As many people here know, I have a (somewhat) concise summary of what I believe to be most of Prosper's many shortcomings that I try to post as a comment where I can in response to puff-pieces that get published about Prosper, in order to provide some balance and realism (as well as some caution to new lenders who don't see beyond the 35% interest rates). Although I have posted much of it on .org in various pertinent threads, I don't believe that I have ever posted the whole thing in one thread here (and I just added paragraph 2, on Prosper's handling of the JDB sales, tonight). Since I believe this will be useful to new or potential lenders who may be new to .org and just browsing the Public Board here, I decided to post it again here:
I have been a lender on Prosper since March 2007, with about $2,400 invested. Although my projected ROI is currently about 7%, I stopped lending in October for a variety of reasons all linked to Prosper's management. Basically, the best way to summarize Prosper is that it is a wonderful concept, executed horribly due to the incompetence and arrogance of management.
There are too many serious problems with Prosper to list here, but brief review of
www.prospers.org, which is the largest Prosper forums, will provide anyone interested with a long list. Here are a few:
1) The default rate on Prosper is MUCH higher than advertised. Chris Larsen, Prosper's CEO has been quoted in news articles saying the default rate is 2.7%. While perhaps technically accurate using Prosper's narrow definition of "default," this is utter balderdash from any real perspective. Prosper only counts a loan as defaulted when it sells it to a junk debt buyer for pennies on the dollar. However, Prosper currently has such sales only quarterly (and is currently more than two months late, claiming that it can't find anyone to buy the bad loans at any reasonable price), so it is not uncommon for there to be many loans that are 5, 6, 7, or more months late. Historically, loans almost never come back from being even 3 months late, so all of these loans are defaults in everything but name. Moreover, Prosper calculates its official default rate as the number of defaults divided by the number of loans, but because many loans are too new to have defaulted even if the borrower never made even the first payment (which happens far more often than you might think), this also tends to understate the default rate. So far as can be seen, the real default rate appears likely to be over 20%.
2) Another problem with Prosper’s handling of defaulted loans, is that the process completely lacks transparency. Prosper flatly refuses to disclose the identity of any of the junk debt buyers that have purchased defaulted Prosper loans, the identity of (or even the number of) any junk debt buyers that have sought or been solicited to participate in the junk debt sales, the process Prosper uses to advertise the junk debt sales to possible buyers, or the method used to calculate the sale prices of the various defaulted loans. Prosper lenders – who, after all, actually OWN the defaulted loans being sold by Prosper for pennies on the dollar – have no idea whether Prosper diligently and/or successfully obtains as high a price as possible for the defaulted loans, or simply sells them off to the first buyer it can find, regardless of price. For that matter, without transparency there is no way to be sure that Prosper doesn’t simply sell the defaulted loans at a favorable price to a company controlled by a Prosper insider. Given Prosper’s many other shortcomings, there is no good reason to believe that Prosper handles the junk debt sales in an appropriate and competent manner. Moreover, there is at least one piece of evidence that it doesn’t. Long before the last junk debt sale, a lender and forum member made a firm offer to purchase a particular loan that was headed to default. He made this offer by sending it certified mail, return receipt requested, to Prosper’s VP of collections and to its General Counsel. In his letter, he explained that Prosper owed its lenders a fiduciary duty to maximize the price obtained during junk debt sales of loans, and that he was fully qualified to purchase this defaulting loan. He also guaranteed that all collection activity he would take on the loan would be in compliance with federal and state law. Prosper completely ignored this offer for almost two months, and then sent a rejection letter at the same time it sold the loan (along with others) to a junk debt buyer for considerably less than what had been offered to Prosper. This unjustified rejection by Prosper collectively cost the almost three-dozen lenders on that loan $500, which was the difference between the rejected offer and the actual sales price to the junk debt buyer Prosper chose to sell the loan to instead.
3) One of the contributing factors to issue #1, is that Prosper's collections are anemic. When a loan turns 1 month late it is turned over to Prosper's collection agency, but historically, only around 15% of loans in collections are brought current. There have been many anecdotal stories by late or defaulted borrowers on Prosper's old forums that they either were never contacted by the collection agency, or the contact consisted of an email or 2 and maybe a phone call or two. Prosper's own relatively newly-hired VP of Collections admitted that the call logs from the collection agency showed that they were repeatedly trying to contact borrowers at the same time of day, such as between 3-5 pm, so if the borrower worked during the day, no contact was made.
4) Very little information about the borrowers is verified by Prosper. Prosper selects a subset of fully-funded listings to verify employment and income, but many listings become loans without such verification. Prosper has already had to repurchase about $400,000 of loans under its ID-theft guarantee, meaning that Prosper let many fraudulent loans through its systems. Indeed, there is one case (identified by a diligent forum member) where one person obtained a dozen loans from Prosper under different identities. After the forum member outed this on the old forum, Prosper repurchased the loans and sued the borrower in Los Angeles Superior Court to get its own money back. However, there is substantial doubt among the lending community that Prosper tries very hard to identify ID-theft loans, because when it does, it has to repurchase them from lenders. There was one case where a different forum member conducted some excellent detective work (the borrower included enough information in the listing to enable their identity to be discovered), including determining that the "borrower" of a Prosper loan was the victim of ID-theft from other creditors, and he actually spoke with the NYPD detective investigating the case. The forum member gave all this information to Prosper, including the name of the detective, and for months Prosper apparently did nothing (the NYPD detective later told the forum member that he had NOT been contacted by Prosper). Only after a major firestorm erupted on the forum about this, did Prosper repurchase the loan from lenders (after it was about 10 months old, as I recall).
5) Although Prosper has funded a number of fraudulent loans, it has also cancelled a number of legitimate loans, apparently through incompetence. One such loan involved the brother of a well-respected Prosper lender and very active forum participant. After claiming that faxed documents were illegible and then that Prosper couldn't open a .pdf file, it cancelled the fully-funded listing with no opportunity for the borrower to resubmit the documents. There have been many other Keystone Kops situations involving Prosper's verification, including one case where Prosper's telephone system apparently couldn't connect to an 888 number (the employer of a borrower), so the loan was cancelled, even though the Prosper employee was able to reach the company on his personal cell phone.
6) Related to issue #5, Prosper's customer service is terrible. Often, they let the phone just ring and ring without answering it. When you send an email, the response is often irrelevant boilerplate. Lenders used to provide a lot of Prosper's customer service for free on their old forums.
7) Prosper's advertising is highly misleading in many ways, if not downright fraudulent. They overstate interest rates in ads directed to lenders, and understate them in ads directed to borrowers. Prosper was caught once apparently having photoshopped a screen shot of an actual listing in an advertisement about the rate (changing the actual rate to something more beneficial). Also, Prosper has repeatedly sent out mass email ads featuring borrower and lender testimonials that were quickly proven to be false. After the first time, Prosper admitted that it hadn't verified the facts claimed by the person, and said it would do so in the future. But whoops, they promptly did it again (in a different testimonial) in the next ad.
8 ) Prosper used to have a vibrant community on its official forums, with about 400,000 posts. These forums were an amazing learning experience for lenders, so that new lenders could avoid the mistakes of their predecessors. Prosper banned me from the forums and from lending (although I had already publicly announced that I had stopped lending due to Prosper's mismanagement) because I sent a bunch of PM's to new lenders alerting them to the existence of Prosper's own official forums. Then, Prosper suddenly deleted its entire forum with no notice, in an effort to hide the truth from new lenders. It then replaced the old forums with a super-moderated version that is largely useless (every post must be approved before being posted, which often takes days even when the moderator lets it through).
9) When another forum member made an archive of the old forums available on
www.prosperreport.com, Prosper had its lawyers send a threatening letter seeking to take the domain away on baseless trademark, unfair competition and cybersquatting grounds. Undoubtedly, Prosper figured this person would cave in and take down the site. Instead, he retained a lawyer from Public Citizen, who responded to Prosper's letter by explaining how Prosper's claims are entirely without merit. Both letters are posted on the site. Prosper has yet to respond.
(10) Prosper has also misappropriated thousands of dollars of lenders' money by charging its servicing fee on loans that were more than a month late, contrary to Prosper's own legal agreements. This too was discovered by yet another forum member. Prosper admitted that its action was "in error," but only recently returned this money to lenders despite having promised to do so months ago.
(11) Another significant issue is whether Prosper will even survive as a company for the three-year term of its loans. As can be seen on
www.Lendingstats.com, loan originations have been largely flat for the last year, and Prosper’s CEO has admitted that loan originations need to increase 400%-500% in order for Prosper to turn a profit. Given that, clearly the outlook is troubling. Although the Prosper Lending Agreement specifies that if Prosper goes out of business the loan servicing will be taken over by another servicing company, there is no guarantee that any such company can and will be found, or that the transition will go smoothly, or that the new company won’t require higher fees in order to do the servicing.
(12) Recently, a new potential legal problem has emerged -- there is a question as to whether Prosper has been illegally selling lenders unregistered securities. This issue recently caused Lending Club (a newer Prosper competitor) to stop signing up new lenders and to stop selling loans to lenders while it obtains regulatory clearance. This issue has also resulted in Canadian P2P loan operations being shuttered. While Prosper has stated that it believes it is in compliance with the law, who knows?
The above issues are really just the tip of the iceberg. If anyone is considering lending on Prosper, do your due diligence. Read
www.prospers.org, and check out the actual performance of lenders on
www.lendingstats.com. For example, you will see that looking at ALL moderately seasoned lenders on Prosper (those with >20 loans and >6 month average loan age), the median projected ROI is a paltry 2.5%. That is less than E-Loan, E-Trade, ING, and other banks offer on their FDIC-insured, 100% liquid savings accounts. And the tax treatment of Prosper loans is also worse (for one thing, you have to pay income tax on the servicing fee that you pay Prosper due to the way it is collected).
Caveat lender!
