200 loan, Marah has been able to expand his garment business, buying three extra sewing machines. So far he has repaid half the loan. More than $US15 million has already been lent through Kiva - and the default rate is claimed to be just .23 per cent. http://www.kiva.org"
Many using Web sites to find, help entrepreneurs around the world from the North Jersey Media Group
"...Some philanthropy experts worry that the peer-to-peer lending sites could suck away money from traditional charities such as UNICEF. And microlending has its share of critics..."
Get real: People will want to connect in 2008 from the USA Today
"Eisenbeis says we should expect to see more examples of 'people banding together to help each other out,' whether it's groups picketing home loan companies or individuals starting so-called peer-to-peer lending programs to assist those experiencing foreclosure and personal bankruptcy.
'There's a 'we're all in it together' feeling out there that's only going to grow as more people get affected by issues such as housing and health care,' Eisenbeis says. 'People are going to lean on each other and push those in power to find the necessary solutions.'"
Peer-to-peer lending the 'eBay of loans' from Deleware Online
"The market for the loans is still relatively small but growing fast, according to Celent, a research firm. Celent projects that $5.8 billion in peer-to-peer loans will be made in the U.S. by 2010, an 800 percent leap from the amount this year...
The more established players -- such as Prosper and CircleLending, which sold a majority stake in the company and rebranded itself Virgin Money US this year -- dominate the business. But more rivals are entering the industry at a time when even people with good credit are finding it harder and costlier to borrow from traditional sources.
In December, Zopa opened up shop in the U.S. Also this month, Lending Club, which began as a service for Facebook members, expanded nationwide.
'It seems that the credit crunch is accelerating our growth,' says Renaud Laplanche, CEO of Lending Club."
- Named one of the 50 best websites of 2007 by Time
- Passed $100 million in loans (now at $108 million)
- Changed the way they interact with members - after several forum riots and other tense public clashes with some members Prosper deletes their forums without notice and re-opens another more moderated forum; started an official blog; starts a monthly lending market survey; starts webinars to educate new lenders and borrowers
- Registers with SEC to create $500 million secondary market for p2p loans
- Announces plans to spread to Japan
- Receives $20 million in venture capital for a total of $40 million raised
- Launches inside of Facebook and loans $100,000 during the first month (now at $4.5 million)
- Expands to users outside Facebook
- Becomes the first p2p lending platform to loan to borrowers nationwide without state-by-state lending caps
- Hosts popular YouTube video contest
- Receives $10 million in venture capital
- (Disclosure: I recently started blogging for Lending Club. Read my Lending Club posts here.)
- Expands from the U.K. to the U.S.
- They announce a very new P2P lending model comparable to a certificate of deposit at a bank or a termshare certificate at a credit union. You also have the option to reduce the rate to help out borrowers. The loans are federally insured and currently earn 5.1%.
- Richard Branson purchases Circle Lending and rebrands it as Virgin Money USA
- Announces they will launch on October 2nd but then delays for "lending licenses and website development"
- This week they just launched a new webpage and appear to be open for institutional lenders and will allow borrowers to sign-up, but individual lenders must wait
- Receives some minor attention in the media during the summer and, like GlobeFunder, announces they will launch in the fall but delays
- Currently advertising on homepage that they are "Coming January 2008"
In June we started Prosper Lending Review. It's been fun and we have learned a lot. According to visitors, these are our most popular articles in 2007.15 Most Popular Articles of 2007
A Prosper scam: The story of Jessica Wolcott
Prosper: A hands-on education in risk management
How does Prosper compare to other investments?
Prosper Lending Review - the first month
When to bid on Prosper loans
Review: Top Prosper Blogs
What is Loanio?
Borrowing money to lend on Prosper: Wise or Foolish?
Credit Scores on Prosper - Part 1 of 2
Why would a borrower use Prosper instead of a traditional bank?
Equity sharing - Prosper for real estate
Loanio prepares for fall launch
Prosper Lending 101 - webinar review
Prosper CEO: Lenders avoid subprime and 'flight to safety'
Lending Club announces $5000 video contest
The most popular articles are not always the most useful articles. While A Prosper scam: The story of Jessica Wolcott may be interesting reading, it is not going to provide solid actionable investment advice like some of the following articles. If you are about to commit your hard earned money to p2p investments it makes sense to do as much research as you can. Of the 100+ post of the last year I recommend that following ten as required reading for all investors (I'll also note they they were all written by the other co-author of this blog, Matt):
10 Best PLR articles of 2007
How does Prosper compare to other investments?
Prosper: A hands-on education in risk management
Why would a borrower use Prosper instead of a bank?
Borrowing money to lend on Prosper: Wise or Foolish?
Most Prosper lenders do not diversify
Are all Prosper loans within a credit grade created equal?
An analysis of pre-payment risk on Prosper loans
Are non-homeowners a safer lending risk in a declining house market?
Credit Scores on Prosper - Part 1 of 2
When to bid on Prosper loans
We look forward to 2008 and the many changes it will bring to the p2p lending marketplace. Happy New Year!
Here are the results of the debt sale as reported by Prosper:
Debt Sale Weighted Average Prices
- Homeowners - 12.5%
- Non-homeowners - 7.3%-9.6% depending on credit grade (NC was 4.8%)
- Texas (all) - 3.5%
In addition, Lending Club recently announced a very nice bonus for lenders - 5% cash bonus if you lend $5,000 or more by February 3, 2008. This is on top of the $25 referral bonus if you sign up through a referral link.
Debt sale: As reported on December 22nd: "We have recently concluded bidding on a package of Prosper loans and are in the process of negotiating terms of the Purchase Sale Agreement with the winning bidder. We are looking to execute the sale as soon as possible."
Aggressive debt collection pilot: As reported on December 22nd: "Prosper is testing a collection law firm and is recording this on member accounts as 'New Agency Test'. This is a limited pilot to test the process of collecting more aggressively on Prosper Accounts. Thus far, in approximately one month, we have seen an uptick in payments and promises to pay in almost 10% of the accounts and the law firm has had direct contact with more than 1/3 of the accounts in the test. These results are encouraging. Actual suits will be initiated on the non-payers in early January. We expect an additional 5% of the accounts to come to terms once they receive service of process."
I'm surprised that Prosper didn't choose to make these announcements on their new blog. Thanks to Rateladder for notifying us of these changes on his blog (debt sale, debt collection pilot).
Renaud Laplanche, CEO of Lending Club based in Sunnyvale, Calif., said lenders in the online community are regular people who don't operate under the same restrictions banks do and are not affected by the credit crunch.
He said loan volume has been increasing 100 percent each month since the company opened in May. This month, about $4 million in loans were made through the Web site. The three-year unsecured loans are $5,000 to $7,000 at interest rates of between 10 percent and 12 percent.
'It's a good rate for the borrowers and an attractive rate for the lenders,' Mr. Laplanche said, adding that the default rate is less than 10 percent. 'I think the credit crunch is a contributing factor (in the increased volume.) There are other factors, but the credit crunch is a main factor.'"
This exciting growth and the mainstream adoption of p2p lending in the general public will cause new p2p lending companies to emerge in the U.S. and throughout the world. We have observed several projects on freelance coding websites to build "Prosper clones."
- The first advertisement was in late June on Rent a Coder. The winning bid was Hiren Kotadiya from India who agreed to build a Prosper clone for $250.
- Next we found an ad on iFreelance.com from someone looking for help building a peer-to-peer lending site.
- A third ad in July on ScriptLance asked for help building a site similar to Prosper.com.
- A fourth ad, also in July, on Getafreelancer.com asked for someone to build a P2P lending site for the Asian market.
Another project just appeared on ScriptLance. Someone wants to build a "Prosper or Zopa Clone." The project budget is $300-600 and here is the description:
"We are looking for clone of either Prosper or Zopa or a mix of these two sites. We need full design, programming and setup of the website and the underlying databases. the clone must not be violating copyrights of prosper nor zopa.
- Programming languages to be open source (e.g. PHP/mySQL)
- has the features and functionalities of prosper or zopa
- online payment gateway integrated
- Daily communication / update during website building is necessary (via email/msn/or PMB)
- Bidders please state clearly your delivery timeframe and link of demo. Thanks for bidding!"
The report was originally expected to come out earlier but due to the rapid changes in the market he delayed the report. As he explains on Netbanker, "I had originally intended on publishing it in early December. But as I was trying to wrap things up, Zopa launched its new U.S unit. So I stopped the presses and added an analysis of its unique model. Then as I was finishing that, Lending Club made a significant change last week, becoming a national lender instead of state-sanctioned one. That too is now in the report."
Here's the abstract:
Person-to-person lending is the perfect product for the Web 2.0-social-networked consumer. Why, then, has growth been relatively slow compared to other networked services? Because it’s a difficult business. Not only are P2P lenders competing with 20,000 other financial institutions for good borrowers, the are up against thousands of investment alternatives for funds to lend, all the while waging a fierce battle with fraudsters and deadbeats. It’s not a business for the faint of heart.
In this report, we look at the market as a whole, examining the strengths and weaknesses of existing products. We list opportunities both for web-based startups and existing financial institutions and lay out a ten-year market forecast. Finally, we take a close look at the four major U.S. P2P lenders: Prosper, Lending Club, Zopa and Virgin Money.
If you would like to have a copy of the report you can get it here. It's only $595.
- How salaried employees can increase their hourly rate - a discussion of an article I found on OmniNerd.com called Paid Twice a Month versus Every Two Weeks.
- Seven steps to wealth - What does Dr. William D. Danko who wrote The Millionaire Next Door - The Surprising Secrets of America’s Wealthy have to say? Believe it or not, the wealthy are not usually those that make the most money.
- Avoid Lending Scams - In connection with my blogging here on PLR I received a letter from a lady who was a victim of a lending scam. On the Lending Club blog I shared excerpts from her letter and tips from the FCC on how to avoid these scams.
- Gambling away wealth - Gambling is one of those money suckers that can quickly consume your income before you know it.
I've enjoyed being part of the blogging team and have learned a lot from the other personal finance bloggers. Two recent articles from DebtKid were quite popular on Digg - 7 Mistakes Geeks Make With Their Money (and How to Fix Them!) and 7 Dating Tips - Ideas for How to Save Money.
New Prosper blog - Propser started a new blog two weeks ago and today they announced that Rateladder will be the editor-in-chief. Rateladder runs several peer to peer websites (RateLadder, ProProsper, and P2P No Bank) and has been a lender on Prosper since July 2006.
So far I've been quite impressed with Prosper's blog. They have pulled in several great writers with different perspectives. Here's a quick run down of the highlights:
- LazyMan, runs Lazy Man and Money blog - Do You Need a Budget? and How Many Income Streams Do You Have?
- Brett McKay, author of The Frugal Law Student - 6 Ways To Save on Traveling This Holiday Season
- The Silicon Valley Blogger (SVB) from The Digerati Life - 10 Super Strategies To Manage Your Debt
- Omahajay - Lender experience
- Mapgirl from Mapgirl’s Fiscal Challenge - Why I Love Being a Prosper.com Lender
- Eric Petroelje from ericscc.com - Follow the Leader: Watching Lenders and Groups on ericscc.com
- Mike from Prosperous Land - Diggin’ For Gold Around The Portfolios
In addition to a variety of guest posts, the Prosper blog also has updates from Prosper staff. This is a welcome addition and something I asked for when I reviewed the top Prosper blogs last summer. Previously Prosper had communicated with users through their forum and John Witchel's (Prosper CTO) blog on prospers.org. That prospers.org blog has since been removed and there is quite a online battle right now with some dissatisfied users. The blog is certainly a step in the right direction to communicate effectively with the public.
Pennsylvania, for example, is the sixth most populous state with over 12 million people. Based on their state lending laws, Prosper only allows loans to borrowers residing in Pennsylvania at 6% and below. Rather than helping borrowers get a good interest rate the practical effect of this legislation has been to prevent borrowers from obtaining a loan. According to LendingStat's loan breakdown by state, only 21 loans have been made to Pennsylvania borrowers ranking them a distant #43 despite their large population. Almost all of these 21 loans are for the minimum loan amount - $1,000.
Some people have attempted desperate measures to obtain a p2p loan despite the rate caps. Eric, who runs deepmarket.com, tried to get a loan on Prosper despite an 11% cap on loans from Virginia. He even offered double interest on the side by immediately paying lenders through PayPal but his loan still did not fund.
Lending Club has finally eliminated all this confusion – they are available to borrowers in all states and are not bound by state interest rate limits any more. In the official announcement, Lending Club CEO Renaud Laplanche said, “We went National today, 6 months after the launch of our Facebook application and 3 months after the limited opening of our public website at http://www.lendingclub.com/.” He estimates that this will open up their platform to an additional 108 million borrowers.
From May 24 to December 14 Lending Club has issued 505 loans worth nearly $4 million. Prosper, which has been around longer, has issued over $100 million in loans. While Lending Club is now available to many more borrowers they still limit borrowing to users with a FICO score over 640. They have had over 4,000 loan applications worth $36 million which have been disapproved.
Read more here:
TechCrunch - P2P Loans GainingTraction. Lending Club Goes Nationwide
Mashable - Lending Club 6 Months Later: Does Peer-Lending Work?
CenterNetworks - Lending Club Now Offers Loans in All States; Releases Six-Month Loan Data
Technically Speaking - Lending Club is now live nationwide in all 50 states
Disclosure: I currently blog for Lending Club. Read my Lending Club posts here.
After p2p cell phones, p2p electricity and others he unveils p2p banking:
It's fairly common knowledge that the money in our bank accounts isn't sitting in some vault somewhere. Banks make money by loaning your money out to other businesses and individuals at a higher interest rate than they give you for loaning your savings to them. Instead of using a centralized lending service to transfer money from investors to borrowers, a P2P network in this capacity would directly match up chunks of money with chunks of debt, minus the bank part of the equation. Borrowers would run a node specifying how much money they need, for how long, and at what interest rate. Similarly, investors would tell their software how much they want to lend, for how long, and at what rate. Even though the likelihood of a one-to-one match between an investor and a borrower would be very small, the system would be able to work out complex arrangements to make the whole thing add up. Borrowers might be loaning from 50 different people at 50 different rates that work out to be exactly the deal they're looking for when all the rates are averaged. Likewise, investors might be lending their money to 500 different borrowers at 500 different rates that average out to the figure they specified. The P2P architecture could supplant the banking industry as we know it, with money flowing more efficiently between borrowers and lenders. Banks would no longer be able to charge tolls on money as it passed through their system.
Well, not too bad. I'd say he predicted the p2p lending market pretty well.
(CNET article found via Buskirk's comment on TechCrunch article - P2P Loans GainingTraction. Lending Club Goes Nationwide)
In a statement on their website CommunityLend said, "The process that we have just gone through to raise our own capital was not so dissimilar to the process that borrowers will be going through at CommunityLend.com to raise theirs. We believe this alignment around the work and process involved in collecting people around a financial request has made us better facilitators for our customer’s financial needs."
CommunityLend hopes to tap the estimated $110-billion (Canadian) unsecured consumer debt market in Canada as soon as spring 2008. While P2P lending options have greatly increased in the U.S. over the last several months Canadians still do not have any social lending options.
Back in July we wrote about Lending Club's $5 referral bonus. Today Lending Club announced a new referral program that provides lenders with a bonus of up to $50 for referring friends to Lending Club. Lending Club's Rob Garcia answered a few questions about the program on the P2P No Bank forums. Here's an excerpt:
What are the terms of the program?
The referral program was initially introduced back in July as a $5 prize for any friend who joined. We quietly revamped it on Oct 25 to increase the prize to $25 for any friend who became a borrower OR lender. This was a test to see how users will receive it, and we noticed users liked this idea better. Today, we officially launched the program and the rules are:
When you refer friends to Lending Club and they become borrowers or lenders, we will deposit a bonus into both your and your friend's accounts:
- $25 when your friend successfully submits a loan application
- $25 when your friend opens a lender account with $1-$999
- $50 when your friend opens a lender account with $1,000 or more
Can I point my referrals to a different page?
Yes. You can use 2 different links.
LINK 1: http://www.lendingclub.com/landing.action?referrer=ScreenName
This one drops referrals on our home page, and if the user creates an account within the same session, you get the bonus. Use this for friends that still may need to read more on the concept before signing up:
LINK 2: http://www.lendingclub.com/refer.action?referrer=ScreenName
This one drops referrals on the sign-up form. Use this for friends you think are ready to sign.
Does the referred user have to sign up immediately or is the referral stored?
The information is stored in the session, so the referred user has to sign up while in the session. Information is not saved in our back end or a cookie. The session will "expire" if the user closes the browser. This means that if the user closes the window, and comes back next day to sign-up, and types up "lendingclub.com", the system will not recognize the referral.
In addition to changes in the referral program Lending Club announced several other improvements and changes which you can read about on the blog. They include:
- You know can be a borrower and a lender. However, before borrowing to lend you may want to read Matt's analysis of borrowing to lend strategies. Also, you can open multiple loans.
- Lending Club now has a performance statistics page.
- You can now ask borrowers a question.
Update (12/13): Lending Club has produced the following image for websites to use:
I'm happy to announce I have joined the blogging team at Lending Club. Read my first post here:
Four months ago Matt and I started this blog to share our fascination with peer to peer lending. It’s been an exciting time and a great learning experience. When we started the blog in late June we thought it would be a blog strictly about Prosper. That explains the current title - Prosper Lending Review.
At first we didn’t realize the explosive growth in the peer to peer lending community. A new peer to peer start-up, Lending Club, was only a couple weeks old. Our first post about Lending Club announced they had just passed the $100,000 mark in loans.
Lending Club has quickly become a popular topic on this blog. We covered their video contest extensively. The most enjoyable posts for me were these interviews with contestants in the contest:
- Rock star calls peer to peer lending ‘anarchy in its finest form’
- 18-year-old leads in Lending Club’s video contest
- Comedian uses ‘guerrilla marketing’ to promote Lending Club video
- Lending Club’s Battle at Kruger
- Chris Barrett shoots commercial for Lending Club’s video contest
- Lending Club awards $8,000 in YouTube video contest – includes interview with CEO Renaud Laplanche
In addition to the video contest, we announced milestones and news such as their expansion beyond Facebook, new features and a $10 million dollar infusion of venture capital. Sometimes I have been critical of Lending Club like when I (accurately) predicted they would have problems using page views as a metric in their video contest or when I (inaccurately) complained that TechCrunch seemed to favor Lending Club over Prosper (on this more recent TechCrunch post about Prosper and P2P lending they don't even mention Lending Club).
All in all, I have been very impressed with Lending Club and their team. They have done a great job of engaging their community and have grown rapidly. I’m impressed how they used the buzz around Facebook to publicize their launch. I’m equally impressed with how quickly they launched beyond Facebook. Too often peer to peer lending users have to wait longer than expected to see announcements come to fruition (think Zopa’s launch in the USA, Globefunder’s missed launch date, Loanio’s unknown launch date, numerous Prosper controversies, and slow state-by-state expansion). I know that Lending Club is not exempt from the regulatory and other hurdles that stymie peer to peer lending but it was refreshing to see a launch outside of Facebook so soon.
Although I haven’t actually met any Lending Club employees, I’ve interacted with Renaud Laplanche, Rex Dixon, Merry Richter and Patrick Gannon on Facebook, their blog, and via email. They have a top notch team and I’m excited to work with them. I look forward to getting to know more of their other 20+ employees.
They also have a great blogging team – DebtKid, Mike Smith, Maneesh Sethi, Andre Nosalsky and Julian Ramirez. Back in July I made these comments as I reviewed Lending Club’s blog:
“Lending Club is challenging Prosper to become the leading peer to peer loan marketplace in the United States. They have been online since May 26th - just six weeks. I have not signed up as a lender or borrower yet, but I've been watching their blog pretty close. I've been very impressed with their communication with their community through the blog. Of course they have the normal things you would expect on a corporate blog such as Lending Club announcements, but they also make a genuine effort to educate users on sound financial principles (mostly the perils of credit card debt). The posts are not overly technical or complicated. Most seem to be written for the average college age person. Someone who might be applying for their first credit card or taking out their first loan.”
My posts on Lending Club will be similar and cover mostly personal finance topics. Will this blog (Prosper Lending Review) change? Well, to be honest, I’ve been pretty busy. I have a full time day job that includes lots of travel and sometimes my blogging time is very limited. As regular readers have probably noticed, our posts have dropped from a daily in July and August to weekly or less recently. Splitting my time between this blog and Lending Club will likely further reduce the frequency of posts. I will, however, continue to write about P2P lending here. I realize that my position as a blogger for Lending Club may introduce a natural bias to my writing. I will fully disclose my position as a Lending Club blogger on all future posts.
I think it’s appropriate to end with a quote from my new blogging boss – Lending Club CEO Renaud Laplanche. As competition in the peer to peer lending market is heating up and several new companies are poised to enter the market he told CenterNetworks, "Prosper is really the only other person-to-person lending marketplace available in the US at this point, but we do not feel competitive with them at all. Both Prosper and Lending Club can be very successful, and the success of both companies will be much more dependent on how fast we can grow the p2p lending space together rather than how well we compete against each other. With 2.4 trillion dollar in personal consumer debt (other than mortgages), it is a big market out there."
I think he is right. The potential market in the P2P lending space is huge. Hopefully my participation in Lending Club’s blog will help grow that space.
Virgin Group plans to use this site to expand its offerings over the next year to include things like small business financing, student loans, and larger-scale loans.
"When the Fed cuts interest rates people often expect mortgage rates to drop. However, this is rarely the case given that mortgage markets typically anticipate rather than react to moves by the Fed. On the flip side of the coin, the variable credit card and savings rate markets react sometime after the Fed moves. In fact, some variable credit cards have a 90-day window to make adjustments reflecting the rate cut. So the question is: did the Prosper marketplace anticipate or react to the Fed rate cut?
Many might assume that the Prosper marketplace would act less like the mortgage markets and more like the credit card and savings rate markets given that the latter compete with Prosper. Nevertheless, the month over month drop in average borrower rates indicates that the Prosper marketplace may have anticipated the Fed cut.
For example, in September the average borrower rates for all prime and near prime loans funded in the Prosper marketplace were 12.29% and 18.22%, respectively; down 0.37% and 0.28%, respectively, from August.
What is interesting about these percentage drops is how close they are to what was widely anticipated to be a quarter-point instead of a half-point reduction by the Fed. However, what remains to be seen is whether the market will continue to push rates down further in line with the Fed’s surprise move."
Last month Larsen said, lenders are exhibiting rational behavior and "being far more cautious about chasing higher rates offered by subprime borrowers."
Prosper also announced plans for building auto-portfolios much like the ones that are available at Lending Club. You will be able to select a portfolio based on your risk tolerance and your desired return. This is similar to the standing order options they currently have, but with the new interface Prosper will set the standing order criteria that best matches the selected portfolio.
Along with these changes Prosper has announced that they will be increasing the servicing fees for A loans to 1% and decreasing the servicing fee for AA loans to 0% (not a misprint).
Doug Fuller, background:
For over two decades Doug Fuller has been a leader in data driven operations management and process optimization with a specialty in collections and risk-management.
Most recently he served as Chief Research Officer at Credigy, a provider of receivables management services focused on the purchase and servicing of distressed receivables. Prior to Credigy, Dr. Fuller served as a principal consultant for Priority Perspective, where his clients included Credigy, GE Card Systems, Ontario Systems, and Thornton Capital Advisors. Prior to his consultancy, he served as Senior Vice President at First Select Corporation/Providian Financial where he led the development and implementation of collection and recovery management systems. In addition, he led Providian’s fraud management activities including detection and prevention of transactional fraud and identity theft.
Dr. Fuller has served as an advisor for the Visa International Fraud Executive Committee, TransUnion Risk Management Panel, Ontario Systems – Artiva Advisory Group, Intelligent Results – Predigy Advisory Group, and Royal Media – Collection Technology Summit. He holds a Ph.D. in Systems Engineering from the University of Virginia and a B.I.E. with highest honors from the Georgia Institute of Technology.
Doug views his role as a steward for Prosper lenders and the integrity of the marketplace. He believes that it is necessary to be as aggressive as regulations permit and to prosecute the most egregious debtors to the full extent of the law.
Doug is methodical in his approach to collections. Drawing on his decades of experience, Doug has already begun an intensive quantitative and qualitative examination of Prosper and its third party collection agencies’ payment recovery techniques and performance. Based on his initial findings, he is confident that there are some short-term solutions that will have a positive near-term impact on Prosper’s recovery rate. In addition, he has developed a laundry list of longer-term strategies aimed at earning Prosper a reputation as one of the leading payment recovery operations in the industry.
Q: Doug, what’s the best way to evaluate your experience in risk management?
A: In my opinion, in order to really evaluate the breadth and depth of somebody’s experience, it is important to look at such things as “span of control”, size of budget and/or P&L and the number of people that a person has hired or fired. In my case, the largest number of people that I’ve had reporting to me was 342 (Providian Fraud). In my most recent job (Chief Research Officer of Credigy); I headed an organization of 72. In terms of P&L experience, my experience was in the small business environment – the maximum P&L that I was responsible for was $22 million. In terms of budget, while head of Fraud at Providian, I controlled an expense line of more than $110 million.
Q: What kind of experience do you have related to unsecured lending risk?
A: My first experience with unsecured lending risk was when I consulted for Capital One while working on my PhD at the University of Virginia. My PhD advisor and I were brought in by Rich Fairbanks, the founding CEO of Cap One, to look at how well, or even if, they were applying their “Information Based Strategy” to the world of Risk Operations. The resulting report served has the blueprint for a complete overhaul of their Risk organization – including the creation of a new SVP position heading Risk Analytics.
Q: What came next?
A: In the course of doing the “Systems Analysis” for Cap One, it became apparent that they had no analytic talent looking at their credit card authorization subsystem. The problem statement that I was given was “Increase our authorization approval rate without increasing our risk.” The resulting “soft credit limit analysis” system was credited with an $8 million impact to Cap One’s bottom line in the first 12 months of operation.
Q: That’s interesting, but is it relevant to Prosper’s business?
A: It depends on how you look at it – I believe that the combination of quantitative and process analytics can improve virtually any business situation – be it optimizing test coverages to maximize the capacity of a semiconductor module line, revising block scheduling procedures to triple patient capacity in an out-patient endoscopy lab or revising the call sequencing strategy to more than double the number of “right party connects” in a collections call shop.
Q: That last one sounds like its directly relevant, will you tell us more?
A: When I arrived at First Select (charged-off debt buying and collections subsidiary of Providian Financial), the first thing that I looked at was our dialer strategy. It was painfully bad – we had an example of an account where 49 calls had been placed to the same phone number in the course of three weeks – all 49 calls covered a span of less than 90 minutes of the day. We had another case where we made 61 calls to the same disconnected number. The first step was to “stop the bleeding” – quit doing the really, really dumb stuff. The second step was to implement a well designed call coverage and rotation strategy. The first step bought us more than 20% improvement. The second step took about 4 months to accomplish, but doubled our results.
Q: Can you do the same thing with Prosper’s collections calls?
A: Actually, for the month of September, we’ve seen greater than a 40% increase in the contact rates at our primary collection agency.
Q: To what do you attribute the improvement?
A: The squeaky wheel gets the grease. Seriously, the problem that we have is that we have very low volume. At our current primary agency, we represent about 2.5 full time employees of a workforce in a 700+ collector organization. It turns out that on a lot of days, our dialer job was started at about the same time (of day) – not the way to maximize your contacts.
Q: How will you bring about the rest of the improvements you discussed?
A: If the agency is willing to work with me, I’m confident that we can improve. If not, I’m going to find a different agency – or possibly just bring it in-house.
Q: What else are you thinking about for Prosper collections?
A: We have to have a legal strategy. I listened to hours-worth of calls with delinquent Prosper borrowers. One of the things that we emphasize in the call is that the delinquent borrower is not hurting some faceless corporation, they are impacting the 20, 50, 200 “ordinary Joes” that funded their loan. Based on the calls that I’ve listened to, this is a clear advantage in some portion of early delinquency calls – there is a personal connection that motivates the borrower to pay. At some point, this advantage flips – the “debtor” (and I use that term with intent) says to themselves that Citibank and American Express are going to sue me – GMAC going to repossess my car -- what’s Prosper going to do to me? Even though debtors could face lawsuits from the debt buyers of Prosper’s defaulted loans, if debtors don’t think they will be sued, this is a perception we have to change.
Q: Do you have experience with suing people?
A: Oh yes. Between First Select and Credigy, I have been responsible for making the decision to sue more than 150,000 people. There are a lot of lawyers that can’t claim that number of suits in a lifetime.
Q: Well why don’t we just sue everybody?
A: The phrase “blood from a turnip” comes to mind. One of the ways that you can go broke in a big way is by suing people that will never be able to pay you at all. Simple math, it costs a lot of money to sue people.
Q: Okay, so you need to decide who to sue, then what?
A: Put quite simply, my philosophy is this – if you won’t pay, but can (or will in the future) be able to pay, I’m going to sue you. If I sue you I’m going to win.
Q: That sounds kind of arrogant, can you back it up?
A: Courts in seven states have recognized me as an expert at consumer debt litigation. At Credigy, if a case got really nasty, I would go testify live. I refuse to lose.
Q: Really? What’s your win/lose record?
A: In my last 18 months at Credigy, I testified live at 42 trials. My record was 41-1. By the way, I fired the law firm where we lost.
Q: What’s the toughest aspect of this type of lawsuit?
A: By and large, judges are comfortable if you can show them a signature on a piece of paper. The vast majority of judges grew up long before the internet and the passage of the “e-signature” bill during the Clinton administration. Sometimes you’ve got to spend a lot of time educating them.
Q: How do you do this?
A: I have been qualified as an “expert witness” in seven states on the subject of the electronic records of consumer lending transactions. There was a judge in Texas that had me on the stand for more than three hours – the majority of the time, the judge was quizzing me. Other than I missed the last flight home, I thought it was time well spent – he never questioned any of our requests for default judgment after that.
Much to my surprise today in the mail I received a thank-you card from Prosper thanking me for referring a friend. Along with the card there was a free t-shirt. Looks like this might be one of Prosper's new marketing campaigns.
"But are these sensible places to borrow or lend money? The interest rates on these unsecured loans tend to be high, so borrowers with good credit scores could get better rates on most mainstream credit cards. Lenders—anyone willing to put up money in the hopes of earning better rates than they would at a bank—might find more to like. Prosper and Lending Club both check borrowers' credit records and are aggressive about collecting on payments, and lenders can make up to 13 percent on their loans."
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.
Also, can lenders earn up to 13%? Yes, it is possible. Unlikely though. Too many borrowers jump in quickly without considering all the risks. In order to earn higher interest rates you must loan to riskier borrowers. The default rates are so high on the riskiest credit grades that the overall return has been negative. Before lending I would consider reading a couple articles:
Prosper: A hands on education in risk management - Matt introduces diversity and talks about the default rates for different credit grades.
How does Prosper compare to other investments? - Matt answers 11 common questions new Prosper lenders have.
Of course, there are plenty of other articles and websites. The article mentions ProsperLenders.com which has a great collection of resources.
Lending Club just recently received $10 million in venture capital and ran a very popular video contest on YouTube. I've previously written about how Lending Club does not need Facebook.
Update: Lending Club has formally announced their new website and move beyond Facebook - active immediately. Rex Dixon, Lending Club's Director of Social Media Content, reveals that Center Networks accidentally stumbled upon the story last night as they were testing the website changes. Here's Rex Dixon's talks about the transition from the old blog/Facebook-focused site to the new open site:
"The story broke by accident last night. Why is that? Well what happened is the IT guru’s at LC decided to just do the simple DNS switch and stop forwarding the “www” address to the “blog.” address.
This was found out and the story broke on one of my favorite blogs last evening. Allen was doing his job and reading blogs, catching up on news, and he was there to see the switch. Great blogging man, and kudos to you. I’m sorry I had to be vague in our chat last night. He also updated the news, as any great blog should, this morning!"
Prosper has just introduced this first monthly market survey which provides "key statistics including: membership and loan volume statistics; marketplace returns; borrower rates; mix of prime, near prime and sub-prime loans; and noteworthy marketplace statistics and trends" and analysis from Prosper's CEO Chris Larsen. Here is the full text of Larsen's announcement about the current market situation for Prosper:
"The market turmoil stemming from the ongoing credit crunch, subprime mortgage meltdown and housing value slump naturally begs questions about what impact this market environment is having on the Prosper marketplace. In a nutshell, we would categorize the impact as broadly constructive for Prosper lenders and prime and near prime borrowers.
As consumers are being hit with the evaporation of introductory credit card rate offers and home equity loan options, Prosper is becoming an even more attractive financing alternative, particularly for more creditworthy borrowers.
At the same time, lenders on Prosper are exhibiting rational behavior by steering their bids toward borrowers in the higher credit categories and being far more cautious about chasing higher rates offered by subprime borrowers. Evidence of this flight to safety is seen in Prosper’s mix of funded borrowers. For example, the subprime category accounted for only 9 percent of loans funded in August 2007, a marked decrease from August 2006 and the 2007 year-to-date average of 25 percent and 14 percent, respectively.
What remains to be seen is whether lenders on Prosper will start placing less weight on homeownership as a factor in their bidding strategies. It is possible that we may begin to see evidence of this trend given that in our most recent defaulted loan sale the debt buyer placed zero value on homeownership across all credit categories – a highly unusual shift away from placing value on what is typically considered Americans’ largest asset."Here at PLR, we have also noticed the movement of lenders away from subprime or high risk borrowers. In addition, we just wrote an article about how homeowners may actually be a greater risk than non-homeowners given the current market situation. This article was written before the recent Prosper debt sale where homeowners were not given a premium. Here are the statistics that Prosper wants to highlight for their first market survey:
August 2007 Prosper People-to-People Lending Market Survey
Membership and Loan Volume Statistics
| ||August 2007|| ||August 2006|| ||2007 Year-to-Date|| ||Since Inception|
|New Members|| ||30,623|| ||12,825|| ||270,866|| ||408,633|
|Funded Loans|| ||$6.6 million|| ||$3.9 million|| ||$56.6 million|| ||$85.0 million|
|Average Loan Size|| ||$6,733|| ||$5,080|| ||$6,969|| ||$6,037|
|Daily Average Number of Borrower Listings|| ||2,575|| ||1,173|| ||2,202|| ||1,366|
| || || || || || || || |
| || || || || || || || |
Estimated Annual Return on Prosper Select Index
| ||August 2007|
|Prosper Select Index|| ||10.31%|
|Prime Select Index|| ||9.41%|
|Near Prime Select Index|| ||10.73%|
|Sub Prime Select Index|| ||14.95%|
| || |
| || |
Average Borrower Rates on Prosper Select Loans
| ||August 2007|| ||July 2007|| ||August 2006|| ||2007 Year-to-Date|| ||Since Inception|
|Prime Select Loans|| ||10.15%|| ||10.29%|| ||11.64%|| ||10.03%|| ||10.14%|
|Near Prime Select Loans|| ||16.83%|| ||17.08%|| ||16.25%|| ||15.90%|| ||16.06%|
|Sub Prime Select Loans|| ||25.88%|| ||22.13%|| ||28.72%|| ||23.30%|| ||23.89%|
| || || || || || || || || || |
| || || || || || || || || || |
Mix of Funded Borrowers
| ||August 2007|| ||August 2006|| ||2007 Year-to-Date|| ||Since Inception|
|Prime|| ||32%|| ||26%|| ||30%|| ||28%|
|Near Prime|| ||59%|| ||49%|| ||57%|| ||54%|
|Sub Prime|| ||9%|| ||25%|| ||14%|| ||18%|
| || || || || || || || |
| || || || || || || || |
|Top Five Prosper Borrower States in August 2007|
(PLR review note: Here's why Pennsylvania, the second most populous state, is not on the top state list.)
It's very important to note how Prosper has defined the terms used above, especially the Prosper select index. Only borrowers with zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less are counted in the calculations. Here are the full definitions:
2007 Year-to-Date: January 1, 2007 through August 31, 2007.
Since Inception: November 1, 2005 through August 31, 2007. Prosper’s by invitation only “friends and family” launch began on November 1, 2005 and Prosper launched to the general public on February 13, 2006.
Prosper Select Index: 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).
Average Borrower Rates: Average Borrower Rates are the weighted average borrower rates on Prosper Select Index loans. Rates shown are interest rates, not annual percentage rates.
Mix of Funded Borrowers: Prime includes AA and A credit grade loans (credit scores of 720+). Near Prime includes B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime includes E and HR credit grade loans (credit scores below 600).Just a couple of weeks ago Prosper was taken to task in the forums and and Prosper blogs for announcing that returns on Prosper beat the S&P 500. Critics said the data which showed Prosper beating the S&P 500 was carefully picked and misleading. Others argue that lenders have the same ability to carefully pick their loans. I look forward to seeing how lenders respond to this report.
All things considered, I think that this monthly data report from Prosper will be valuable. It's good to hear Chris Larsen's analysis and it gives a regular public way for Prosper to report their growth and success.