MNH Report #5
Prior to September 13, 2007, Prosper.com group leaders could opt to receive compensation for each loan funded within their groups. This compensation, which Prosper originally referred to by the inaccurate euphemism of “group rewards” and later called “group leader rewards,” and which users frequently called “group leader fees,” came in two forms: a “Finder’s Match Reward,” which was paid out of the origination fees for the loan once the borrower made the first payment (provided that it was made within 30 days after the due date), and a “Finder’s Payment Reward,” a portion of the interest component of each payment made by the borrower (provided that the payment is no more than 30 days late). Match rewards were eliminated in June 2007, when the referral program was launched.
In a rare gesture toward encouraging accountability among group leaders, Prosper has withheld the payment rewards due to the group leader on each payment made during the first 3 months of the loan, and disbursed them to the group leader only after the loan is paid in full. As a now-deleted help page from May 2007 explained:
Payment rewards are paid after a 3-month withholding period to ensure the loan isn't bad right out of the gate. After 3 months, all current month payment rewards earned for that month are paid. At the end of the loan term, any remaining rewards withheld are paid in full.
If the loan defaults, the withheld payment rewards would be paid to the lenders on the loan, rather than to the group leader:
There is one last benefit to lenders of a group that takes group leader rewards: if one of those borrowers defaults, the lenders will share the first 3 months of earned group leader rewards. Every little bit counts!
http://web.archive.org/web/20070504010155/www.prosper.com/help/topics/groups-rewards.aspx
Prosper.com is supposed to issue a statement for group leaders once a month, but the last one I received covers the month of June. For each loan shown on that statement, there is a figure for “Accruals pending payback,” explained in a footnote as “Payment rewards accrued in the first three periods of any loan are deferred until the loan is paid in full.”
Without a more recent statement, it’s hard to calculate an exact figure, but I would estimate that Prosper.com has withheld at least $120 of the payment rewards owed to me as the leader of a small group. For the largest group on Prosper, that amount is likely in the $5000 to $10,000 range. And my quick-and-dirty calculation of the total amount withheld from all group leaders shows that Prosper.com may have withheld $50,000 to $100,000 in accrued payment rewards.
There’s just one problem.
Prosper has no legal authority to do this.
Under Paragraph 3 of the current Group Leader Registration Agreement (dated November 8, 2007), Prosper.com is required to pay group leaders within 30 days after the borrower makes each payment, and there is no provision for deferring or withholding payments accrued during the first 3 months of a loan.
The Finder's Payment Reward will be paid to you monthly, within thirty (30) days after Prosper's receipt of the applicable monthly payment. Finder's Payment Rewards will be paid to you by automated deposit into an FDIC-insured non-interest bearing account at Wells Fargo Bank, N. A. (the "Prosper Funding Account") separate from Prosper's own funds. You will not earn interest on funds in the Prosper Funding Account. You may at any time request that your uncommitted funds in the Prosper Funding Account be returned to you, in which case Prosper will promptly return the remaining funds to your designated deposit account.
http://www.prosper.com/account/common/agreement_view.aspx?agreement_type_id=9
The same is true of the Group Leader Registration Agreement which was in effect when I registered as a group leader (June 22, 2006, version):
The Finder's Payment Reward will be paid to you monthly, within thirty (30) days after Prosper's receipt of the applicable monthly payment.
Ditto for the February 12, 2007, version. (Those were the only three that I had access to while writing this report.)
What’s more, none of the three versions of the Group Leader Registration Agreement which I have reviewed contain any provision requiring a group leader to forfeit any compensation when a borrower defaults. In fact, the language makes it quite clear that a group leader has no liability for loans originated within his group. Quoting Paragraph 4 of the current version:
Group leaders do not guarantee payments on any loan, and you are not required or obligated in any way to guarantee any loan obtained through the Prosper website by any member of your group, or by any other person.
Unlike funds belonging to lenders, for which Prosper Marketplace Inc. has a fiduciary responsibility, rewards owed to group leaders appear to be ordinary debts owed to us as independent contractors. As a result of its decision to withhold the first three months of payment rewards, in the absence of contractual authority, Prosper.com is, and has been for some time, 90 days delinquent in the payment of these debts. (Technically, since the amount of payment rewards due to group lenders are larger than the rewards on later payments, these accounts are probably more than 90 days past due.)
Given the lack of any contractual language or clarifying explanations, I have no way of knowing what Prosper has been doing with these funds. It might be crediting them to group leaders’ Prosper accounts (but rendering them invisible and not subject to withdrawal), meaning that the funds are being held in a non-interest-bearing FBO (“for benefit of”) account at Wells Fargo. Or it might be holding them in some other form of trust.
More likely, Prosper Marketplace Inc. is simply carrying the debt as accounts payable on its balance sheet, and using the funds withheld from group leaders to cover its ordinary operating expenses.
Should Prosper Marketplace Inc. cease operations and/or declare bankruptcy (something I am not predicting here, but cannot exclude as a possibility, given its lackluster performance and lack of growth over the past year), lender funds would (we hope) be protected by the FBO account structure; they do not represent debts owed by Prosper to lenders, but funds belonging to the lenders which Prosper is merely holding.
On the other hand, any funds owed by Prosper to group leaders would likely be treated as ordinary debts in a bankruptcy proceeding, and group leaders would be standing in line alongside the rest of the unsecured creditors.
So, it makes a very real difference to me as a group leader whether I get my $120 or so in accrued payment rewards now, as the contract provides, or a few years from now, when Prosper says it will release the funds.
Not to mention that I’d really like a monthly statement which is less than six months out of date, so I know just how much Prosper owes me. According to the Group Leader Registration Agreement (all three versions):
7. Reporting by Prosper. Prosper will administer your account and provide you with online monthly statements reflecting Finder's Payment Rewards that accrue to your account.
If Prosper cannot withhold payment rewards from group leaders, and group leaders do not forfeit their payment rewards if a loan defaults, where does that leave lenders, who were promised that they would receive the first three months of payment rewards if a loan defaulted?
The promise that lenders would receive forfeited payment rewards if a loan defaults appears nowhere in the Lender Registration Agreement.
However, since Prosper made this promise on the website for the specific purpose of inducing lenders to bid on loans in groups whose leaders were compensated, I’d argue that Prosper Marketplace Inc. must honor that promise. Only the funds cannot come from Prosper’s delinquent debt to group leaders, but must be paid out of Prosper’s own pocket. (This is fitting, I think, since it was Prosper Marketplace Inc. which is ultimately responsible for creating a deeply flawed group system and failing to address its flaws long after they became obvious.)
Lenders attempting to reconcile the amount of reimbursement due from Prosper for defaulted loans should note that this promise, as written in the help pages, applied to rewards due on payments which are made in the first three months of the loan, not to the first three scheduled payments, and that is how Prosper appears to have been interpreting its promise.
(I know this because one of the borrowers in my group just made her fourth scheduled monthly payment a few days early. I was expecting to see a payment reward credited to my account, but it never appeared. My attempt to determine whether Prosper.com’s entitlement to withhold payment rewards applied to the first three payments, or to the first three months, led me to the discovery that Prosper was not entitled to withhold any funds whatsoever.)
Sigh. Another day, another letter to Prosper’s general counsel.
[Additional discussion of this report can be found at Prospers.org.]
Wednesday, December 26, 2007
Tuesday, December 25, 2007
Trav's Do-It-Yourself Secondary Market & Panaderia
[A longer version of this post appeared on the Verified Lenders forum at Prospers.org (registration required; limited to lenders with $500 or more in Prosper.com loans) on November 8, 2007. Since Prosper.com has promised that a debt sale will be finalized by the end of this month, this seemed like an appropriate time to make it available to a larger audience. For those of you who are wondering, I have thus far received no reply to or acknowledgment of my offer.]
MNH Report #4
Over the past year or so, various lenders have expressed an interest in buying defaulted Prosper loans, but various Prosper employees (most recently Doug Fuller, as channelled through Shira) have said that Prosper would not sell defaulted loans to Prosper lenders.
However, to the best of my knowledge, all of these conversations have occurred at a theoretical level, and both the lenders who wanted to buy the defaulted loans and the Prosper employees who said they wouldn't sell might have just been blowing smoke. There has, again to the best of my knowledge, never been a formal, legally-binding, offer from a Prosper lender to purchase a defaulted loan, so Prosper management has never had to confront this issue directly.
Until now.
Yesterday, I mailed the following letter to Doug Fuller, with a copy to Ed Giedgowd, both by certified mail, return receipt requested:
* * * *
November 7, 2007
Doug Fuller
Vice President of Operations
Prosper Marketplace Inc.
111 Sutter St, 22nd floor
San Francisco CA 94104
CERTIFIED MAIL – RETURN RECEIPT REQUESTED
Dear Dr. Fuller:
It has come to my attention that Loan No. **** (Borrower: ****) is more than 120 days past due, and is therefore eligible for sale to a debt buyer, as provided in Section 6.f. of the Lender Registration Agreement.
Accordingly, I hereby offer to purchase all Notes associated with Loan No. **** (Borrower: ****), together with the associated Servicing Rights (as that term is defined in the Lender Registration Agreement) and all causes of action against the borrower arising from this loan (including, but not limited to, claims based on contract and fraud theories), for the amount of **** percent (****%) of the outstanding principal amount due at the time of purchase.
As servicing agent for the lenders on this loan, Prosper Marketplace, Inc., (PMI) has a fiduciary duty to maximize recovery of the lenders’ investment through the loan sale process. After reviewing the results of past sales of comparable loans, I expect that this offer will be significantly more advantageous for lenders than the offers which PMI will receive from other debt buyers. If so, it would be a violation of PMI’s fiduciary duty to the lenders to reject this offer.
The borrower on Loan No. **** is located in ****, and I reside in ****. Based on my review of the relevant state statutes pertaining to collection of debts, it appears that no license is required to collect debts which have been purchased by the collector. (In addition, debt collectors who are attempting to collect fewer than two debts on behalf of another person are specifically exempted from licensing requirements.) Accordingly, I believe that I am fully qualified to purchase this debt under the terms of the Lender Registration Agreement.
As part of the purchase agreement, I will guarantee that all collection activity will be conducted in compliance with federal and state law, including the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.
I further certify that this is a bona fide offer to purchase a delinquent debt for the purpose of collecting that debt, to the extent permitted by law, and that I have had no prior communications whatsoever with the borrower, or any representative of the borrower, with respect to the purchase of this debt.
As you know, delinquent debts are a rapidly depreciating asset, and unreasonable delay on the part of PMI in acceptance of this offer may reduce the value of the Notes, Servicing Rights, and causes of action. Accordingly, if this offer is not accepted by December 31, 2007, I reserve the right to withdraw or modify it with 30 days notice to PMI. Because a withdrawal or modification would almost certainly reduce the amount recovered on behalf of the lenders, unreasonable delay, like rejection of this offer in favor of an inferior one, may constitute a breach of PMI’s fiduciary duty to the lenders.
Please feel free to contact me if you need any additional information, or to make arrangements for payment and assignment of the Notes, Servicing Rights, and causes of action.
Sincerely,
**** ****
cc: Ed Giedgowd
* * * *
I have been unable to identify any legal or regulatory issue which would prevent Prosper from selling defaulted loans to Prosper lenders (though it is possible that there may be some state-by-state licensing or regulatory issues based on the residence of the borrower, lender, or both). And while I have my own theories as to why Prosper would prefer not to sell defaulted loans to Prosper lenders, I don't believe their preferences can be allowed to outweigh their fiduciary duty to obtain the highest possible sale price.
My offer was roughly 4 to 5 times what I expect the lenders would get in a bulk debt sale. I wanted the difference to be dramatic enough to get Prosper's attention. Obviously, each offer to purchase a defaulted loan raises the stakes for Prosper if it chooses to violate its fiduciary duty by rejecting the offers without legal justification, and increases the likelihood that lenders will be allowed to participate as debt buyers.
[Additional discussion of this report can be found at Prospers.org, in The Lobby (no registration required) and on the original thread in the Verified Lenders forum (registration required; limited to lenders with $500 or more in Prosper.com loans.]
MNH Report #4
Over the past year or so, various lenders have expressed an interest in buying defaulted Prosper loans, but various Prosper employees (most recently Doug Fuller, as channelled through Shira) have said that Prosper would not sell defaulted loans to Prosper lenders.
However, to the best of my knowledge, all of these conversations have occurred at a theoretical level, and both the lenders who wanted to buy the defaulted loans and the Prosper employees who said they wouldn't sell might have just been blowing smoke. There has, again to the best of my knowledge, never been a formal, legally-binding, offer from a Prosper lender to purchase a defaulted loan, so Prosper management has never had to confront this issue directly.
Until now.
Yesterday, I mailed the following letter to Doug Fuller, with a copy to Ed Giedgowd, both by certified mail, return receipt requested:
* * * *
November 7, 2007
Doug Fuller
Vice President of Operations
Prosper Marketplace Inc.
111 Sutter St, 22nd floor
San Francisco CA 94104
CERTIFIED MAIL – RETURN RECEIPT REQUESTED
Dear Dr. Fuller:
It has come to my attention that Loan No. **** (Borrower: ****) is more than 120 days past due, and is therefore eligible for sale to a debt buyer, as provided in Section 6.f. of the Lender Registration Agreement.
Accordingly, I hereby offer to purchase all Notes associated with Loan No. **** (Borrower: ****), together with the associated Servicing Rights (as that term is defined in the Lender Registration Agreement) and all causes of action against the borrower arising from this loan (including, but not limited to, claims based on contract and fraud theories), for the amount of **** percent (****%) of the outstanding principal amount due at the time of purchase.
As servicing agent for the lenders on this loan, Prosper Marketplace, Inc., (PMI) has a fiduciary duty to maximize recovery of the lenders’ investment through the loan sale process. After reviewing the results of past sales of comparable loans, I expect that this offer will be significantly more advantageous for lenders than the offers which PMI will receive from other debt buyers. If so, it would be a violation of PMI’s fiduciary duty to the lenders to reject this offer.
The borrower on Loan No. **** is located in ****, and I reside in ****. Based on my review of the relevant state statutes pertaining to collection of debts, it appears that no license is required to collect debts which have been purchased by the collector. (In addition, debt collectors who are attempting to collect fewer than two debts on behalf of another person are specifically exempted from licensing requirements.) Accordingly, I believe that I am fully qualified to purchase this debt under the terms of the Lender Registration Agreement.
As part of the purchase agreement, I will guarantee that all collection activity will be conducted in compliance with federal and state law, including the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.
I further certify that this is a bona fide offer to purchase a delinquent debt for the purpose of collecting that debt, to the extent permitted by law, and that I have had no prior communications whatsoever with the borrower, or any representative of the borrower, with respect to the purchase of this debt.
As you know, delinquent debts are a rapidly depreciating asset, and unreasonable delay on the part of PMI in acceptance of this offer may reduce the value of the Notes, Servicing Rights, and causes of action. Accordingly, if this offer is not accepted by December 31, 2007, I reserve the right to withdraw or modify it with 30 days notice to PMI. Because a withdrawal or modification would almost certainly reduce the amount recovered on behalf of the lenders, unreasonable delay, like rejection of this offer in favor of an inferior one, may constitute a breach of PMI’s fiduciary duty to the lenders.
Please feel free to contact me if you need any additional information, or to make arrangements for payment and assignment of the Notes, Servicing Rights, and causes of action.
Sincerely,
**** ****
cc: Ed Giedgowd
* * * *
I have been unable to identify any legal or regulatory issue which would prevent Prosper from selling defaulted loans to Prosper lenders (though it is possible that there may be some state-by-state licensing or regulatory issues based on the residence of the borrower, lender, or both). And while I have my own theories as to why Prosper would prefer not to sell defaulted loans to Prosper lenders, I don't believe their preferences can be allowed to outweigh their fiduciary duty to obtain the highest possible sale price.
My offer was roughly 4 to 5 times what I expect the lenders would get in a bulk debt sale. I wanted the difference to be dramatic enough to get Prosper's attention. Obviously, each offer to purchase a defaulted loan raises the stakes for Prosper if it chooses to violate its fiduciary duty by rejecting the offers without legal justification, and increases the likelihood that lenders will be allowed to participate as debt buyers.
[Additional discussion of this report can be found at Prospers.org, in The Lobby (no registration required) and on the original thread in the Verified Lenders forum (registration required; limited to lenders with $500 or more in Prosper.com loans.]
What we have here is a failure to verify: Prosper.com and the case of laurenleigh
MNH Report #3
In MNH Report #2, I reported that Prosper Marketplace Inc. modified the Lender Registration Agreement on October 30, 2007, to relieve itself of any responsibility for verifying borrowers’ income, employment, or any other information submitted by the borrower (aside from identity).
As I noted there,
The borrower in question was laurenleigh, a clean HR who received a $6001 loan in June 2006, made 5 payments, and defaulted in August 2007. Her loan was number 1380; listing was
http://www.prosper.com/lend/listing.aspx?listingID=18121
The most interesting discussion of this listing occurred on a RML thread started by her group leader, PsychDoc, now archived at:
http://www.prosperreport.com/prosper/forums/archive/threads/3/1/3107.0.HTM
According to the listing, she was borrowing $6000 to pay off an equal amount of credit card debt. Her monthly payment on the Prosper loan was $234.65; assuming that the monthly minimums on the credit card debt were the same, her 12% DTI would mean that she claimed an annual income of at least $47,000. If other debts appeared on her credit report, the self-reported income would be higher. On her profile (now deleted), she claimed an annual income of $70,000.
On the now-deleted (but independently archived) Prosper.com forum, laurenleigh presented a paystub to document her income, showing $1346.15 as income for her first week on a new job, corresponding to an annual salary of $70,000. That paystub was posted, with her permission, at:
http://prosperlenders.wikispaces.com/18121
Lenders quickly pointed out a number of obvious flaws with this document, some damning, others merely suspicious:
(1) It appeared to be created using a word processing program, not tax software.
(2) The employer’s address was missing the quadrant information (SE/SW/NE/NW) that is part of every Washington, D.C., address.
(3) According to the USPS website, the employer’s address did not exist in any quadrant of D.C.
(4) The USPS did have a record of a similar address (Ct. rather than Ave., NE quadrant), with a nine-digit zip matching the one on the paystub. A reverse directory search of that address revealed that the corresponding phone number belonged to someone with the same first initial and last name as laurenleigh.
(5) Extensive searches failed to uncover any documentation of the employer’s existence.
(6) The company name included initials which matched those of the borrower.
(7) The check date is shown as May 1, 2006, but the pay period was May 25-31 of that year.
(8) The check number contained slashes.
(9) The withholding status was listed as H-3, which is not a valid IRS status.
(10) No state tax was withheld.
Assuming that laurenleigh submitted the same document to Prosper for verification, for Prosper to verify her income based on an obviously forged document, reporting wages paid by a non-existent employer with a non-existent address, was not “commercially reasonable.”
In the thread, Cusip suggested that she might have submitted other documentation, such as federal tax returns, to Prosper to document her income. However, she had admitted on CreditBoards.com that she only reported $40,000 on the tax returns which she actually filed with the IRS, so they would not have supported a claim of annual income in the $47,000 - $70,000 range. (On the RML thread, she did not deny understating her income on the tax forms, and said that she would be filing amended returns.)
The nature of laurenleigh’s employment also casts doubt on her ability to supply Prosper verification staff with legitimate documents supporting her self-reported income of $47,000 to $70,000.
Elsewhere on the web, and perhaps hinted at by alan in the RML thread, laurenleigh posted that she had been employed as an exotic dancer – a cash-based profession for which paystubs would ordinarily be unavailable.
Following childbirth, she had an extended period of unemployment (or at least an absence from the strip clubs). During that time, she underwent a breast enlargement, tummy tuck, and liposuction. The surgery occurred two months before she sought the loan; the disappearing semi-nude photos in her Yahoo album referred to in the RML thread were presumably the before and after shots. I have no idea about recovery time for plastic surgery, so I don’t know if she would have been ready to resume her career by the time she requested the loan.
In any event, it seems highly unlikely that she would have been able to produce legitimate proof of income to support income in the $47,000 to $70,000 range, and the posting of the fake paystub and other thread discussion should have alerted Prosper verification staff to the likelihood that any other documentation submitted would be equally bogus.
Prosper cannot claim that its verification staff simply overlooked the flaws in the paystub since a lender on the RML thread, norcal_cct, flagged the listing and contacted Prosper directly to alert their staff to the problem.
Even after it was placed on notice that laurenleigh was attempting to use manufactured documentation of her income, Prosper Marketplace Inc. approved the loan and disbursed the funds. The ensuing default resulted in a loss of approximately $5,000 for lenders.
In retrospect, my own posts on that RML thread were not as clear as they should have been. In short, I believed that Prosper verification should have cancelled this loan for fraud (or, at least, inability to prove income). When I placed a bid, even after exposing the paystub as a fake, it was with the expectation that they were likely to do so. However, at the time, I believed that laurenleigh did in fact have enough income to repay the loan, even if that income could not be documented, so I was glad that they allowed the loan to originate. Once she stopped paying, of course, the latter part of my opinion changed.
While Prosper could argue that some of us (myself included) placed bids with full knowledge that the paystub was a fake, many lenders bid before this information became available, or bid without viewing the forum thread, and certainly deserved to have the full protection of Prosper’s verification process.
At the time laurenleigh’s loan was approved, Prosper’s Lender Registration Agreement provided that:
[Emphasis added.]
I’ve addressed elsewhere the difficult question of what constitutes material statements of fact in the context of a loan listing, and I suspect that the same considerations apply to a determination of what constitutes “commercially reasonable” verification of those facts.
The problem, briefly, is that, on the one hand, due to the unique social character of P2P lending, any fact, no matter how obscure, trivial, or unrelated to the borrower’s willingness and ability to repay the loan, might trigger a particular lender’s decision to bid or not bid, and could be considered a material fact. (The only exception would be information regarding the borrower’s race, sex, ethnicity, religion, etc., which lenders are prohibited from treating as material facts.)
On the other hand, a court might hold that the only material facts are those which a reasonable commercial lender would use to make a lending decision – identity, credit history, financial history and status, income, and employment. Using the latter theory, a court might hold that “commercially reasonable efforts” applies only to those facts which would be verified by a reasonable commercial lender, not every extraneous piece of data in the listing.
We need not resolve this question, however, in the case of laurenleigh. Prosper’s failure to exercise “commercially reasonable” verification efforts went to the heart of the borrower’s ability to pay – her income and employment. Particularly when the defects in the paystubs were brought to its attention prior to origination, there is no “commercially reasonable” justification for accepting a paystub from a fake company with a fake address, bearing multiple indicia of fraud, as proof of income.
Prosper clearly breached its warranty to lenders, by failing to make “commercially reasonable efforts” to verify laurenleigh’s income and employment.
Under the terms of this agreement, if Prosper failed to use “commercially reasonable efforts” to “verify information provided by the borrower in connection with the loan,” it would be in breach of its warranty, and would be required to cure the defect, repurchase the loan, or indemnify lenders against all losses (including losses due to delinquency or default).
A defect in pre-origination review cannot be cured once the loan is originated. Nor can Prosper repurchase the loan from lenders, since it has already been sold to a debt buyer. Prosper’s only option is to indemnify the lenders for all losses arising from the late payment and default of this loan, including lost interest at 23.75%.
As a lender on this loan, I am writing to Ed Giedgowd, Chief Compliance Officer and General Counsel for Prosper Marketplace Inc., to request that PMI honor its warranty and reimburse the lenders on this loan for their losses. I urge other affected lenders to do the same.
* * * *
I’m sure there are many loans where Prosper’s verification efforts fell far short of “commercially reasonable efforts,” though, in most cases, lenders do not have enough data about the borrower to prove this. If you know of a case where you believe that Prosper, prior to October 30, 2007, violated its warranty of “commercially reasonable” verification, please feel free to post it here.
[Additional discussion of this report can be found on Prospers.org.]
In MNH Report #2, I reported that Prosper Marketplace Inc. modified the Lender Registration Agreement on October 30, 2007, to relieve itself of any responsibility for verifying borrowers’ income, employment, or any other information submitted by the borrower (aside from identity).
As I noted there,
One could argue, of course, that this change has no real significance (other than as a symbol of Prosper’s lack of commitment to protecting lenders from fraud). It is possible, after all, that Prosper never made “commercially reasonable efforts” to protect lenders from fraud and never intended to honor this part of its representations and warranties to lenders. In MNH Report #3, I’ll explore this possibility, with a close (but PII-free) look at Prosper’s handling of a loan (now defaulted) where a borrower provided obviously false information.
The borrower in question was laurenleigh, a clean HR who received a $6001 loan in June 2006, made 5 payments, and defaulted in August 2007. Her loan was number 1380; listing was
http://www.prosper.com/lend/listing.aspx?listingID=18121
The most interesting discussion of this listing occurred on a RML thread started by her group leader, PsychDoc, now archived at:
http://www.prosperreport.com/prosper/forums/archive/threads/3/1/3107.0.HTM
According to the listing, she was borrowing $6000 to pay off an equal amount of credit card debt. Her monthly payment on the Prosper loan was $234.65; assuming that the monthly minimums on the credit card debt were the same, her 12% DTI would mean that she claimed an annual income of at least $47,000. If other debts appeared on her credit report, the self-reported income would be higher. On her profile (now deleted), she claimed an annual income of $70,000.
On the now-deleted (but independently archived) Prosper.com forum, laurenleigh presented a paystub to document her income, showing $1346.15 as income for her first week on a new job, corresponding to an annual salary of $70,000. That paystub was posted, with her permission, at:
http://prosperlenders.wikispaces.com/18121
Lenders quickly pointed out a number of obvious flaws with this document, some damning, others merely suspicious:
(1) It appeared to be created using a word processing program, not tax software.
(2) The employer’s address was missing the quadrant information (SE/SW/NE/NW) that is part of every Washington, D.C., address.
(3) According to the USPS website, the employer’s address did not exist in any quadrant of D.C.
(4) The USPS did have a record of a similar address (Ct. rather than Ave., NE quadrant), with a nine-digit zip matching the one on the paystub. A reverse directory search of that address revealed that the corresponding phone number belonged to someone with the same first initial and last name as laurenleigh.
(5) Extensive searches failed to uncover any documentation of the employer’s existence.
(6) The company name included initials which matched those of the borrower.
(7) The check date is shown as May 1, 2006, but the pay period was May 25-31 of that year.
(8) The check number contained slashes.
(9) The withholding status was listed as H-3, which is not a valid IRS status.
(10) No state tax was withheld.
Assuming that laurenleigh submitted the same document to Prosper for verification, for Prosper to verify her income based on an obviously forged document, reporting wages paid by a non-existent employer with a non-existent address, was not “commercially reasonable.”
In the thread, Cusip suggested that she might have submitted other documentation, such as federal tax returns, to Prosper to document her income. However, she had admitted on CreditBoards.com that she only reported $40,000 on the tax returns which she actually filed with the IRS, so they would not have supported a claim of annual income in the $47,000 - $70,000 range. (On the RML thread, she did not deny understating her income on the tax forms, and said that she would be filing amended returns.)
The nature of laurenleigh’s employment also casts doubt on her ability to supply Prosper verification staff with legitimate documents supporting her self-reported income of $47,000 to $70,000.
Elsewhere on the web, and perhaps hinted at by alan in the RML thread, laurenleigh posted that she had been employed as an exotic dancer – a cash-based profession for which paystubs would ordinarily be unavailable.
Following childbirth, she had an extended period of unemployment (or at least an absence from the strip clubs). During that time, she underwent a breast enlargement, tummy tuck, and liposuction. The surgery occurred two months before she sought the loan; the disappearing semi-nude photos in her Yahoo album referred to in the RML thread were presumably the before and after shots. I have no idea about recovery time for plastic surgery, so I don’t know if she would have been ready to resume her career by the time she requested the loan.
In any event, it seems highly unlikely that she would have been able to produce legitimate proof of income to support income in the $47,000 to $70,000 range, and the posting of the fake paystub and other thread discussion should have alerted Prosper verification staff to the likelihood that any other documentation submitted would be equally bogus.
Prosper cannot claim that its verification staff simply overlooked the flaws in the paystub since a lender on the RML thread, norcal_cct, flagged the listing and contacted Prosper directly to alert their staff to the problem.
Nice catch. Clearly a faked paystub for a company she just made up. This listing should not pass Prosper verification, and I personally will flag the listing (as well as contact Prosper) to make sure that it does not.
Even after it was placed on notice that laurenleigh was attempting to use manufactured documentation of her income, Prosper Marketplace Inc. approved the loan and disbursed the funds. The ensuing default resulted in a loss of approximately $5,000 for lenders.
In retrospect, my own posts on that RML thread were not as clear as they should have been. In short, I believed that Prosper verification should have cancelled this loan for fraud (or, at least, inability to prove income). When I placed a bid, even after exposing the paystub as a fake, it was with the expectation that they were likely to do so. However, at the time, I believed that laurenleigh did in fact have enough income to repay the loan, even if that income could not be documented, so I was glad that they allowed the loan to originate. Once she stopped paying, of course, the latter part of my opinion changed.
While Prosper could argue that some of us (myself included) placed bids with full knowledge that the paystub was a fake, many lenders bid before this information became available, or bid without viewing the forum thread, and certainly deserved to have the full protection of Prosper’s verification process.
At the time laurenleigh’s loan was approved, Prosper’s Lender Registration Agreement provided that:
Prosper makes the following representations and warranties to you that, with respect to each Note sold to you under this Agreement, as of the date the Note is funded by Prosper and transferred to you:
* * *
c. Prosper has made commercially reasonable efforts to authenticate the identity of the borrower and verify information provided by the borrower in connection with the loan evidenced by the Note. Based on such authentication and verification, to the best of Prosper’s knowledge: (i) the borrower had full legal capacity to execute and deliver the Note, and (ii) each Note sold to you by Prosper is the legal, valid and binding obligation of the borrower, and is enforceable in accordance with its terms.
[Emphasis added.]
I’ve addressed elsewhere the difficult question of what constitutes material statements of fact in the context of a loan listing, and I suspect that the same considerations apply to a determination of what constitutes “commercially reasonable” verification of those facts.
The problem, briefly, is that, on the one hand, due to the unique social character of P2P lending, any fact, no matter how obscure, trivial, or unrelated to the borrower’s willingness and ability to repay the loan, might trigger a particular lender’s decision to bid or not bid, and could be considered a material fact. (The only exception would be information regarding the borrower’s race, sex, ethnicity, religion, etc., which lenders are prohibited from treating as material facts.)
On the other hand, a court might hold that the only material facts are those which a reasonable commercial lender would use to make a lending decision – identity, credit history, financial history and status, income, and employment. Using the latter theory, a court might hold that “commercially reasonable efforts” applies only to those facts which would be verified by a reasonable commercial lender, not every extraneous piece of data in the listing.
We need not resolve this question, however, in the case of laurenleigh. Prosper’s failure to exercise “commercially reasonable” verification efforts went to the heart of the borrower’s ability to pay – her income and employment. Particularly when the defects in the paystubs were brought to its attention prior to origination, there is no “commercially reasonable” justification for accepting a paystub from a fake company with a fake address, bearing multiple indicia of fraud, as proof of income.
Prosper clearly breached its warranty to lenders, by failing to make “commercially reasonable efforts” to verify laurenleigh’s income and employment.
Under the terms of this agreement, if Prosper failed to use “commercially reasonable efforts” to “verify information provided by the borrower in connection with the loan,” it would be in breach of its warranty, and would be required to cure the defect, repurchase the loan, or indemnify lenders against all losses (including losses due to delinquency or default).
A defect in pre-origination review cannot be cured once the loan is originated. Nor can Prosper repurchase the loan from lenders, since it has already been sold to a debt buyer. Prosper’s only option is to indemnify the lenders for all losses arising from the late payment and default of this loan, including lost interest at 23.75%.
As a lender on this loan, I am writing to Ed Giedgowd, Chief Compliance Officer and General Counsel for Prosper Marketplace Inc., to request that PMI honor its warranty and reimburse the lenders on this loan for their losses. I urge other affected lenders to do the same.
* * * *
I’m sure there are many loans where Prosper’s verification efforts fell far short of “commercially reasonable efforts,” though, in most cases, lenders do not have enough data about the borrower to prove this. If you know of a case where you believe that Prosper, prior to October 30, 2007, violated its warranty of “commercially reasonable” verification, please feel free to post it here.
[Additional discussion of this report can be found on Prospers.org.]
Wednesday, December 19, 2007
New lender agreement cuts back on promise of fraud protection for lenders
[Originally posted on Prospers.org on November 1, 2007. Extensive discussion can be found there. (Registration required.)]
MNH Report #2
In her infamous “snippets” post, Prosper_Shira attempted to justify Prosper’s crusade against public posting of Personally Identifiable Information (PII) on the grounds that Prosper’s anti-fraud department was aggressively protecting lenders against borrower dishonesty.
http://forums.prosper.com/index.php?showtopic=30759 (dead link; Prosper.com deleted its official forum)
On October 30, 2007, Prosper went one step further in obstructing the efforts of lenders to detect fraudulent activity by borrowers when it hid almost all closed listings from view. So, more than ever before, lenders are forced to rely solely on “Prosper’s fraud detecting abilities.”
At the time Shira posted about “snippets,” Section 7 of Prosper’s Lender Registration Agreement (based on my hard copy printout from August 25, 2007) provided that:
[Emphasis added.]
Under the terms of this agreement, if Prosper failed to use “commercially reasonable efforts” to “verify information provided by the borrower in connection with the loan,” it would be in breach of its warranty, and would be required to cure the defect, repurchase the loan, or indemnify lenders against all losses (including losses due to delinquency or default).
Since Prosper expects (demands) that lenders rely solely upon “Prosper’s fraud detecting abilities,” one would expect that this warranty would be strengthened to demonstrate Prosper’s confidence in its own anti-fraud efforts, right?
Wrong.
In the new version of the Lender Registration Agreement, with changes effective October 30, 2007, Prosper no longer promises to make “commercially reasonable efforts” to prevent any form of fraud other than identity theft:
From the new Section 7:
(Prosper still “reserves the right to verify all information provided by borrowers,” (Section 9.a) but, by making these changes in the Lender Registration Agreement, it has relieved itself of any obligation to do so, and of any consequences arising from its failure to do so.)
One could argue, of course, that this change has no real significance (other than as a symbol of Prosper’s lack of commitment to protecting lenders from fraud). It is possible, after all, that Prosper never made “commercially reasonable efforts” to protect lenders from fraud and never intended to honor this part of its representations and warranties to lenders. In MNH Report #3, I’ll explore this possibility, with a close (but PII-free) look at Prosper’s handling of a loan (now defaulted) where a borrower provided obviously false information.
* * *
The elimination of Prosper’s commitment to make “commercially reasonable efforts” to combat fraud (other than identity theft) is, I think, the most significant change made in the Lender Registration Agreement on October 30, 2007. Two other changes which might be of interest (or at least pathos) are:
(1) The addition of the Xraider Clause. Last month, lender xraider contacted Penncro to discuss their unsuccessful efforts to extract funds from a delinquent borrower. Prosper’s response was to tell the Penncro employee not to talk to her, and add a new paragraph to Section 14, which lists Prohibited Activities for Lenders:
In another thread, xraider has put Prosper on notice that she declines to be bound by this change in terms, as it was not part of the Agreement which she originally accepted not art of the Agreement at any time that she placed a bid.
http://forums.prosper.com/index.php?showtopic=32056 (forum deleted by Prosper.com)
(2) In past versions of the Lender Registration Agreement, the non-discrimination clause in Section 2 began with this sentence:
That language has been deleted.
* * *
Final disclaimers: I am not a lawyer, and nothing in this post constitutes legal advice.
MNH Report #2
In her infamous “snippets” post, Prosper_Shira attempted to justify Prosper’s crusade against public posting of Personally Identifiable Information (PII) on the grounds that Prosper’s anti-fraud department was aggressively protecting lenders against borrower dishonesty.
Prosper’s fraud detecting abilities are much more sophisticated than snippets of information coming from snooping lenders here and there. We have bank records, address records, phone records, IP addresses, and other copious amounts of information about the borrowers that lets us do a much more thorough and definitive assessment of risk and fraud. Your snippets (which are additive to the data we already have) are more valuable coming through your “Report this listing” reports than being posted on the forums.
http://forums.prosper.com/index.php?showtopic=30759 (dead link; Prosper.com deleted its official forum)
On October 30, 2007, Prosper went one step further in obstructing the efforts of lenders to detect fraudulent activity by borrowers when it hid almost all closed listings from view. So, more than ever before, lenders are forced to rely solely on “Prosper’s fraud detecting abilities.”
At the time Shira posted about “snippets,” Section 7 of Prosper’s Lender Registration Agreement (based on my hard copy printout from August 25, 2007) provided that:
Prosper makes the following representations and warranties to you that, with respect to each Note sold to you under this Agreement, as of the date the Note is funded by Prosper and transferred to you:
* * *
c.
Prosper has made commercially reasonable efforts to authenticate the identity of the borrower and verify information provided by the borrower in connection with the loan evidenced by the Note. Based on such authentication and verification, to the best of Prosper’s knowledge: (i) the borrower had full legal capacity to execute and deliver the Note, and (ii) each Note sold to you by Prosper is the legal, valid and binding obligation of the borrower, and is enforceable in accordance with its terms.
[Emphasis added.]
Under the terms of this agreement, if Prosper failed to use “commercially reasonable efforts” to “verify information provided by the borrower in connection with the loan,” it would be in breach of its warranty, and would be required to cure the defect, repurchase the loan, or indemnify lenders against all losses (including losses due to delinquency or default).
Since Prosper expects (demands) that lenders rely solely upon “Prosper’s fraud detecting abilities,” one would expect that this warranty would be strengthened to demonstrate Prosper’s confidence in its own anti-fraud efforts, right?
Wrong.
In the new version of the Lender Registration Agreement, with changes effective October 30, 2007, Prosper no longer promises to make “commercially reasonable efforts” to prevent any form of fraud other than identity theft:
From the new Section 7:
Prosper makes the following representations and warranties to you that, with respect to each Note sold to you under this Agreement, as of the date the Note is sold, assigned and transferred to you:
* * *
c. Prosper has made commercially reasonable efforts to authenticate and verify the identity of the borrower on the loan evidenced by the Note. Based on such authentication and verification, to the best of Prosper's knowledge: (i) the borrower had full legal capacity to execute and deliver the Note, and (ii) each Note sold to you by Prosper is the legal, valid and binding obligation of the borrower, and is enforceable in accordance with its terms.
In case any lender is confused as to Prosper’s intent in making this change, a brand new paragraph has been added to Section 9, which covers Prosper’s right to verify information and cancel listings:
e. In most instances, Prosper does not verify the income, employment and occupation or other information provided by borrowers in listings. The borrower's income, employment and occupation are self-reported, and the borrower's non-housing debt-to-income ratio is determined by Prosper from a combination of the borrower's self-reported income and information from the borrower's credit report. The credit data that appears in listings is taken
directly from a credit report obtained on the borrower from a credit reporting agency, without any review or verification by Prosper. Prosper does not verify any statements by borrowers as to how loan proceeds are to be used and does not confirm after loan funding how loan proceeds were used. In most instances homeownership status is derived from the borrower's credit report, but is not verified by Prosper; if the report reflects an active mortgage loan, the borrower is presumed to be a homeowner. In connection with Prosper's identity and anti-fraud verification of borrowers, Prosper verifies the borrower's deposit account to determine that the borrower is the holder of record of the account.
(Prosper still “reserves the right to verify all information provided by borrowers,” (Section 9.a) but, by making these changes in the Lender Registration Agreement, it has relieved itself of any obligation to do so, and of any consequences arising from its failure to do so.)
One could argue, of course, that this change has no real significance (other than as a symbol of Prosper’s lack of commitment to protecting lenders from fraud). It is possible, after all, that Prosper never made “commercially reasonable efforts” to protect lenders from fraud and never intended to honor this part of its representations and warranties to lenders. In MNH Report #3, I’ll explore this possibility, with a close (but PII-free) look at Prosper’s handling of a loan (now defaulted) where a borrower provided obviously false information.
* * *
The elimination of Prosper’s commitment to make “commercially reasonable efforts” to combat fraud (other than identity theft) is, I think, the most significant change made in the Lender Registration Agreement on October 30, 2007. Two other changes which might be of interest (or at least pathos) are:
(1) The addition of the Xraider Clause. Last month, lender xraider contacted Penncro to discuss their unsuccessful efforts to extract funds from a delinquent borrower. Prosper’s response was to tell the Penncro employee not to talk to her, and add a new paragraph to Section 14, which lists Prohibited Activities for Lenders:
g. Contact any collection agency or law firm to which your Note has been
referred for collection;
In another thread, xraider has put Prosper on notice that she declines to be bound by this change in terms, as it was not part of the Agreement which she originally accepted not art of the Agreement at any time that she placed a bid.
http://forums.prosper.com/index.php?showtopic=32056 (forum deleted by Prosper.com)
(2) In past versions of the Lender Registration Agreement, the non-discrimination clause in Section 2 began with this sentence:
THE PROSPER MARKETPLACE IS INTENDED TO FOSTER IDEALS OF COMMUNITY SERVICE, CONNECTION, AND RESPONSIBILITY.
That language has been deleted.
* * *
Final disclaimers: I am not a lawyer, and nothing in this post constitutes legal advice.
Follow-up to MNH Report #1
I originally posted MNH Report #1 ("Misappropriation of lender funds by Prosper Marketplace Inc.) on both the independent discussion forums at Prospers.org and the Prosper.com official forums (which have since been deleted) on October 31, 2007. After six weeks, Prosper.com has still not reimbursed lenders for the thousands of dollars which they took without legal authority.
Here is my follow-up letter to Ed Giedgowd (Chief Compliance Officer and General Counsel), Chris Larsen (Chief Executive Officer and Founder), and John Witchel (Chief Technology Officer and Founder):
[VIA E-MAIL AND U.S. MAIL]
December 18, 2007
Gentlemen:
On October 31, 2007, I posted on the official forums for Prosper Marketplace Inc. (PMI) a complaint that PMI had violated its contractual and fiduciary obligations to loan purchasers (“lenders”) by misappropriating thousands of dollars in servicing fees and group leader fees from payments made by delinquent borrowers to lenders, in the absence of any legal right or authority to do so.
Under Paragraph 5 of the Lender Registration Agreement which was in effect prior to November 8, 2007:
"With respect to each Note you purchase from Prosper, the Servicing Fee is payable only upon Prosper's receipt of the full monthly payment from the borrower on such Loan no later than thirty (30) days after the due date of the payment."
The Lender Registration Agreement, in Paragraph 13, has also provided – and continues to provide -- that group leader fees will only be deducted from borrower payments which are made within 30 days of the due date:
"a. You acknowledge that the group leader on certain loans that resulted from listings that were posted prior to September 13, 2007 may receive a percentage of the interest portion of each monthly loan payment made by each borrower on your Notes, provided that no loan payment is more than thirty (30) days past due. ….
"b. The group leader will not receive any Finder's Payment Reward at a time when any payment on a Note is more than thirty (30) days past due. With respect to loan payments received by Prosper on a Note that is more than thirty (30) days past due, Prosper will pay you, rather than the group leader, the entire amount of principal and interest received on such Note."
For more than one and one-half years, PMI has violated these contractual agreements and misappropriated funds belonging to the lenders for whom it serves as servicing agent, taking those funds for its own use and for distribution to its independent contractors (“group leaders”).
Several days after I posted this complaint in the official PMI forums, Shira Levine, PMI’s Director of Community Marketing, replied. According to Ms. Levine’s explanation, the taking of these funds was a deliberate and intentional act by PMI, while the language in the legal agreements precluding it from doing so was “an unintended drafting error”. On the forum, Ms. Levine promised that:
"Lenders who were charged servicing fees in a manner inconsistent with the language quoted above will receive an appropriate credit in their funding account."
Six weeks have passed since that promise was made, but PMI has not reimbursed lenders for the thousands of dollars which it has taken from their accounts without legal authority to do so.
Indeed, it appears that rather than honoring its contractual and fiduciary responsibilities to the lenders, PMI has devoted its considerable resources to suppressing information about this and other instances of corporate malfeasance, with the goal of depriving lenders of the opportunity to exercise their legal rights. My original post, along with Ms. Levine’s promise, have been deleted, along with all other contents of PMI’s original forum, and my attempts to post regarding this issue on the new official forums have been blocked. PMI has also taken extreme steps to prevent lenders from becoming aware of the existence of an independent forum where this issue and others are freely discussed.
Prosper’s decision to focus its resources on suppressing information rather than making prompt restitution to lenders creates a clear impression that PMI’s continuing misappropriation of lender funds is a deliberate attempt by PMI to enrich itself at the expense of lenders to whom it owes a fiduciary duty, and that PMI has no intention of making lenders whole. It is my understanding that many jurisdictions treat deliberate misappropriation of funds, and failure to promptly return negligently misappropriated funds, by a party acting in the role of fiduciary, as a criminal conversion, i.e. theft.
Accordingly, I am filing formal complaints against PMI with the attorneys general of California and New Mexico, as well as the Federal Trade Commission.
In the event that all Prosper lenders are not reimbursed for the unauthorized servicing fees and group leader fees by the end of this month (two months after the date of my original complaint), I will be filing complaints with the attorneys general for the other 48 states, since each of them almost certainly has constituents who have been adversely affected by this misappropriation of funds.
In addition, I am sending copies of my formal complaint to each of the state agencies which have granted lending licenses to PMI, and to the Massachusetts Division of Banks, where PMI is registered as a loan servicer. While breaches of duties owed to persons other than borrowers are outside of the direct jurisdiction of most of these agencies, it appears to be relevant to the financial responsibility, character, reputation, integrity, and general fitness of PMI, which is typically a prerequisite for licensing. My understanding, however, is that the bond which PMI was required to post with the Massachusetts Division of Banks does protect loan purchasers against such breaches, and affected lenders may wish to file claims against this bond.
Finally, I am providing a copy of my complaint to the Securities and Exchange Commission. Given that PMI is unwilling or unable to honor its existing fiduciary responsibilities, I do not believe that it is appropriate for PMI to expand its activities to include operation of a secondary trading market for securities.
Please be aware that the issues which I raised on October 31 – and which PMI has failed to satisfactorily address – are merely the tip of the iceberg. Since September 13, I have devoted considerable time to reviewing compliance issues related to PMI’s operations.
[Preview of MNH #5 et seq. deleted.]
When I discovered PMI in May 2006, I was excited by the concept of P2P lending, and, despite early skepticism regarding various aspects of PMI’s implementation of that concept, I regarded it as a noble experiment worthy of support, as did many other lenders whose support and goodwill PMI has squandered. I became an active lender, and once I felt that I had an adequate understanding of what was necessary to deliver profitable loans to loan purchasers, I opened a group, and began working on plans to actively promote the Prosper product. (My group, by the way, has yielded a net ROI for “lenders” of over 20%, from loans to the subprime borrowers which PMI now wishes to exclude from its customer base.)
As long as I could believe that PMI was engaged in a noble experiment, I was willing to set aside many of my suspicions and concerns about corporate misconduct in the hopes that these violations were simply the growing pains of a start-up enterprise, and that they would eventually be addressed or ameliorated over time.
Sadly, PMI’s actions over the past ten months, beginning with the March 31 forum suspensions, and continuing through the closure and deletion of the official forum and attacks on independent third-party websites, demonstrate that PMI has chosen the low road of suppressing information about its short-comings and malfeasance, rather than the high road of making a good faith attempt to correct them. They have persuaded me that there is nothing noble about PMI, and I will be proceeding accordingly, as an advocate for the interests of lenders and borrowers who have been victimized by its actions.
Sincerely,
Trav
Here is my follow-up letter to Ed Giedgowd (Chief Compliance Officer and General Counsel), Chris Larsen (Chief Executive Officer and Founder), and John Witchel (Chief Technology Officer and Founder):
[VIA E-MAIL AND U.S. MAIL]
December 18, 2007
Gentlemen:
On October 31, 2007, I posted on the official forums for Prosper Marketplace Inc. (PMI) a complaint that PMI had violated its contractual and fiduciary obligations to loan purchasers (“lenders”) by misappropriating thousands of dollars in servicing fees and group leader fees from payments made by delinquent borrowers to lenders, in the absence of any legal right or authority to do so.
Under Paragraph 5 of the Lender Registration Agreement which was in effect prior to November 8, 2007:
"With respect to each Note you purchase from Prosper, the Servicing Fee is payable only upon Prosper's receipt of the full monthly payment from the borrower on such Loan no later than thirty (30) days after the due date of the payment."
The Lender Registration Agreement, in Paragraph 13, has also provided – and continues to provide -- that group leader fees will only be deducted from borrower payments which are made within 30 days of the due date:
"a. You acknowledge that the group leader on certain loans that resulted from listings that were posted prior to September 13, 2007 may receive a percentage of the interest portion of each monthly loan payment made by each borrower on your Notes, provided that no loan payment is more than thirty (30) days past due. ….
"b. The group leader will not receive any Finder's Payment Reward at a time when any payment on a Note is more than thirty (30) days past due. With respect to loan payments received by Prosper on a Note that is more than thirty (30) days past due, Prosper will pay you, rather than the group leader, the entire amount of principal and interest received on such Note."
For more than one and one-half years, PMI has violated these contractual agreements and misappropriated funds belonging to the lenders for whom it serves as servicing agent, taking those funds for its own use and for distribution to its independent contractors (“group leaders”).
Several days after I posted this complaint in the official PMI forums, Shira Levine, PMI’s Director of Community Marketing, replied. According to Ms. Levine’s explanation, the taking of these funds was a deliberate and intentional act by PMI, while the language in the legal agreements precluding it from doing so was “an unintended drafting error”. On the forum, Ms. Levine promised that:
"Lenders who were charged servicing fees in a manner inconsistent with the language quoted above will receive an appropriate credit in their funding account."
Six weeks have passed since that promise was made, but PMI has not reimbursed lenders for the thousands of dollars which it has taken from their accounts without legal authority to do so.
Indeed, it appears that rather than honoring its contractual and fiduciary responsibilities to the lenders, PMI has devoted its considerable resources to suppressing information about this and other instances of corporate malfeasance, with the goal of depriving lenders of the opportunity to exercise their legal rights. My original post, along with Ms. Levine’s promise, have been deleted, along with all other contents of PMI’s original forum, and my attempts to post regarding this issue on the new official forums have been blocked. PMI has also taken extreme steps to prevent lenders from becoming aware of the existence of an independent forum where this issue and others are freely discussed.
Prosper’s decision to focus its resources on suppressing information rather than making prompt restitution to lenders creates a clear impression that PMI’s continuing misappropriation of lender funds is a deliberate attempt by PMI to enrich itself at the expense of lenders to whom it owes a fiduciary duty, and that PMI has no intention of making lenders whole. It is my understanding that many jurisdictions treat deliberate misappropriation of funds, and failure to promptly return negligently misappropriated funds, by a party acting in the role of fiduciary, as a criminal conversion, i.e. theft.
Accordingly, I am filing formal complaints against PMI with the attorneys general of California and New Mexico, as well as the Federal Trade Commission.
In the event that all Prosper lenders are not reimbursed for the unauthorized servicing fees and group leader fees by the end of this month (two months after the date of my original complaint), I will be filing complaints with the attorneys general for the other 48 states, since each of them almost certainly has constituents who have been adversely affected by this misappropriation of funds.
In addition, I am sending copies of my formal complaint to each of the state agencies which have granted lending licenses to PMI, and to the Massachusetts Division of Banks, where PMI is registered as a loan servicer. While breaches of duties owed to persons other than borrowers are outside of the direct jurisdiction of most of these agencies, it appears to be relevant to the financial responsibility, character, reputation, integrity, and general fitness of PMI, which is typically a prerequisite for licensing. My understanding, however, is that the bond which PMI was required to post with the Massachusetts Division of Banks does protect loan purchasers against such breaches, and affected lenders may wish to file claims against this bond.
Finally, I am providing a copy of my complaint to the Securities and Exchange Commission. Given that PMI is unwilling or unable to honor its existing fiduciary responsibilities, I do not believe that it is appropriate for PMI to expand its activities to include operation of a secondary trading market for securities.
Please be aware that the issues which I raised on October 31 – and which PMI has failed to satisfactorily address – are merely the tip of the iceberg. Since September 13, I have devoted considerable time to reviewing compliance issues related to PMI’s operations.
[Preview of MNH #5 et seq. deleted.]
When I discovered PMI in May 2006, I was excited by the concept of P2P lending, and, despite early skepticism regarding various aspects of PMI’s implementation of that concept, I regarded it as a noble experiment worthy of support, as did many other lenders whose support and goodwill PMI has squandered. I became an active lender, and once I felt that I had an adequate understanding of what was necessary to deliver profitable loans to loan purchasers, I opened a group, and began working on plans to actively promote the Prosper product. (My group, by the way, has yielded a net ROI for “lenders” of over 20%, from loans to the subprime borrowers which PMI now wishes to exclude from its customer base.)
As long as I could believe that PMI was engaged in a noble experiment, I was willing to set aside many of my suspicions and concerns about corporate misconduct in the hopes that these violations were simply the growing pains of a start-up enterprise, and that they would eventually be addressed or ameliorated over time.
Sadly, PMI’s actions over the past ten months, beginning with the March 31 forum suspensions, and continuing through the closure and deletion of the official forum and attacks on independent third-party websites, demonstrate that PMI has chosen the low road of suppressing information about its short-comings and malfeasance, rather than the high road of making a good faith attempt to correct them. They have persuaded me that there is nothing noble about PMI, and I will be proceeding accordingly, as an advocate for the interests of lenders and borrowers who have been victimized by its actions.
Sincerely,
Trav
Misappropriation of lender funds by Prosper Marketplace Inc.
[This information was originally posted at Prospers.org (Registration required) on October 31, 2007. Extensive discussion can be found there as well.]
MNH Report #1
Under Section 5 of the Lender Registration Agreement,
It appears that Prosper has repeatedly violated the terms of this agreement – and breached its fiduciary duty to lenders as the servicing agent for these loans -- by deducting Servicing Fees from payments which are made more than 30 days after the due date.
I was a lender on Loan #1976 (Borrower: abrittain), now defaulted. Every payment which was made on this loan was made in the form of a community payment, and almost all of them were made by me (on her behalf). Given this dual role, I can say with certainty that every payment on this loan was made “later than thirty (30) days after the due date of the payment” and, beyond that, that no payment made on this loan ever brought this loan to within 30 days of being current. As a result, under the terms of the Lender Agreement, no Servicing Fee was payable to Prosper.
Nevertheless, Prosper abused its power as servicing agent to deduct a Servicing Fee from each payment, as shown on my Account Activity page:
Nov-21-2006 003386713 $0.10
Dec-04-2006 003666637 $0.01
Dec-28-2006 004400835 $0.02
Jan-17-2007 005066722 $0.02
Jan-22-2007 005327198 $0.00
Feb-21-2007 006500138 $0.03
Mar-19-2007 007844654 $0.02
Apr-23-2007 009751255 $0.03
Jun-18-2007 011192551 $0.03
Jul-09-2007 013384189 $0.04
(While the Servicing Fee charged on the Jan-22-2007 payment is listed as $0.00, this is due to rounding. The full six-digit display shows that a fee was taken by Prosper.)
No refunds or Servicing Fee Adjustments associated with this loan appear on my Account Activity page.
Unfortunately, this is not an isolated incident. Two other borrowers in my portfolio have made payments more than 30 days after the due date of the payment. In each case, Prosper deducted a Servicing Fee without the legal right or authority to do so:
Loan 1236 (Borrower: cheriamor01) Feb-01-2007 005647157 $0.05
Loan 1380 (Borrower: laurenleigh) Jan-09-2007 004909806 $0.04
If the limited data from my account is any indication, it would appear that Prosper has taken a Servicing Fee from every 30+-day-late payment made by a borrower.
While these unauthorized deductions are only pennies each, this data covers only one lender account (with only a $50-$62 stake in each loan) and only three loans. If this pattern extends across all loans and all lenders, and through the full history of Prosper, as I suspect it does, then Prosper has taken thousands dollars from lenders’ accounts without legal authority to do so. (If the collection agencies had been effective in collecting 30+-day-late loans, the total amount of unlawfully misappropriated funds would have been much higher.)
None of these loans involved borrowers in groups whose group leaders charged fees. However, a report on this forum from I_M_Spartacus suggests that Prosper has also been deducting funds from late payments for group leader fees.
http://forums.prosper.com/index.php?showtopic=31528 [Note: Prosper.com subsequently removed this discussion forum from the Internet; fortunately, it has been archived.
Paragraph 13 of the Lender Agreement provides, in part:
Since any payment made while a loan is in collections would be “received by Prosper on a note that is more than thirty (30) days past due,” the lenders would be legally entitled to “the entire amount of principal and interest received,” with no deduction for group leader fees.
I am unable to verify the accuracy of I_M_Spartacus’s post using data from my personal lender account, but, if that post is correct, Prosper is also breaching its fiduciary duty to lenders by misappropriating lender funds for the benefit of group leaders. (Because group leader fees could range as high as 5.0%, while the Prosper servicing fee was set at 0.5%-1.0%, the total dollar amount taken by Prosper without legal authority for the benefit of group leaders may be much higher than the amount taken for Prosper’s own benefit.)
Because the Lender Agreement specifically precludes Prosper from deducting Servicing Fees and Group Leader Fees from payments made more than 30 days after the due date, and because doing so constitutes a breach of contract and breach of fiduciary duty on the part of Prosper Marketplace Inc., I request that Prosper make immediate restitution of the misappropriated funds to lender accounts.
* * *
How can you, as a lender, know if your funds have been misappropriated?
There may be a simpler way, but here’s how I did it: While signed in at Prosper, select the “Your Account” tab, then the “Accounts” tab. Click on the link for “Activity.” Set the Recorded Dates to cover the entire period during which you have been a Prosper member, and set Purpose to “Collection agency fee”. Then click the “Search” button.
This will generate a list of payments on which a Collection Agency Fee was deducted; these should also be the payments received on loans which are 30+ days late. Sort this list by Loan ID.
For each Loan ID, click on the link for the loan number; this will take you to the payment history for that loan. Locate the line in the payment history which corresponds to the payment from which a Collection Agency Fee was deducted.
If you see a deduction for “Servicing fee” or “Group rewards” associated with a payment from which a “Collection agency fee” was deducted, then you have probably been a victim of this practice.
* * *
Final disclaimer: I am not a lawyer, and nothing in this post constitutes legal advice.
MNH Report #1
Under Section 5 of the Lender Registration Agreement,
With respect to each Note you purchase from Prosper, the Servicing Fee is payable only upon Prosper's receipt of the full monthly payment from the borrower on such Loan no later than thirty (30) days after the due date of the payment.
It appears that Prosper has repeatedly violated the terms of this agreement – and breached its fiduciary duty to lenders as the servicing agent for these loans -- by deducting Servicing Fees from payments which are made more than 30 days after the due date.
I was a lender on Loan #1976 (Borrower: abrittain), now defaulted. Every payment which was made on this loan was made in the form of a community payment, and almost all of them were made by me (on her behalf). Given this dual role, I can say with certainty that every payment on this loan was made “later than thirty (30) days after the due date of the payment” and, beyond that, that no payment made on this loan ever brought this loan to within 30 days of being current. As a result, under the terms of the Lender Agreement, no Servicing Fee was payable to Prosper.
Nevertheless, Prosper abused its power as servicing agent to deduct a Servicing Fee from each payment, as shown on my Account Activity page:
Nov-21-2006 003386713 $0.10
Dec-04-2006 003666637 $0.01
Dec-28-2006 004400835 $0.02
Jan-17-2007 005066722 $0.02
Jan-22-2007 005327198 $0.00
Feb-21-2007 006500138 $0.03
Mar-19-2007 007844654 $0.02
Apr-23-2007 009751255 $0.03
Jun-18-2007 011192551 $0.03
Jul-09-2007 013384189 $0.04
(While the Servicing Fee charged on the Jan-22-2007 payment is listed as $0.00, this is due to rounding. The full six-digit display shows that a fee was taken by Prosper.)
No refunds or Servicing Fee Adjustments associated with this loan appear on my Account Activity page.
Unfortunately, this is not an isolated incident. Two other borrowers in my portfolio have made payments more than 30 days after the due date of the payment. In each case, Prosper deducted a Servicing Fee without the legal right or authority to do so:
Loan 1236 (Borrower: cheriamor01) Feb-01-2007 005647157 $0.05
Loan 1380 (Borrower: laurenleigh) Jan-09-2007 004909806 $0.04
If the limited data from my account is any indication, it would appear that Prosper has taken a Servicing Fee from every 30+-day-late payment made by a borrower.
While these unauthorized deductions are only pennies each, this data covers only one lender account (with only a $50-$62 stake in each loan) and only three loans. If this pattern extends across all loans and all lenders, and through the full history of Prosper, as I suspect it does, then Prosper has taken thousands dollars from lenders’ accounts without legal authority to do so. (If the collection agencies had been effective in collecting 30+-day-late loans, the total amount of unlawfully misappropriated funds would have been much higher.)
None of these loans involved borrowers in groups whose group leaders charged fees. However, a report on this forum from I_M_Spartacus suggests that Prosper has also been deducting funds from late payments for group leader fees.
http://forums.prosper.com/index.php?showtopic=31528 [Note: Prosper.com subsequently removed this discussion forum from the Internet; fortunately, it has been archived.
Paragraph 13 of the Lender Agreement provides, in part:
a. You acknowledge that the group leader on certain loans that resulted from listings that were posted prior to September 13, 2007 may receive a percentage of the interest portion of each monthly loan payment made by each borrower on your Notes, provided that no loan payment is more than thirty (30) days past due. ….
b. The group leader will not receive any Finder's Payment Reward at a time when any payment on a Note is more than thirty (30) days past due. With respect to loan payments received by Prosper on a Note that is more than thirty (30) days past due, Prosper will pay you, rather than the group leader, the entire amount of principal and interest received on such Note.
Since any payment made while a loan is in collections would be “received by Prosper on a note that is more than thirty (30) days past due,” the lenders would be legally entitled to “the entire amount of principal and interest received,” with no deduction for group leader fees.
I am unable to verify the accuracy of I_M_Spartacus’s post using data from my personal lender account, but, if that post is correct, Prosper is also breaching its fiduciary duty to lenders by misappropriating lender funds for the benefit of group leaders. (Because group leader fees could range as high as 5.0%, while the Prosper servicing fee was set at 0.5%-1.0%, the total dollar amount taken by Prosper without legal authority for the benefit of group leaders may be much higher than the amount taken for Prosper’s own benefit.)
Because the Lender Agreement specifically precludes Prosper from deducting Servicing Fees and Group Leader Fees from payments made more than 30 days after the due date, and because doing so constitutes a breach of contract and breach of fiduciary duty on the part of Prosper Marketplace Inc., I request that Prosper make immediate restitution of the misappropriated funds to lender accounts.
* * *
How can you, as a lender, know if your funds have been misappropriated?
There may be a simpler way, but here’s how I did it: While signed in at Prosper, select the “Your Account” tab, then the “Accounts” tab. Click on the link for “Activity.” Set the Recorded Dates to cover the entire period during which you have been a Prosper member, and set Purpose to “Collection agency fee”. Then click the “Search” button.
This will generate a list of payments on which a Collection Agency Fee was deducted; these should also be the payments received on loans which are 30+ days late. Sort this list by Loan ID.
For each Loan ID, click on the link for the loan number; this will take you to the payment history for that loan. Locate the line in the payment history which corresponds to the payment from which a Collection Agency Fee was deducted.
If you see a deduction for “Servicing fee” or “Group rewards” associated with a payment from which a “Collection agency fee” was deducted, then you have probably been a victim of this practice.
* * *
Final disclaimer: I am not a lawyer, and nothing in this post constitutes legal advice.
Tuesday, December 18, 2007
Welcome to my blog
Hi, I'm Trav! I'm known as traveler505 on Prosper.com (a people-to-people lending site), Prospers.org (an independent forum for discussion of P2P lending), and CreditBoards.com (a self-help consumer advocacy site).
When I discovered Prosper Marketplace Inc. (PMI) in May 2006, I was excited by the concept of P2P lending, and, despite early skepticism regarding various aspects of PMI’s implementation of that concept, I regarded it as a noble experiment worthy of support, as did many other "lenders". ("Lenders" is Prosper's terminology for people who bid on the opportunity to purchase parts of the loans which Prosper originates.)
I became an active lender, and once I felt that I had an adequate understanding of what was necessary to deliver profitable loans to loan purchasers, I opened a group, and began working on plans to actively promote the Prosper loan product. (My group, by the way, has yielded a net ROI for “lenders” of over 20%, from loans to the subprime borrowers which PMI now wishes to exclude from its customer base.)
As long as I could believe that PMI was engaged in a noble experiment, I was willing to set aside many of my suspicions and concerns about corporate misconduct and mismanagement in the hopes that these issues were simply the growing pains of a start-up enterprise, and that they would eventually be addressed or ameliorated over time.
Unfortunately, Prosper’s actions over the past six months, beginning with the March 31 suspension of ten lenders from its official forum, and continuing through the recent closure and deletion of the official forum and attacks on independent third-party websites, demonstrate that PMI has chosen the low road of suppressing information about its short-comings and malfeasance, rather than the high road of making a good faith attempt to correct them.
They have proven to me that there is nothing noble about PMI, and I will be proceeding accordingly, as an advocate for the interests of “lenders” and borrowers who have been victimized by its actions.
* * * *
When Prosper Marketplace Inc. eliminated compensation for group leaders, forcing me to close my small but very successful group, a lender who goes by BigGulp told me "Trav, you can always take up another hobby."
I took his advice, and the result was a series of MNH ("My New Hobby") reports, exposing regulatory and contractual compliance issues in Prosper's operations. This blog is the new home of the MNH Reports; you can also find them on Prospers.org.
I'll also be using this blog to comment more generally on the evolution of the P2P lending concept, as new players open for business.
When I discovered Prosper Marketplace Inc. (PMI) in May 2006, I was excited by the concept of P2P lending, and, despite early skepticism regarding various aspects of PMI’s implementation of that concept, I regarded it as a noble experiment worthy of support, as did many other "lenders". ("Lenders" is Prosper's terminology for people who bid on the opportunity to purchase parts of the loans which Prosper originates.)
I became an active lender, and once I felt that I had an adequate understanding of what was necessary to deliver profitable loans to loan purchasers, I opened a group, and began working on plans to actively promote the Prosper loan product. (My group, by the way, has yielded a net ROI for “lenders” of over 20%, from loans to the subprime borrowers which PMI now wishes to exclude from its customer base.)
As long as I could believe that PMI was engaged in a noble experiment, I was willing to set aside many of my suspicions and concerns about corporate misconduct and mismanagement in the hopes that these issues were simply the growing pains of a start-up enterprise, and that they would eventually be addressed or ameliorated over time.
Unfortunately, Prosper’s actions over the past six months, beginning with the March 31 suspension of ten lenders from its official forum, and continuing through the recent closure and deletion of the official forum and attacks on independent third-party websites, demonstrate that PMI has chosen the low road of suppressing information about its short-comings and malfeasance, rather than the high road of making a good faith attempt to correct them.
They have proven to me that there is nothing noble about PMI, and I will be proceeding accordingly, as an advocate for the interests of “lenders” and borrowers who have been victimized by its actions.
* * * *
When Prosper Marketplace Inc. eliminated compensation for group leaders, forcing me to close my small but very successful group, a lender who goes by BigGulp told me "Trav, you can always take up another hobby."
I took his advice, and the result was a series of MNH ("My New Hobby") reports, exposing regulatory and contractual compliance issues in Prosper's operations. This blog is the new home of the MNH Reports; you can also find them on Prospers.org.
I'll also be using this blog to comment more generally on the evolution of the P2P lending concept, as new players open for business.
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