Prosper.com picked up speed again fast after the relaunch. As of today there are already more than 500 loan listings open for bidding. 5 loans already originated, despite the short timespan since re-opening.
Today I saw the first note for resale on the note trading platform. It is sold in auction mode where lenders can bid (sealed bids) during a seven days auction. Currently there are four bids. Would the auction end right now, then the buyer would purchase the note at a steep discount (40.4 Cents on the dollar). But I am sure bid prices will rise fast when more lenders discover that there is now activity on Prosper’s secondary market.
Following up on my last post here are the largest operational changes at the new Prosper.com:
Minimum credit score requirement is now 640 (up from 520)
Prosper calculates expected defaults (‘loss rate’) now by using the two factors: the credit score obtained by an external agency and the internal Prosper score (in the past the fore-casted value was based only on external data and way to low)
There is a hard bid floor (a minimum interest rate set by Prosper) on each loan listing ‘The bid floor is the minimum yield a lender can bid on a listing. It’s not possible to bid any lower. This also affects the minimum rate a borrower can possibly receive.The bid floor for each listing is calculated by adding the national average 3yr CD rate to the minimum estimated loss rate assigned to each Prosper Rating. For example, a B-rated listing with a minimum estimated loss rate of 4.0% is added to a national average CD rate of 2.27%*, resulting in a bid floor of 6.27%.‘
Minimum bid amount is now 25 US$, instead of 50 US$
There are several legal changes affecting lenders (e.g. ‘In the unlikely event that we receive payments on the corresponding borrower loans relating to your Notes after the final maturity date, you will not receive payments on your Notes after maturity.‘ – this seems to mean that, if a late borrower who paid more than a year after the date the loan was supposed to be paid back in full, the lender is not credited that amount – but check yourself I might be misinterpreting the meaning)
New Lenders should read the SEC prospectus. Some disclosures might make them wary. Quotes:
You assume the risk that information provided by borrowers may be intentionally false.
Status information given on loans between inception and March 31, 2009 shows 31.3% of loans had been at least 15 days late at least once, and 20.1% had defaulted.
The fact that Prosper will have the exclusive right and ability to investigate claims of identity theft in the origination of loans creates a significant conflict of interest between Prosper and the lender members
That might we necessary legal disclaimers – but if Prosper performs in future like in the past, the risk for lenders will be high and by the prospectus Prosper will exclude liability for all risks spelled out.
I read that Prosper makes all lenders re-sign 6 new legal agreements.
Prosper.com has reopened – now with the long sought approval of the SEC which was granted last Friday. In his blog statement “We mean it this time!” CEO Chris Larsen sheds light on what was delaying SEC approval. It was auction bidding on loan requests:
… the first Internet auction-based P2P loans marketplace and trading platform to have its SEC registration declared effective, which means the SEC is permitting Prosper to facilitate auctions in a way that has never been done before.
Selling securities by auction is not new and critical to greater efficiency in fair price discovery for both sides of the transaction. However, the SEC has never permitted Wall Street investment banks or any other institution to run a true auction where investors could make an irrevocable bid that committed funds prior to the establishment of a final rate….
Prosper introduces a secondary market. The internet auction priced trading platform for Prosper Notes is operated by FolioFN (like Lending Club’s Note Trading platform). Only loans (‘notes’) issued after July 13th can be traded.
At the moment lenders from California, Colorado, Delaware, Georgia, Illinois, Minnesota, Montana, Nevada, New York, South Carolina, South Dakota, Utah, Wisconsin and Wyoming can use Prosper, if they fulfill state set financial suitability requirements. Prosper is open to borrowers from almost all states.
With the PR Prosper will likely build up a large selection of loan listings again fast (as of now there are 10). The interesting question will be if Prosper lenders will continue to have faith investing via Prosper after extremely high default rates and low collection results in the past. Furthermore disappointed (former) long term lenders are critisizing risks for lenders embedded in the latest SEC filing.
With the likely press coverage of the relaunch all p2p lending companies in the US can expect to see a rise in traffic.
The State of Montana signed an agreement with Prosper Marketplace Inc. to resolve matters relating to unregistered securities and securities fraud. Continue reading →
P2P lending holds great promise: more transparency, purposeful direction of investments and economic advantages for borrowers and lenders. Some even talk of democratization of financial processes.
But are advantages and risks evenly balanced between borrowers and lenders?
For the borrower p2p lending fulfills most promises and the only risk is that the desired loan goes unfunded. Most services have a simple fee structure with no hidden fees and the borrower only pays fees when he does receive the wanted loan. And within a time frame of a few weeks after sign-up the borrower reaches his goal – once his loan is funded and the money is transferred to his account. Platforms with auction mechanisms can even benefit the borrower further in supplying the loan at a lower interest rate then the maximum he set.
The lender on the other side is promised an attractive return on investment but faces multiple risks:
borrower fails to repay the loan
(identity) fraud
p2p lending company fails and ceases to service loans (e.g. Boober Netherlands)
unreliable forecasts of ROI and default rates
on some services: open/undefined tax and legal issues
on some microfinance services: currency exchange risks
on some microfinance services: risk of MFI failure
There is also an information asymmetry. The borrower usually has most of the information he needs in advance and the information he has is accurate. Should the information be not accurate (e.g. wrong information on at what interest rates he can be funded) then he can retry at no additional costs only incurring a delay. The lender has information, which is partly based on estimates or forecasts that might prove unreliable and other parts of the information might be untrue (e.g. borrower reported income or borrower description of purpose of the loan). For privacy reasons it might also be a subset of the information the p2p lending service itself has on the borrower (e.g. town of residence omitted, or income or jobs listed only in categories instead of values).
The lending experience of the lender is further hindered by the timeline. The problems may impact him at any point in time of a several year loan term. And he either has no way to terminate his investment immediately or if there is a secondary market he might be only able to do so by accepting economic disadvantages in return for the option to selling off.
The situation of the lenders in this comparison to the borrowers is worsened by the alignment of interests of the p2p lending service company with the borrowers. This is due to several factors:
in most models borrowers pay the larger part of the fees and are thereby important for the revenues
in some markets attracting borrowers is the limiting factor for growth
for obvious image and marketing reasons the p2p lending company is not eager to share information on fraud and (in some cases) default details
for the same reasons companies are slow to react and change their lender information when real default levels are much higher then fore-casted (or even advertised) default levels (examples are Prosper, MYC4)
This imparity results in different levels of satisfaction with the p2p lending service for lenders and borrowers. While those p2p lending services that offer (unmoderated) discussion forums have only few unsatisfied borrowers voicing their opinion (and then mostly on technical issues) lender concern and critic rises over time on some of these services (to the extend that Prosper even deleted it’s forum at one point in time).
They tested the following hypothesises for statistical evidence:
Borrowers within groups are able to borrow at lower credit spreads.
The recommendation of a credit listing by the group leader leads to lower credit spreads.
A group leader’s bidding serves as a credible signal for the quality of the credit listing and results in lower credit spreads.
A group leader’s bidding on a credit listing signals information quality and has a stronger impact on credit spreads than a recommendation by the group leader.
A higher group rating leads to lower credit spreads.
Increasing group size leads to lower credit spreads.
They found that the group leader as intermediary played a very important role on the ability of the borrower to obtain a loan and to obtain this loan at a lower then average interest rate.
Since most of the bids on group affiliated loans came from lenders that were not members of the group, the authors conclude that the group leader has an important signaling function.
Some of the empirical results:
The results … confirm our fundamental hypothesis H1: the use of an interme- diary in the electronic marketplace significantly lowers borrowers’ loan spread. Group affiliation ceteris paribus lowers the credit spread by 25 basis points. (page 15)
Does the choice of the intermediary matter? Should borrowers make demands on paid intermediary services? In order to be able to compare the net impact of unpaid and paid groups, we analyze Bor- rower Rate Net … and find that intermediation significantly lowers borrower’s cost of credit overall. However, we document a dif- ference in the net impact of group membership of 42 basis points: An unpaid intermediary reduces borrower’s credit spread by 107 basis points, a paid intermediary by 65 basis points. It follows that the group fee can turn the case for a paid intermedi- ary borderline. The average group fee of 110 basis points … will more than counter the net reduction in credit spread. Taken together, inter- mediation has a positive net impact but the choice of intermediary matters. We hereby do not com- ment on the overall impact of paid groups, since this analysis does not incorporate the intermediary’s role in overall access to credit or the long-run performance of the loan thus originated. (page 15ff)
the group leader’s bid for the borrower’s credit listing exerts a significant stronger impact on borrowers’ credit conditions than a recommendation. Moreover, Certification is only significant at the 10-percent level. We can confirm Hypothesis H3b: the regression coefficient of Group Leader Bid exceeds Certification. (page 18)
The study delivers strong evidence that Prosper borrowers benefited financially from joining Prosper groups.
