Defaults, bad debt, debt sale

Prosper seeks Hedge Funds as lenders

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Prosper.com is actively promoting it's marketplace to hedge funds.

Prosper is America’s largest peer-to-peer marketplace with over 600,000 members,” stated Kirk Inglis, CFO of Prosper. “As credit markets experience unprecedented changes, institutional lenders, including hedge funds, are using Prosper to diversify portfolio returns without the lack of transparency and fees associated with structured consumer debt products.

(via ProsperousLand)

Another recent Prosper related topic was the concern raised by lenders that in select states Prosper stops any collection activities on small loans, if the borrower sends a Cease-and-Desist letter (the example given is a 2,500 US$ loan in Texas). The author of the blog post argues that the risks for lenders rise, if this example really shows overall practise.

Moreover, they won't pursue legal action to recover small loans. So all small loans are now risky since the borrower has an easy method to halt payment, collections and legal proceedings. Prosper simply seems unwilling to go after small borrowers.

Finally, even for larger loans, it seems unsafe to lend, since Prosper will only sue in select states. I don't recall Prosper saying anything about selective enforcement in my many lender agreements, but before I put another penny into Prosper, you can be damn sure I will ask them what states they will take legal action in and what the minimum loan amount is for which they will sue.

 

 

Insuring p2p lending borrowers against hazards

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German p2p lending service Smava.de yesterday introduced an optional insurance for borrowers. Borrowers can take out an insurance together with their loan. In the case of death, disability or unemployment (through no fault of one's own), the insurance will pay the repayments. To offer the residual debt insurance (see a definition of residual debt insurance), Smava partnered with an insurance company. The costs for the insurance paid by the borrower are:

  • death hazard only: approx. 0.5% of loan amount
  • death and disability: approx. 2.5% of loan amount
  • all three: approx 4.7% of loan amount

It will be interesting to see how many borrowers are willing to opt in to the insurance.

Lenders profit because this lowers the default risk. Unfortunately at the moment lenders can not on a borrower's loan listing whether the borrower selected insurance or not.
11 months after launch defaults at Smava are still rare. Only 3 of 368 loans have defaulted and only 2 are currently late. A chart shows the development of the Smava interest rates since start.

Reports on Prosper Days 2008

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Prosper Days 2008 took place Monday and Tuesday. Judging from the impressions of attending lenders, who blogged about it, it was a well organised event, but for seasoned lenders there were few news announced. No news about the long awaited secondary market. One blogger sees the Bidding via API function as highlight. Further news is that Prosper will start suing borrowers who defaulted on their loans. This could improve results in the collection process, where effiency is low. Explanations of Prosper about which changes were tested in the collection process were appreciated. 
A good improvement will be Prosper's plan to change payment dates. So far the date a payment is due has been dependent on the initiation date of the loan. Soon payment dates will be matched with borrowers pay day. I am sure this will reduce lates, but I do wonder why such an obvious and easy change was not implemented much earlier. Some of the international sites from inception took into consideration at which time of the month the borrowers are likely to be liquid when setting payment dates.

I hope Prosper will publish videos of the session on their website, like they did with the Prosper Days 2007. 

First loans default at Smava

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As P2P-Kredite.com reports the first 2 loans at German p2p lending service Smava.de have defaulted. Since the Start in March 2007 a loan volume of 1 million Euro (approx. 1.4 million US$) has been funded at Smava. The amounts of the two defaulted loans are 4,000 and 6,000 Euro resulting in a default rate of about 1%. At Smava loans default 40 days after they are late and are sold in a debt sale for a fixed rate of 25% (22% on lowest credit grades) to a collection agency.
2007 has been a very good year for Smava lenders as defaults (and late payments) have been significantly below expected rates.

Is identity theft a possible threat to the p2p lending concept

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On most peer to peer lending services (Prosper, Lendingclub, Smava, Boober) the identity of the borrower is hidden to the lender. Only the service itself knows the identity of the borrower. Therefore the lender has no means to check if information given is accurate and has to trust the platform.

The service has to

  • ensure that it takes adequate measures to verify the identity the borrower has stated at registration is correct
  • instill trust to the lender that the fraud risk of borrowers impersonating under a false identity is minimal, non-existant or while existant not covered by the lender.

Prosper gives a "100% Identity Theft Guarantee" and in case of identity theft repurchases the fraudulent loan:

Prosper reserves the right to buy back loans at any time. If Prosper buys back a loan, the outstanding principal balance will be returned to lenders and the loan will be marked as "repurchased".

Prosper typically repurchases loans in accordance with Prosper's 100% Identity Theft Guarantee, under which Prosper has agreed to repurchase loans from lenders if the loan is found to involve identity theft of the named borrower's identity.

Prosper is committed to providing a safe and secure marketplace, and works with law enforcement authorities to prosecute to the fullest extent perpetrators of identity theft.

Rateladder had one of his loans repurchased today. But how often does this occur?

Looking at the Wiseclerk Prosper loan stats by status, the column Repurchased shows a value of 400000 US$. Out of the total loan value of 96 million US$ that is about 0.4%. Not all of the repurchased loans are due to identity fraud.

Prosper checks identity by several measures like checking documentaion supplied by the borrower, calling him, verifying bank adresses, sending postcards to his adress… There have been several discussions on this topic with details on the Prosper forum.

Other services use other measures. German Smava.de uses the PostIdent-process a service that requires the registering service to produce a government id (passport) in person. The Postident process is used by nearly all German online banks and is considered quite safe.

P2p lending services can tolerate only a low level of identity theft cases. The innovative approach of p2p lending requires that lenders trust the concept and the service. Fraud cases endanger that trust.

Prosper loan figures

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Prosper loans have meanwhile surpassed 66 million dollars loan volume. A look at wiseclerk's prosper loan aging table shows that Prosper.com succeeds in increasing originating loan volume nearly every month. Currently new loans for about 8 million US$ originate each month.

However the figures also show an alarmingly high volume for late and defaulted loans. Especially when looking at older loans (the new ones do not have aged enough to be technically able to default). For example of 2.1 million dollar loan value that originated in June last year, $177,000 loan value has defaulted and another $105,000 are 3 or more months late. The default rate for loans from June 2006 will therefore be well above 10 percent at the end of the 36 month term. And this is no execption. For March and April 2006 defaults are already higher than 10 percent of originating loan value.

prosper loan aging