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[yankeefan]

In which Doug admits the test didn't work...

results From the Legal Collections test

[yankeefan]

Let's see if this is posted

Thanks for the update. Analyzing the numbers, it appears (admittedly in retrospect) that the high point of the test effort was reached immediately after the first “lawyer letter”, when we got $40,000 in collections. From that point on, little happened that was good for the lenders/Prosper.

It is a concern that judges would be leary of what a departing Prosper Executive recently claimed “state and federal regulators have since described as one of the most promising financial innovations in the last five years. ”

I am also confused as to how the SEC filing and “quiet period” could have had ANY effect on normal business activities such as these lawsuits.

[Mtnchick]

Lobby

[yankeefan]

Fine with me.

[bamalucky]

Holy shit. I think I predicted this when it was planned.

I told everyone it would just make them file BK

I can't believe he's this honest. He must be getting ready to quit

[bamalucky]

So whats his court record now?

[Senator]

I have to capture this before it gets removed.

ETA:  Will Doug Fuller leave or admit he was wrong?

The Results From the Legal Collections Test

11/3/09 posted by Doug Fuller    

Before discussing the results of the test, let’s review what we were testing. In November 2007, 74 loans that would have been included in the December Debt Sale were selected for a test of applying a legal collections strategy. These loans had an outstanding principal balance of approximately $705,000. They were placed at Hunt & Henriques, a prominent California debt collection law firm.

Once placed with the firm, these accounts were sent a “demand letter” stating that the balance would be accelerated in 30 days if an acceptable payment arrangement was not negotiated. Three days after the letters were sent, the collections department of the law firm started a calling campaign. At the 30 day mark, a second letter was sent stating that the law firm had been engaged to sue the accountholder if the debt was not brought current or settled. In mid January, a “last chance” letter was sent. Through this time, phone efforts continued.

During this “pre-legal” phase, a total of $39,997.98 was collected from 14 different accounts. Five of the accounts “cured” returning to a current status. Three accounts filed for bankruptcy. The collections in the pre-legal phase were low, but not statistically outside of the expected range.

In mid-February, the law firm began filing suit against the remaining 66 accountholders. This is the point at which the indication of changes started to become apparent. 16 of the cases had to be closed because either the debtor had moved out of state (3 cases) or we were unable to obtain service. Of the 13 cases in which we were unable to obtain service, 11 of them were homeowners.

How could we be so stupid as to file a suit against a person using the wrong address? This is a real annoying one. Having the right address is critical to success of a legal strategy. So how did we confirm we had the right address? In the past, I have been successful at using a combination of information from the Lexis-Nexis Accurint service with the results of mailing first class letters to the target address.

In previous testing, the Accurint “best address” was found to be correct more than 70% of the time – by applying some additional criteria, the confidence level on the address could be increased to almost 85%. In separate testing, it was shown that the USPS return mail process was approximately 60% effective (meaning that a letter mailed to an inaccurate address would be returned within a month 60% of the time).  Furthermore, we preformed a second round test in which the addresses on which no return letter had been received were sent a second letter – again approximately 60% of these were returned within a month of mailing.

What does all of that mean? It says that using the Accurint best address combined with at least two first class letters that have not been returned (with a month of return time), you have an expected confidence level on the address of 95+% of the time. Clearly that expectation did not apply to this population. At the time that the files were closed, Accurint was still reporting the same address as “best” in 13 of the 16 cases. A subsequent review of the 11 homeowners, show that 10 had foreclosure proceedings started during the summer of 2008.

The second major deviation from the expected results was in the bankruptcy rate. Traditionally, you expect 10 to 15% of accounts to respond to the threat of legal action by filing bankruptcy. Of the original 74 accounts in the test, 21 filed bankruptcy.

The third and most disturbing deviation was the level of payment induced by the filing of suits. Traditionally, you expect a significant amount of collections to be received once the debtor knows that they have been sued – the rule of thumb is that post-filing/pre-judgment collections will be 50% more than the amount received during the pre-legal phase. In this test, the gross collections were less than $3,000 ($2,879) as compared to more than $17,000 in filing and service fees.

The final issue encountered was environmental.  In California, there are two types of default judgments – a Clerk’s Judgment vs. a Court Judgment. A Clerk’s Judgment is used in “cut and dried” cases. At the recommendation of the law firm, we initially filed Clerk’s Judgments on these cases. We knew there was a chance that the courts might not accept this approach due to the novel nature of the Prosper loans, but H&H felt that it was worth trying for the Clerk’s Judgment with its lesser level of required documentation. As it turned out, the vast majority of courts rejected the requested Clerk’s Judgment.

The environmental aspect is twofold. The courts have exercised a marked increase in consumer protectionism as foreclosures and mortgage related defaults have skyrocketed. The second aspect involves the timing of these suits versus Prosper entering its quiet period. In October, 2008, I met with H&H to develop an account affidavit and documentation package necessary to support a Request for Default Court Judgment. Before the new motions were filed, we entered the quiet period. At the recommendation of the law firm, we decided to wait for completion of the registration process to pursue the cases. The length of our quiet period resulted in some cases being dismissed without prejudice rather than risk losing a motion in front of a leery judge.

So what does all this mean? Is Prosper just incapable of having a legal strategy? No, I still believe that a legal strategy is critical to Prosper’s collections. Let me address this in two parts, first what happens with the rest of the test and second the future of legal collections at Prosper.

Regarding the accounts in this test – in cases on which service was not obtained or were dismissed due to the quiet period – if they are still suit worthy, new cases will be filed. In some cases, the debtor has moved out of state or their credit score has dropped so low that re-filing is not worthwhile (there are several accounts that had credit scores above 700 that now have a score in the low 400’s).

The request for Court Judgment are being filed in open, uncontested cases. The contested cases will be brought to trial – we’re finally starting to get court dates scheduled for those trials.

At this point, I have no expectation that this legal test is going to be the financial success that I had predicted. However, there is still value in getting the courts used to dealing with the enforcement of peer-to-peer loans.

For the long term, I have great hopes for developing an effective legal strategy. In the pre-registration phase, we had two significant challenges regarding pursuing legal action. Most critical was that since Prosper did not own the loans, it took an extraordinary act for Prosper to have the standing to bring a lawsuit (the loans had to be assigned back to Prosper – and each step of assignment increases the complexity of a debt collection case). This is resolved with the new loan/Payment Dependent Note structure. Since Prosper owns the loan, there is no question of our standing to bring suit.

The second issue is creating a mechanism to pay upfront court costs. In the case of the current test Prosper paid the upfront court costs. Depending on state, this can be between $150 and $400 dollars per loan. Typically these costs are covered by “pooling” legal accounts – meaning that recoveries from accounts with recoveries pay the costs of the sued accounts on which no recovery is made. This approach does not work with the Prosper concept of lenders receiving the revenue from the specific loans that they selected for investment. We have some ideas and will be working out a viable plan to address this problem.

Another key question is how to determine what loan would be suit eligible given the current environment. For the last 10 to 15 years, the fact of homeownership has been the most important determinant for suit eligibility. That is no longer the case. We are investigating possible mechanisms for recovery scoring.

Creating an effective legal strategy is a critical component of collection efforts in unsecured lending. Given the environment and the uniqueness of the Prosper structure, developing the optimal strategy is going to take work. The reason for testing is to learn while minimizing the economic impact. Although the results of this test were not what we hoped, we will continue to learn from it – and from additional tests that we undertake in the future. This is a work in process.

[The_Cat]

So deadbeats know how to successfully beat debtors and Prosper was a deadbeat magnet?

[ira01]

The Results From the Legal Collections Test
In mid-February, the law firm began filing suit against the remaining 66 accountholders. This is the point at which the indication of changes started to become apparent. 16 of the cases had to be closed because either the debtor had moved out of state (3 cases) or we were unable to obtain service. Of the 13 cases in which we were unable to obtain service, 11 of them were homeowners.

So out of 66 cases, Prosper was unable to affect service on 13 -- about 20%?  WTF?  I call bullshit on Prosper's long-winded explanation about inaccurate addresses.  There are a variety of commercial databases available to locate people -- not just the Lexis-Nexis one DF talks about, but also ones run by Westlaw and other vendors.  These are relatively cheap to access.  Moreover, as a creditor, Prosper had the legal right to pull credit reports on these deadbeats.  Those often have addresses as well. 

And last (but not least), in California a plaintiff can apply to the court to use service by publication once diligent efforts to affect service have been tried and have failed.  This request is routinely granted.  Service by publication is just what it sounds like -- you run a classified ad in a certain type of newspaper under a particular schedule (something like once a week for 4 weeks), and voila! -- service is deemed made (even though everyone understands that the chances of the defendant actually seeing the notice is about nil).  Did Prosper make any attempt to serve these 13 defendants by publication?  Not so far as we have seen (and since I'm sure DF would have mentioned it if they had, I think it is safe to assume that Prosper didn't bother).

The final issue encountered was environmental.  In California, there are two types of default judgments – a Clerk’s Judgment vs. a Court Judgment. A Clerk’s Judgment is used in “cut and dried” cases. At the recommendation of the law firm, we initially filed Clerk’s Judgments on these cases. We knew there was a chance that the courts might not accept this approach due to the novel nature of the Prosper loans, but H&H felt that it was worth trying for the Clerk’s Judgment with its lesser level of required documentation. As it turned out, the vast majority of courts rejected the requested Clerk’s Judgment.

IIRC, several of the court dockets that we were following indicated that Prosper simply failed to file the appropriate paperwork in a proper and timely manner. 

The environmental aspect is twofold. The courts have exercised a marked increase in consumer protectionism as foreclosures and mortgage related defaults have skyrocketed.

So what?  I issue default judgments (sometimes 10 or more) every time I sit as a Judge Pro Tem.  The majority of these are consumer debt cases -- debt from retail installment purchases, debt from car loans, debt from bad checks, etc.  Yes, the creditor/plaintiff has to prove their case -- they show me the contract, a statement showing any payments made and the balance due, evidence about the repossession and sale of the collateral in the case of the car loans, etc.  And then they win (usually).  This isn't rocket science, and Prosper is not sufficiently different from other creditors to make it qualitatively different.  Especially under the structure of the NAT, where Prosper repurchased all the pieces of the NAT loans, so it was clear that Prosper was the proper plaintiff.  Prosper should have been able to easily put together a standardized packet of pertinent documents and a brief summary explaining them that would have been highly convincing to the judges.  Apparently, it failed.  Badly.

The second aspect involves the timing of these suits versus Prosper entering its quiet period. In October, 2008, I met with H&H to develop an account affidavit and documentation package necessary to support a Request for Default Court Judgment. Before the new motions were filed, we entered the quiet period. At the recommendation of the law firm, we decided to wait for completion of the registration process to pursue the cases.

I call more bullshit.  Prosper's "quiet period" is irrelevant to the NAT cases.  Unless what Prosper is really saying is that it was concerned that something in the affidavit would adversely affect its SEC registration, so it put its own interests ahead of the NAT lenders' interests, breaching its duties (once again) to the NAT lenders.

The length of our quiet period resulted in some cases being dismissed without prejudice rather than risk losing a motion in front of a leery judge.

Prosper's registration was complete what, 3 months ago?  So why didn't it refile the cases the day afterwards?

Regarding the accounts in this test – in cases on which service was not obtained or were dismissed due to the quiet period – if they are still suit worthy, new cases will be filed. In some cases, the debtor has moved out of state or their credit score has dropped so low that re-filing is not worthwhile (there are several accounts that had credit scores above 700 that now have a score in the low 400’s).

Who cares what their credit scores are?  What matters is do they have any assets and/or jobs and/or other judgments against them that might take priority. 

At this point, I have no expectation that this legal test is going to be the financial success that I had predicted.

There's a surprise.     Prosper fucked this up badly and, as usual, lenders bear the brunt.

Most critical was that since Prosper did not own the loans, it took an extraordinary act for Prosper to have the standing to bring a lawsuit (the loans had to be assigned back to Prosper – and each step of assignment increases the complexity of a debt collection case).

I'm not so sure that repurchase was necessary, but regardless, who cares?  Prosper did repurchase the loans.  The "complexity" could easily have been dealt with.  Prosper made loan to borrower.  Prosper assigned pieces of the loans to lenders, and then lenders assigned pieces back to Prosper.  Thus, Prosper once again owns entire loan.  What is so "complex" about that?

This is resolved with the new loan/Payment Dependent Note structure. Since Prosper owns the loan, there is no question of our standing to bring suit.

That's nice for the Prosper 3.0 lenders -- how about the 40,000 schmucks left holding the bag on all the Prosper 1.0 loans?

The second issue is creating a mechanism to pay upfront court costs. In the case of the current test Prosper paid the upfront court costs. Depending on state, this can be between $150 and $400 dollars per loan. Typically these costs are covered by “pooling” legal accounts – meaning that recoveries from accounts with recoveries pay the costs of the sued accounts on which no recovery is made. This approach does not work with the Prosper concept of lenders receiving the revenue from the specific loans that they selected for investment. We have some ideas and will be working out a viable plan to address this problem.

The NAT avoided this problem entirely, because the NAT loans WERE pooled.  So what's the problem (other than the fact that Prosper doesn't want to invest any of its own time and money on behalf of lenders)?

Another key question is how to determine what loan would be suit eligible given the current environment. For the last 10 to 15 years, the fact of homeownership has been the most important determinant for suit eligibility. That is no longer the case. We are investigating possible mechanisms for recovery scoring.

Didn't DF trumpet his expertise in doing exactly this (picking the right loans for suit)?  Didn't he tell us that Prosper carefully cherry-picked the NAT loans in order to find excellent loans to sue on with high likelihoods of success (both on the cases and in collection of the resulting judgments)?  So in other words, Prosper's careful selection of a mere 66 loans turned out to be just as incompetent as pretty much everything else that Prosper does?  So after almost two years (an insanely long time for collections cases), out of 66 cases, Prosper has won exactly ONE so far as we know?  Way to go Prosper.   

Creating an effective legal strategy is a critical component of collection efforts in unsecured lending.

You think?

Given the environment and the uniqueness of the Prosper structure, developing the optimal strategy is going to take work.

Maybe it would have been a good idea to do some of that work BEFORE starting the NAT, and/or DURING the intervening 22 months.   

[Fred93]

Ira, I agree with you on all points.

In addition, although his present confession gives us a few numbers, he has yet to give lenders any accounting, or anything that would satisfy his original promise of "monthly statements".

Waiting two years and then saying "we didn't do very well" does not satisfy a promise of monthly statements for our $705,000 worth of loans.

[NewHorizon]

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.

So much for a near-pristine record.

In order to change our current agreements to allow for lawsuits, a number of challenges need to be met. I want Prosper account holders to know that we will sue them and if we sue, we will win.

(Quotes are from Doug Fuller in October '07)

[112233]

(sniff) (sniff) I smell a fred blog post cooking

[Cushie]

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.

So much for a near-pristine record.

In order to change our current agreements to allow for lawsuits, a number of challenges need to be met. I want Prosper account holders to know that we will sue them and if we sue, we will win.

(Quotes are from Doug Fuller in October '07)

He's big hat, no cattle. 

[Urbi_et_Orbi]

It's hard to believe that Doug Fuller is not only still employed at Prosper, he was actually promoted.

Fuller's level of incompetence, misrepresentation and failure is stunning.

(btw, Thanks for your analysis, Ira.)

[Staneslav]

a