mothandrust's blog

This is likely my final blog entry; the idea of lending to borrowers whose friends/family/co-workers/etc. know them and will put up their own money to loan (which "strangers" can match) is a worthwhile idea.

However, Prosper's latest incarnation requires that lenders not only have confidence in the borrowers but also in the financial soundness of Prosper itself. Lenders make the loan TO PROSPER and so even if you pick your loans perfectly, Prosper might go bankrupt and you could lose your entire investment.

The Social Collateral Screen has taken a few hits but is still viable.

118 loans pass the screen:

-Originated between 2/12/07 (start of the extended data) and 9/1/09
-0 current DQs
-2 or more bidding friends
-Friends bidding $300 or more in aggregate

Obviously one would not want to bid on loans where a bidding friend pumped-and-dumped the listing, but there is no way to weed out these loans from the performance utility.

Of these 118 loans, 27 are paid-off, 16 were charged-off, 4 are late and 71 are current.

Late-Or-Worse Loans made 2/12/07-9/1/09

28% = All Prosper Loans
23% = Prosper Loans with 0 current DQs
17% = Social Collateral Screen

Prosper lenders who rely on Social Collateral to screen listings continue to outperform those who lend "by the numbers". I had blogged on 3/18/08 about how selecting loans with 0 current DQ’s and 2+ bidding friends who bid $300+ in aggregate would produce a portfolio of 48 loans, all current. But how would a portfolio look constructed with that Social Collateral screen...28 weeks later...?

Loans originated between 2/12/07 (the start of the Extended Data) and 6/1/08 (to allow new loans time to make payments) would give you 75 loans: 66 current, 7 paid off, 1 charged-off, and 1 late.

My personal portfolio does not look anything like that—I have half the loans but three times the lates!

Then I had the epiphany that I should be selecting borrowers rather than selecting listings.

The aggregate 0 DQ Prosper loans over the same period show 595 charge-offs (out of 10963 loans originated) and 371 lates, so that’s 5.4% charged-off and 3.4% late, compared with 1.3% for charge-offs and lates in the Social Collateral portfolio.

Why does Social Collateral work? The principle is the same as considering insider buying of common stocks. If you notice that several directors are all buying stock on the open market, it tells you that that they might know some good news is forthcoming. On the other hand, if you see the CEO and the CFO dumping large numbers of shares, you might not want to be buying what could be the next Enron.

Let’s look at the 2 bad loans out of 75 from this screen and see what secondary screening might have caught them. 

The losers share the following behavioral characteristics:

-The Borrower hides his City

-The Endorsers fail to state the rate(s) and amount(s) bid

-The Endorsers fail to state their relationship to the borrower and its duration

Certainly there are some conventional credit factors one might bring up--high utilization, large loan amounts, etc. but here we are only discussing social factors, since each lender has his own endemic numerology.

This first loan from the Cashfunders group is not even a true multiple BE loan, but is only one of the 75 because Prosper’s performance utility tracks only the amount bid and not the amount winning:

http://www.prosper.com/lend/listing.aspx?listingID=296216 

The borrower has only one real-world "friend" (the relationship is not stated), Kenkobiz, who is on the loan for $100. Cashfunders, who had no previous real-world relationship with the borrower bid $8800 right from the start, but these were all bid off when the rate went 21%.—only $77.69 remained on the loan at the end. Katenvironment’s $125 bids never returned.

There is no social mojo that a stranger’s bid brings to a listing, and I suspect that many of these Cashfunders loans will go the way of the vetted group listings of Prosper’s yesteryear.

This next listing does fit the Social Collateral screening criteria and shows that this criteria by itself is not sufficient to weed out terrible listings. Doesn’t your gut tell you not to lend this borrower "working capitol" to flip a house? Heads you get 10% on your investment, tails you lose it all:

http://www.prosper.com/lend/listing.aspx?listingID=243243 

Recently I have been urging borrowers whose listings feature Bidding Endorsements to take the Transparent Borrower’s Pledge: https://connect.prosper.com/t/3885.aspx although most refuse to take it. Pledge-takers are required to disclose any early prepayment intentions, display their City, put their endorsements in the accepted format, and answer publicly all Questions put to them in the Q&A.

The TBP is substantially what the defunct Sincere Borrower’s Pledge required, only there is no requirement from borrowers to contact late borrowers, and it is open only to borrowers with 0 current DQ’s.

I would have to warn you about combining the TBP with the Social Collateral screen; if you do this, you will find, as I have, that no listing has come forth in the last 3 months that qualifies! 

It's not what you think. 

There is no promise to repay the loan (we can but hope).

By saying "I have accepted the Sincere Borrower's Pledge" it means that I have already:

(1) Set my City to Reveal on my Profile Page.

(2) Had all Endorsers stipulate in the endorsement text their relationship to me, its duration, the amount(s) bid and the interest rate(s). (It is not a requirement to have any Endorsers--but if you do have any, this information must appear in the endorsement text.)

(3) Stated any intent to prepay my loan early in the listing text.  (Many lenders dislike early prepays, others prefer them.  Honesty is the best policy!)

(4) Sent Personal Messages (PM's) to 5 Late Borrowers in my credit grade (AA, A, etc.) picked at random, which say:

Dear (Late_Borrower),

I am a Borrower with (Your_Credit_Grade) on Prosper and am seeking a loan. 

Some lenders are willing to help, but others are now reluctant because previous Borrowers have not honored their promise to pay back what they borrowed.

You are late on your Prosper loan and you are making it hard for others (like me) in the Prosper community to get a loan.

Please make a payment today, even if it is a partial payment, so that the good people who lent money to you in your time of need can see that you are serious and diligent about repaying them. 

It would also help if you started a thread in the Lender Forum to let lenders know your plans to catch up.

Sincerely,

(Your_Prosper_Alias)

and I have posted the listing numbers on this forum thread.  Make sure that you are not a lender to any of these borrowers yourself--that would be a violation of Prosper's TOS.  You can use LendingStats or Eric's Credit Community sites to find late borrowers that are in the same credit grade as you are.

I furthermore promise to:

(5) Answer publically all Questions lenders ask on my listing in the Q&A.

(6) At funding, I will send a PM to mothandrust, a Prosper lender, a description of the verification efforts that Prosper made on my loan.  This description will be shared publically with other lenders, so please do NOT include any personal information! 

(7) Should my loan ever go late (even <15 days late), I will start a thread on the Prosper Lender Forum explaining what efforts I am making to bring my loan current and I will stay active on that thread until my loan is current again.

Comments

There are 2,375 listings up at the time of this writing.  If just 25% of the Borrowers took the pledge, 2,969 PM's would be sent to Prosper's 2,550 late borrowers.

Lenders are of course barred by Prosper TOS from contacting late borrowers on any of our Notes, but there is nothing stopping borrowers from contacting other borrowers.  The borrower is not a debt collector or even a creditor, so the FDCPA does not apply. 

This is simply the Community policing itself in a healthy way: today's borrowers confront yesterday's borrowers with how their actions have impaired their funding prospects and are costing them in higher loan payments. 

Now not all of these PM's will result in a dialogue opening up or even reach the late borrower.  But the first Pledger got a polite response back from one of the 5 late borrowers saying that he was "in the process of having the matter cleared up."  88679 and 81506 are the only male borrowers of her 5, and both are 4+ months late at the moment.

The other articles of the Pledge address my personal pet peeves about listings, while providing the most minimal coaching to borrowers.  I just don't want to waste time on Hidden City listings with pump-and-dump Endorsements from borrowers who won't answer Questions.

I’ve been running various screens with Prosper’s performance utility using "social screens" to improve ROI and reduce lates. Do endorsements matter? Can a bid from a friend help a borrower get funded? Can social screens compete with lending strategies based on conventional screens to reduce lates and boost lender ROI?

Since we now have a year’s worth of "extended data" I looked at the loans originated between 2/12/07-2/12/08, with an observation date of 3/17/08. 

But before I show the results, let’s try a little quiz!

1. 9.66% of Prosper loans during this time are late or worse; to best improve this you should screen out:

(a) Non-Homeowners

(b) Loans with no bidding friends

(c) Autofund loans

(d) DTI > 20%

(e) Loans with 1 or more current DQ’s

2. You see a posting from a newbie D borrower who has 1-3 current DQ’s who can’t get funded asking for help. You make one suggestion that will improve the ROI for lenders (if he acts on it) which is to:

(a) Pay off the current DQ’s and then relist

(b) Get someone to endorse his listing (even if the endorser doesn’t bid)

3. B Borrowers that have 0 DQ’s have more percentage lates if they have:

(a) 1 or more bids from friends

(b) 0 Public Records + 0 DQ in last 7 years + 0 INQ + Exclude Autofund

4. If you were a lender on all loans that had two or more friends bidding a total of $300 or more you would have:

(a) Only 17 loans in your portfolio, 14 of them AA

(b) 48 loans, all current

(c) Only loans from the Malama Ohana group

(d) 4 defaults (out of 106 loans) that were GL pump-and-dumps

If you've been a lender on Prosper for over a year, you aced it, didn't you? 

Everyone knows the Autofund loans are awful, the newbie D should pay off those current DQ’s and come back, and endorsements are failed and flawed because the pump-and-dumpers bid big and leave lenders holding the bag.

But let's put our prejudices aside for a moment and look at the numbers instead of what we feel the numbers should be.  In fact, (b) is the correct answer to all the above questions.

And yes, the "bids from friends" includes bids from people that have no real-world connection with the borrowers, and that the "bids" may have been outbid. A $500 pump-and-dump appears the same in the performance data as it does if the friend is in the loan for $500.

Let's start with the baseline and tweak one variable at a time to see its effect:

(a) Social Screens Work. A bidless endorsement has no effect, but the act of having a friend bid reduces the "late or worse" percentage even more than screening for 0 DQ's, low DTI listings, Homeowners, etc.  The bid has to be more substantial than "just a snickers" ($50) to have this positive effect.

(b) But Huge Bids Not So Much.  The dollar amounts are the sums of all the bids by friends on the listing—they appear in the data even if the friend was later outbid.  At amounts of $300 and above the default rate actually creeps up slightly; this could be due to some of the big bids being pump-and-dumps or to "get the ball rolling".  The %Current looks better because it is cannibalizing from the payoffs. So large bids noticably reduce payoffs (the friend wants a good ROI) but they don’t reduce defaults.

(c) The More Friends The Better.  When we look at multiple friends bidding—the number of loans dropps off very fast! Most of these are Malama Ohana loans; one loan in that group has 20 bidding endorsers on it and from different relationship circles: family friends, eBay clients, high school buddies, etc.  Loans like this inspired me to "Save All My Lending Cash" for a borrower who could submit this type of listing.

(d) When we combine a quality listing (0 current DQ’s) with a friend bidding substantially, the default rate drops below 1%.

(e) There are very few Prosper loans where 3+ friends are all bidding large amounts; in fact, StaciM’s loan in Cubbies' group is the only of these 11 outside the Ohana.

Adopting a Social Factor Lending Strategy

The social factors that seem to be most relevant are multiple friends bidding, and/or friends who bid substantially ($300+). These factors are at least as important as autofund, low DTI, and even current DQ’s.  When we combine the fundamental and the social factors, the default rate improves dramatically.

But don’t program your Standing Orders just yet—some of these loans with just one bid could be pump-and-dump time bombs and the "friends" are not real-world relationships.  Just 2 defaults in a sample of 100 would skew this data; we really need a lot more loans with endorsements and friends bidding.

To protect yourself, demand that friends who endorse the loan stipulate at what rate they are bidding at—if they can write 3 lines of gushing accolades they can certainly include, "and I’m bidding $700 at 5%" so that lenders know whether they are committed to the loan or not. 

I will be personally reinvesting my Prosper payments into listings with 0 DQ's and where multiple bidding friends "state their rate". 

I have $1229.48 in my lending account at the moment (was $570.09 on 7/29/07) and will bid the whole amount at 1% interest on the first Prosper listing that meets my criteria. 

If your listing "wins" I will do what I can to promote it to other lenders, since I believe it will be a unique listing in the history of Prosper.

I am not a Group Leader. You can prepare your listing through any Group Leader (GL) who is willing to do the verification and who is unrelated to you.

REQUIRED LISTING CRITERIA:

(1) Borrower's Listing must have:

- Credit Grade AA-D
- No Current DQ's
- City Set Visible
- Loan Amount => $3000
- Interest Rate 10% or higher
- Any prior Prosper loan paid off or have 12+ consecutive on-time payments

(2) Listing must have at least 5 Verified Endorsers (no two from the same category) who bid personally and are from these categories:

- a next-door neighbor
- a co-worker
- your boss
- your priest/rabbi/minister
- your landlord
- a parent or grandparent
- an in-law (if married)
- a longtime friend
- a job reference/business associate
- a Leader/Officer of local organization/association/club you've been involved with for 2+ years (up to 3, each from different ones)

(3) Each Verified Endorser is required to:

- declare their relationship to the borrower
- declare at what interest rate/amount all bidding is made at
- be willing to be contacted by the GL for verification

(3) The borrower will supply the GL with contact information for the Verified Endorsers, and the GL will contact them to confirm the relationship and will post the confirmation on the listing.

Good luck! I don't care about pictures, budget, why you want the loan, etc. but other lenders might want that information.

As I receive payments from my other Prosper loans I will let it accumulate in my lending account so I can increase the amount of my bid on the "winning" listing....I'm Saving All My Lending Cash for you!

Edits made: 

Removed references to GL fees since these fees were eliminated by Prosper. (9/13/07)
Added requirement that GL be unrelated to the borrower. (9/13/07)
Added as potential endorsers: Leader/Officer of local organization/association/club (9/13/07)
Requirement that any prior Prosper loan be paid off (11/22/07)
Updated Lending Account Cash (11/22/07)
Requirement for Loan Amount to be at least $3000 (12/12/07)
Allowed Borrowers who have made 12+ consecutive on-time payments to qualify (1/29/08)

This Borrower's Challenge was originally posted on the Prosper.Com forums on 7/29/07.  While other lenders publically pledged an additional $1200 on this loan, the records are temporarily unavailable.  My personal pledge remains in effect, and any lenders who would like to indicate their support on this loan may do so here.

SuperCleanRick and nextmarket indicated that they would be interested in perhaps being the Group Leader for the winning listing.

"I’m Saving All My Lending Cash For You!" threads (7/2007-3/2008)

http://www.prosperreport.com/prosper/forums/archive/threads/2/8/9/28963.0.HTM

http://www.prospers.org/forum/im_saving_all_my_lending_cash_for_you_95175-t3976.0.html

https://connect.prosper.com/p/1532/8865.aspx

https://connect.prosper.com/t/558.aspx

Discussion thread on the Winning Listing:

http://www.prospers.org/forum/eandr123_10_raised_by_vbes_the_mothandrust_challenge-t6245.0.html

For Borrowers & Group Leaders—"How To Write Endorsements To Attract Lender Bids"

https://connect.prosper.com/p/938/3295.aspx#3295