Prosper didn't catch fraudster using its services, but CEO takes credit for conviction

Two years in a row, Prosper CEO Chris Larsen has used his keynote address at Prosper Days to announce progress in Prosper's fight against fraud.

In 2007, he announced the first arrest of a suspected fraudster, and, this year, the first conviction. According to the San Francisco Business Times,

Lenders attending Prosper Days made it clear that they're eager for the company to do more to crack down on fraud, even as Larsen touted Prosper's first conviction for someone committing fraud through Prosper.

Both of Larsen's speeches were referring to the same person, Jehoshua Sean Kilen, who, from November 2006 until January 2007, used Prosper to launder funds which he had stolen from accounts at Key Bank, his former employer. He pled guilty to one count of bank fraud in federal court (Case No. 07-5011M, Western Distrct of Washington), and was sentenced to 18 months in prison.

But what was Prosper's role in bringing Kilen to justice?

Based on the complaint filed in federal court, it looks like Prosper didn't have a clue that Kilen had used - and was still using - its services to facilitate the theft of approximately $120,000, until the federal investigator assigned to the case called Prosper.

According to the complaint, Key Bank started an internal investigation in November 2006, because of the size of the transfers from one of the looted accounts.

On January 19, 2007, once it determined that $96,000 had been stolen from an account belonging to a deceased individual, and that $80,000 of those funds had been transferred to Kilen's Prosper account, Key Bank contacted the feds. A federal investigator placed a call to Prosper's head of security on the same day.

It appears that, prior to that call, Propser was oblivious to the fact that Kilen was using its site to commit fraud. In fact, just one day before it got the call, Prosper was still allowing Kilen to slowly transfer the stolen money from Prosper to his own bank account.

(In fairness, it does appear that Prosper, once it was contacted by the feds, did significantly assist the investigation by identifying a second Key Bank account from which Kilen had transferred an additional $40,000. It also provided documentation showing that the funds Kilen withdrew from Prosper had ben deposited in Kilen's own bank accounts.)

Kilen, then living in the Tacoma, Washington, area, opened his Prosper account on November 2 or 3, 2006, and, during November and December, added four verified bank accounts. Two of these belonged to him; the other two were accounts which he had used his position as a relationship manager at Key Bank to compromise. He attempted to add a third Key Bank account, but it failed verification.

Kilen then transferred a total of approximately $120,000 from the two compromised Key Bank accounts into his Prosper account. He made various outbound transfers totalling $32,351.23 from Prosper to his own bank accounts, and invested $7858.61 in Prosper loans. (Since I can't find a lender who matches this exact amount, I suspect this was his loan balance as of January 19, not the amount he loaned out.) Prosper did block one $20,000 outbound transfer, because of its size, but allowed subsequent smaller transfers, the last one being $2,500 on January 18. This left Kilen with a cash balance at Prosper of approximately $80,000.

By January 23, 2007, Key Bank had reversed the unauthorized transfers to Kilen's Prosper account, leaving it with a negative balance of $40,000. Kilen then called Bryan Maas at Prosper to ask what happened to his funds. Maas got him to acknowledge that the Key Bank accounts did not belong to him, though Kilen claimed that he had been given permission to use them. Maas then referred Kilen to Prosper's head of security, who told him that the ACH transfers had been reversed, and advised him to contact Key Bank for an explanation.

Kilen was arrested on February 2, 2007, in California, two weeks before Prosper Days.

One fraud conviction after two years isn't much to brag about, given lenders' suspicion that fraud committed by borrowers frequently goes unnoticed and unpunished by Prosper. But when the record indicates that Prosper's internal security staff failed to notice the fraudulent activities until a federal investigator contacted them, Kilen's arrest and conviction is hardly a testament to Prosper's success - or even its commitment - with regard to stopping fraud on the site.

Larsen did say, according to reports from attendees, that thirteen other fraud cases are in the pipeline - three filed, ten in preparation. Perhaps those will reflect more favorably on Prosper's own anti-fraud efforts.

If you do nothing else at Prosper Days ...

... please do this:

Grab the most prominent member of the news media you can find with one hand (gently, of course), and the highest-ranking Prosper employee you can find with the other (ditto), sit them down in front of a computer, and invite the Prosper employee to demonstrate how one can arrive at the ROI estimates shown on Prosper's home page ("Earn 8.74% to 12.10% returns") using Prosper's own marketplace performance page, which is cited as the source of the data.

The parameters, as stated in the footnote on the home page, are:

Rates of return shown are the average annual returns on Prosper loans

originated between 7/1/06 and 11/30/07

to borrowers with AA - C credit grades

who requested automatic funding,
have 0 - 1 current delinquencies
and 0 inquiries in the last 6 months on their credit record,

as of 1/17/08.

[I formatted the text to make the criteria easier to read, but made no other changes.]

When I entered these parameters on Prosper's marketplace performance page yesterday, I got:

AA - 5.42%
A - 5.61%
B - 6.17%
C - 11.27%

which is a far cry from "8.74% to 12.10% returns".

Oh, one more thing. You might mention that the total dollar amount of the 399 loans which meet the specified criteria is $2,959,672, or just over 3% of the loans generated by Prosper during that time period.

(Just a few days ago, the estimated lender ROI range on Prosper's home page was even higher: "9.49 - 12.81%". The footnote for that version says that it was based on loans meeting the same credit and automatic funding criteria, but with origination dates of 7/1/06 through 10/30/07 and an observation date of 11/30/07. I couldn't replicate those ROI numbers using the marketplace performance page either.)

For background reading:

MNH Report #6

The related thread on Prospers.org

Prosper announces new features in advance of Prosper Days

Last night, Prosper announced several new features in advance of Prosper Days 2008. Since the Pre-Prosper Days Release included only relatively minor changes, I expect that additional announcements will be made during the event itself.

Here’s the preliminary scorecard for my Prosper Days predictions, based on last night’s activity:

Increase in state rate caps. Prosper announced one rate cap increase (for the District of Columbia) and four rate cap reductions (Arkansas, Delaware, Kentucky, and Tennessee), but not the across-the-board 1% increase which I predicted. (It could still happen.) On the other hand, the fact that Prosper is still tinkering with the state caps means that I was right on the money when I said there would be no announcement of a “national license.”

Lender-created portfolios. I was right on this one; lenders can now create and share their own portfolio plans.

Groups, friends, and endorsements. I speculated – rather vaguely and tentatively - that Prosper would announce enhancements to the friends and endorsements program, but would not eliminate groups (yet). Sure enough, the Pre-Prosper Release includes at least a modest enhancement: number of verified friends, number of verified endorsements, and the number and dollar amount of bids from friends are now available as criteria which lenders can use for searching listings, developing portfolio plans, and analyzing marketplace performance.

This wasn’t the wholesale incorporation of features from social networking sites that I thought might happen, and my suggestion that Prosper was seeking to benefit from borrowers who sign up their “imaginary friends” was perhaps a bit too cynical: The new features place the emphasis on friends and endorsers whose identities have been verified.

Collections. The Prosper.com website finally began to reflect the transfer of delinquent loans from Penncro to AmSher last night, just before the maintenance period. There are still reports of glitches and inconsistent data, but at least Prosper Vice President of Operations Doug Fuller will be able to report that progress has been made.

Third loans for borrowers. I predicted that this would not happen, at least not at this year’s Prosper Days, and it looks like I was right. Prosper made a wise decision to raise the eligibility requirements for second loans instead.

Changes (unspecified) to loan verification. I said “doubtful,” but I suppose the removal of the confusing “bank account verified” icon qualifies for inclusion in this category.

That’s it for now. I’ll update again once additional announcements are made.

What new features will be announced at Prosper Days 2008?

Last year, at Prosper Days 2007, CEO Chris Larsen announced several major changes in the Prosper platform. Lenders and bloggers have been speculating about the changes and new features which will be announced next week at Prosper Days 2008.

In January, HollowOak posted a poll thread at Prospers.org with 21 possible options. (Numbers in parentheses are the percentage of members who selected that feature.)

* The secondary market for loans (20%)
* Increase in the minimum credit grade that may create a listing (4.4%)
* Publication of legal actions against defaulting borrowers (8.3%)
* Increase in loans servicing fees (7.2%)
* Increase in state rate caps (2.2%)
* A national Prosper license (3.9%)
* Increased options on the search loans feature (4.4%)
* More granular credit data (1.7%)
* Credit report from more than one credit reporting agency (8.3%)
* Reduced minimum bid size (3.9%)
* Lenders can create their own portfolios (7.8%)
* Lenders can publicize their portfolios for other lenders to follow (6.1%)
* Stock options for long-time lenders (1.1%)
* 3rd loans for borrowers (3.3%)
* Borrower refinancing their loans directly (2.2%)
* Revolving credit loans (1.7%)
* The entry of corporate lenders (4.4%)
* Changes (unspecified) to loan verification (2.8%)
* Streamlined borrowing for AA-B credit grades (1.1%)
* Enhancements to the Friends and Endorsements program (0%)
* Complete elimination of groups (5%)

Mike at Prosperousland recently offered his wish list of four items, two of which were on HollowOak’s list: a secondary market and a national license. The other two may appeal to those of a more technical bent:

* AJAX: Prosper will AJAX-ify their website, bringing eye candy to the otherwise drab world of banking. Think of it as an upgrade to Web-2.5. The buzzwords will fly.

* Search API: I'm hoping for an upgrade to Prosper's developer API to let me run performance search queries on their performance engine without all that pesky web browser getting in the way.

And, of course, lenders are expecting announcements (or at least explanations) regarding two collections-related issues which, while well-intentioned, have been the subject of a series of embarrassing blunders and delays over the past month or so: switching loans from Penncro to AmSher, and initiating litigation against 66 California borrowers whose loans are at least 4 months late. (Fred93's blog is the best source for tracking collections issues.)

Without further ado, here are my predictions for Prosper Days 2008. Be sure to check back next week and tell me how wrong I was.

Secondary market. Prosper Marketplace Inc. has been promising to create a secondary market for quite a while, and on October 31, it filed a registration statement for a Resale Platform with the U.S. Securities and Exchange Commission. If Chris Larsen does not announce at Prosper Days 2008 that the secondary market is ready to go, it will be a major embarrassment for Prosper.

On the other hand, actually launching the secondary market may result in greater embarrassment down the road, or worse.

While the secondary market, like the advent of second loans for borrowers, will likely create a brief flurry of activity on the Prosper site – and generate a bit of extra income – it’s unlikely to generate a significant sustained cash flow. But if disgruntled lenders take advantage of the new platform to dump their portfolios en masse, at a discount, the results will reflect badly on Prosper loans as an investment class, and likely reduce demand for newly originated loans. Who wants to invest in a Prosper loan today, knowing that it will be worth less than face value tomorrow?

But that’s not the worst case scenario.

As readers of this blog already know, lenders have expressed numerous concerns about Prosper Marketplace Inc.’s compliance with its contractual, fiduciary, and other legal obligations. I’ve caught Prosper violating its own legal agreements on several occasions, and quite a few of us have pointed out their repeated failures to act in the best interests of the lenders whose loans they are servicing. As I documented in another post this week (and others have pointed out before me), Prosper’s advertising regarding lender ROI is seriously misleading. And there are more issues that I have yet to mention here.

In my opinion, once these concerns began to surface with some regularity, Prosper should have commissioned a comprehensive compliance audit – conducted by an independent party, not in-house counsel - to ensure that its practices conform to its legal agreements and comply fully with applicable laws, and that its marketing claims can be fully substantiated. After watching Prosper bungle the collections issues over the past month, I’m pretty sure that this hasn’t happened; the legal agreements still don’t match what Prosper is actually doing.

For Prosper to launch a secondary market platform subject to SEC scrutiny without first identifying and correcting the obvious legal problems in the existing platform is, in my opinion, damn foolish. State regulators, for the most part, are only interested in how Prosper treats its borrowers. The Securities and Exchange Commission will be interested in how Prosper treats the lenders who purchase registered securities on its platform, in the quality of those securities, and in the marketing claims which are made regarding them.

Lenders have invested real money in the loans that are originated and serviced by Prosper, and will invest real money in the loans which are re-sold – now in the form of securities – on its secondary market platform. When we discover Prosper's lapses, many of us have a tendency to make federal cases out of them, figuratively speaking. Launching the secondary market on a platform regulated by the SEC creates the opportunity for disgruntled lenders to convert those figurative federal cases into literal ones.

Increase in state rate caps. At the end of October, Prosper Marketplace Inc. increased the maximum borrower interest rate to 36% (except where state law imposes a lower cap), with the maximum lender rate capped at 35% (or one percentage point below the state cap). The difference between the borrower and lender caps, historically speaking, is that borrowers who opted to pay by bank draft paid 1% above the lender rate to cover the costs of processing the drafts.

Now that the bank draft “surcharge” (technically, it was a discount for not using bank drafts, rather than a surcharge) has been eliminated, there is no reason for Prosper not to raise the rate caps by 1% across the board (other than an overabundance of caution, which, in light of Prosper’s history, seems wise but unlikely). In fact, I suspect that the only reason Prosper hasn’t already done this is that it has been saving the announcement for Prosper Days 2008.

I don’t expect to hear an announcement that Propser has obtained a so-called “national license,” however. (Technically, a “national license” is not a license but an alliance with a bank or credit union, which serves as the lender of record for the loans. Under federal law, banks and credit unions are exempt from state rate caps, except those imposed by their home states. Lending Club and Zopa USA have partnered with banks or credit unions, so they can offer the same interest rates in all 50 states.)

I’ve speculated elsewhere (and let me emphasize that this is pure speculation) that the regulations governing banks and credit unions may require that interest rates for borrowers be based on objective criteria bearing a rational relationship to credit risk. (Or, at least, that banks and credit unions are sufficiently fearful of discrimination suits – and value their licenses sufficiently – that they are unwilling to do otherwise.)

LendingClub and Zopa USA set the interest rates for all loans originated on their sites, using credit scores and other objective criteria, while Prosper loan rates are set by a bunch of oddballs (yeah, us) whose criteria are anything but rational. Of course, when the platform – rather than the lenders - sets the interest rate, part of the fun – and much of the P2P appeal of the site - is lost.

If my speculation is accurate, Prosper may simply be unwilling to make such a dramatic change in its business model and sacrifice its P2P appeal in exchange for a “national license.”

Lender-created portfolios. When Prosper created portfolio plans at the end of October, Prosper_Andrew said: “In the future, you'll be able to build your own plans based on your standing orders.” So I think it is quite likely that this feature will be announced at Propser Days 2008.

I thought there had also been discussion of enabling lenders to share their portfolio plans, but I couldn’t find it in the announcement thread. Perhaps that was just something that lenders thought would be a good idea, not a feature that Prosper had on the drawing board.

More credit data. Experian is most likely the bottleneck here; I suspect that its contract with Prosper limits the amount of data which can be disclosed to lenders. On the other hand, I doubt that negotiating for lenders’ right to see more data is high on Prosper’s priority list.

In my opinion, the biggest weakness in the Prosper credit scorebox is the lack of chronological data. LendingClub’s borrower listings, which are based on TransUnion data, include two chronological fields not available on Prosper: “months since last delinquency” and “months since last public record.” At best, lenders can hope that Prosper Days 2008 will include an announcement that Prosper will announce that it has persuaded Experian to allow it to add these two fields.

(In my opinion, addition of these two fields would help “red flag” some loans, but will still not give lenders enough information to understand the trends in the borrower’s credit history over time. When I was an active lender and group leader, analyzing these trends – I called it “Trajectory Analysis” – was central to my loan-picking methodology; I learned from my early lending mistakes that it is almost impossible to do this effectively without access to a full credit report.)

I wouldn’t expect to see announcements of credit data from more than one credit reporting agency, full (albeit sanitized) credit reports, replacement of ScoreX with FICO, or any other major improvement in the character or granularity of credit data.

Elimination of HR loans. At Prosper Days 2007, Prosper announced that HR borrowers with ScoreX credit scores below 520 and NC (no credit history) borrowers would no longer be eligible to borrow on Prosper. I won’t be surprised if Prosper goes a step further this year and eliminates the HR category altogether.

The evolution of Prosper toward numbers-based people-to-credit-data lending, the increased emphasis on standing orders and portfolio plans, and the elimination of almost all vetting-based groups (which, in my opinion, were an essential element of any sub-prime lending strategy) have made it almost impossible for HR borrowers to fund, even at the new maximum interest rate of 36%. (The increase to 36% may actually have made sub-prime lending riskier for lenders; some of us believe that the very willingness of a borrower to pay 36% indicates a lack of financial competence.)

I have argued elsewhere that unsecured installment loans are primarily a sub-prime financial product, and that Prosper’s attempts to attract large numbers of prime borrowers (who are more interested in prime products such as low-interest credit cards and secured loans) are unlikely to succeed. In my opinion, Prosper should have focused on reducing default risk in the sub-prime categories – through mandatory vetting, stronger collections, etc. – rather than distancing itself from the sub-prime market altogether. But its management had other ideas.

Unless Prosper executes a sudden about-face (something which I regard as highly unlikely at this point), eliminating HR borrowers is the logical next step. There won’t be much of a revenue drop at this point; only 61 of the 1050 loans originated in January went to HR borrowers. The only downside for Prosper would be a dramatic reduction – by one-third - in the total number of active listings, generating the appearance of negative growth.

Groups, friends, and endorsements. An announcement of a major change in this area won't surprise me, but I'm not sure exactly what to expect.

When it eliminated compensation for group leaders in September, Prosper claimed that it was trying to return the group system to the original concept: small, tight-knit communities originating from real-life social networks. Since September, however, Prosper has put zero effort into promoting formation of social-network groups, so there has been no progress in that direction.

What the elimination of group leader compensation did accomplish was the neutralization of the parasitical groups which had become an embarrassment to Prosper (good), and the almost complete elimination of the vetting-based groups (including my own group) which were showing at least some success in reducing lender risk (bad). As things stand, the group system (with even fewer exceptions than before the elimination of compensation) is a vestigial organ with no apparent reason for its continued existence.

Rather than invest the effort required to promote the social-networking model or resurrect the vetting-based model, I expect that Prosper will eliminate groups altogether. I'm not confident that this will happen next week, as Prosper may want to enhance the friends and endorsements system first, but it will almost certainly happen eventually.

The other social networking aspect of Prosper - friends and endorsements - is now a year old (it was announced at Prosper Days 2007). I still find it difficult to take friends and endorsements seriously, particularly since verification of identity is optional, and many borrowers' endorsements are likely from their "imaginary friends." But, from Prosper's perspective, signing up a borrower's friends - even imaginary ones - pads the membership metrics and creates at least an illusion of growth and Web 2.0-ishness.

I'll go out on a limb and predict that Prosper's next step on the social networking front will be to enhance the friends and endorsements program so that it can eventually serve as a replacement for groups. A borrower's friends and endorsers - both real and imaginary - will be treated as an ad hoc group, and accompanied by some sort of borrower ratings system adapted from social networking websites. Experienced lenders have learned the perils of evaluating borrowers based on who their friends are, but perhaps newbies will find the enhanced friends and endorsements system appealing.

Collections. As noted above, lenders attending Propser Days 2008 can hope for new information regarding the litigation test and the transfer of collection responsibilities from Penncro to AmSher. (I assume that is what HollowOak was referring to by “publication of legal actions against defaulting borrowers.”)

Everything else. The rest of the possible announcements and features on HollowOak’s list strike me as either unlikely or unimportant (and I’m not techie enough to understand the two from Mike’s list), so I’ll just repeat a few additional comments from my post to the poll thread:

Increase in loans servicing fees -- Probably something best announced when lenders are on the opposite end of a modem, not in person

Reduced minimum bid size -- Nope.

Stock options for long-time lenders -- Yeah, right.

3rd loans for borrowers -- Probably not until they have statistics on performance of second loans; even then, it's something else that is best announced from the other end of a modem.

Borrower refinancing their loans directy -- Prosper will stick to their "regulatory issues" story on this.

Revolving credit loans -- Nope.

The entry of corporate lenders -- Corporate lenders could already be lending if they wanted to; I don't know what there is to announce.

Changes (unspecified) to loan verification -- Doubtful.

Streamlined borrowing for AA-B credit grades -- Maybe.

As I said, in a few days, you can come back and tell me how wrong I was.

UPDATE: Prosper responds to MNH Report #4, and I respond to Prosper

In MNH Report #4, I described my attempt to purchase a Prosper loan (Loan No. 4018) which was 4+ months late and eligible for sale to a debt buyer.

On November 7, 2007, I wrote to Doug Fuller, Prosper Marketplace Inc.’s Vice President of Operations, and offered to pay 20.00% of the outstanding principal at the time of purchase for the notes and servicing rights associated with this loan. (One of the notes – in the original amount of $109.89 – already belonged to me as a lender on the loan; technically I would have been purchasing that note from myself, through Prosper as the servicing agent.)

As I explained in my offer,

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.

On December 26, 2007, Prosper sold Loan No. 4018. But not to me, and not for 20.00%.

The loan was sold to an anonymous junk debt buyer (Prosper does not reveal the identity of the debt buyers who purchase our defaulted loans) for just 8.1% of the outstanding principal balance. As a result, the lenders on this loan received about $500 less than they would have gotten if Prosper had accepted my offer.

On December 31, I received an email from Dr. Fuller, formally rejecting my offer to purchase Loan No. 4018.

He offered two reasons for the decision to go with the low bidder:

First, he defended Prosper’s practice of selling defaulted loans as “a reasonable accommodation” of competing interests, including “regulatory and practical concerns” and Prosper’s obligation to be “sensitive to the rights of borrowers.”

Second, he contended that Section 14 of the Lender Registration Agreement (LRA), which prohibits lenders from engaging in collection activities, prevented Prosper from selling loans to registered lenders. “[A] sale of the loan to you at any price would be in violation of the LRA,” he wrote, since I was offering to buy the loan for the purpose of collecting on it.

My reply to Dr. Fuller was quite lengthy (what, you’re not surprised?), but the key points were:

(1) There were no practical obstacles to accepting my bid. My offer was made nearly a month before the cut-off date for inclusion of 120-day late loans in the sale; all PMI had to do was add an asterisk indicating that an offer had been made on Loan No. 4018, and notify other prospective bidders that Loan No. 4018 might be sold separately. Each loan is priced individually in the bidding process, so an extra bid on one loan would not have affected bidding on the other loans in the sale.

(2) By acknowledging that Prosper gave greater weight to its philosophical predilections in favor of large debt buyers and to the interests of the defaulted borrowers than to the interests of the lenders who own the notes, Dr. Fuller effectively admitted that Prosper had violated its fiduciary duty to the lenders. While the law imposes certain duties on creditors, it does not give borrowers the right to determine who a debt is sold to. On the other hand, Section 5 of the LRA requires Prosper to service the loans in such a way as to “maximize the timely recovery of principal and interest” for the lenders.

(3) Any reasonable reader of Section 14 would understand it to restrict the actions of a lender when he is acting in the capacity of a lender, not when he is acting in another role, such as that of debt buyer. (Section 14 also prohibits registered lenders from claiming to speak on behalf of Prosper. Under Dr. Fuller’s interpretation of that section, neither he, Chris Larsen, nor John Witchel could ever speak on behalf of Prosper, in any context, since they are all registered lenders.)

Even if the contract between me and PMI were interpreted to prohibit Prosper from selling a loan to me, my letter of November 7, 2007, offering to purchase that loan, would have acted as a waiver of that contractual provision.

I went on to explain:

PMI’s authority to act as servicing agent for the Lenders is limited by the Lender Registration Agreement (LRA), by its fiduciary duty, and by the instructions which it receives from the owners of the Notes.

Section 5 of the Lender Registration Agreement defines the extent of PMI’s authority to act on behalf of the Lenders as their servicing agent, providing in part that “Prosper shall seek to maximize the timely recovery of principal and interest on the Notes” when acting as servicing agent for Lenders. Prosper does not have the authority to bind the Lenders to an agreement with a low bidder which intentionally minimizes the amount recovered by the Lenders.

As I pointed out in my letter of November 7, 2007, PMI has a fiduciary duty to act in the best interest of the Lenders whose Notes it services. PMI’s rejection of my offer in favor of the low bidder caused a collective loss of approximately $500 to the Lenders who had entrusted PMI with responsibility for servicing their Notes, and was certainly not in the best interests of the Lenders involved.

My letter of November 7, 2007, also made it clear that any offer of less than 20% would be unacceptable to me as a Lender, and served as a specific directive to PMI not to sell my Note for less than that amount. PMI’s violation of that specific directive from principal to agent provides an additional basis for my conclusion that PMI exceeded the authority which had been delegated to it.

Since PMI lacked the authority to act on my behalf when it purported to sell my Note, I regard the sale agreement as null and void. I specifically reject the offer of $7.82 from the debt buyer, and choose to retain ownership of my Note.

(Since borrowers are on notice that their loan is in fact a collection of individual notes, each of which is assigned to a separate lender, there is no legal requirement that all of the notes associated with a particular loan be sold together. I lacked standing to assert the rights of any lender other than myself, so I couldn’t block the sale of the entire loan, but I could assert my rights as to the note which I purchased.)

Enclosed with my reply to Dr. Fuller was a money order for $7.82, refunding the money that the junk debt buyer had tendered for my share of the loan. (I would have sent the money to the junk debt buyer directly, but Prosper refuses to disclose the buyer’s identity.)

In my letter, I gave Prosper an opportunity to correct its violation by notifying the junk debt buyer that it had made an error and retrieving the whole loan from the junk debt buyer, or by resuming its servicing responsibilities as provided in the Lender Servicing Agreement for my $109.89 share of the loan. Otherwise,

Since PMI has abandoned its obligation to service this Note, in breach of the LRA, I can no longer be bound (as to this Note) by the provisions of the LRA which assign exclusive servicing rights to PMI. Accordingly, PMI’s abandonment of its servicing responsibilities leaves me free to assign the note to another servicing agent, or to service it personally, collecting the amount due me on this Note by lawful means, including, but not limited to, the filing of a lawsuit against [the borrower].

In a letter dated January 17, 2008, Doug Fuller returned my money order, stating that the sale of Loan No. 4018 to the junk debt buyer was “not open to renegotiation or review.”

He added a third justification for Prosper’s rejection of my offer: The current version of the LRA (Section 6.f.) specifies that defaulted loans must be sold to an “unaffiliated” debt buyer. “The use of the term ‘unaffiliated’ applies to both parties to the LRA, including the lender, such that neither Prosper nor a lender is eligible to purchase a charged off loan,” he wrote.

I found this a rather strange argument, coming from someone who is currently engineering the purchase of 66 defaulted loans by Prosper itself, as part of the litigation test.

Fortunately, my latest letter to Dr. Fuller provides him with the obvious solution to this inconsistency in his position:

Section 6 of the LRA specifies PMI’s obligations with regard to delinquent loans, not the obligations of Lenders. Read in context, the reasonable interpretation of the word “unaffiliated” is that it, like the rest of the section, relates to PMI, not to the Lenders, and precludes only PMI, or a company affiliated with PMI, from purchasing defaulted loans.

Even assuming, arguendo, that the requirement that debt buyers be “unaffiliated” precludes the sale of defaulted loans to Lenders, this language did not appear in the LRA at the time Loan No. 4018 was originated and the associated Notes were purchased by Lenders. A prohibition on sale of defaulted loans to Lenders would materially impair the value of Loans previously purchased by Lenders, by limiting the universe of potential purchasers. (As I noted previously, PMI’s refusal to accept my offer reduced the value of the notes associated with Loan No. 4018 by approximately $500.) As a result, such a provision cannot be applied retroactively without the consent of both parties to the contract.

As you know, PMI has announced that it will be purchasing selected defaulted loans for the purpose of litigation. If the insertion of the term “unaffiliated” in Section 6 were to be applied retroactively, the LRA would preclude PMI from conducting the so-called “legal test”. Accordingly, I must assume that PMI shares my view that this amendment is not retroactive, and that loans originated prior to October 31, 2007, including Loan No. 4018, are exempt from the requirement that the debt buyer must be “unaffiliated.”

I have returned the $7.82 once again, explaining that:

I am sorry that Prosper Marketplace Inc. (PMI) has chosen to reaffirm its decision to violate its contractual and fiduciary duties to the Lenders on Loan No. 4018 by rejecting my offer to purchase the associated notes and servicing rights.

It appears, however, that you misunderstood my position regarding the Note which I purchased from PMI. As I noted in my previous correspondence, PMI lacked the authority to act on my behalf when it accepted the debt buyer’s offer to purchase my Note, and I, as owner of the Note, have rejected its offer. As a result, I retain ownership of this Note, regardless of the fate of the other Notes associated with this Loan. Because PMI has breached the Lender Registration Agreement (LRA) by abandoning its servicing obligations and refusing to acknowledge my continuing ownership of the Note, I am left with no alternative but to mitigate my damages by assigning my Note to another servicing agent or servicing it personally.

As of this writing, the other lenders on this loan have lost approximately $500 as a result of Prosper’s refusal to sell Loan No. 4018 to the highest bidder. (In my opinion, Prosper owes them compensation for this breach of its contractual and fiduciary duties.) A junk debt buyer has paid Prosper for a loan that Prosper was not authorized to sell to the low bidder. And two parties – the junk debt buyer and this lender – now claim ownership of – and the right to collect on - the same note. (The debt buyer believes that it owns all of the notes associated with the loan, because Prosper has failed to inform it of my rejection of its offer, while I assert continued ownership only of the one note which I purchased from Prosper for $109.89 when the loan was funded.)

This whole mess could have been avoided so easily, if only Prosper had chosen to act in the best interests of the lenders on Loan No. 4018, and accepted my original offer to purchase this defaulted loan.

Lender ROI on Prosper Select loans declines for sixth consecutive month

MNH Report #6


Since August 2007, Prosper management has tried to deflect criticism of high default rates and low return-on-investment by calculating what it calls the Prosper Select Index, and publishing that index in a monthly People-to-People Lending Market Survey. Rather than considering the ROI on all Prosper loans, the Prosper Select Index encourages investors to focus on a subset of the market which, according to Prosper, should produce a more acceptable profit for lenders.

Prosper defines the Prosper Select Index as

the estimated average annual return on invested principal, based on actual delinquency performance to date. The Prosper Select Index includes AA - E credit grade loans for borrowers whose credit reports at the time of application indicated zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less. The annual return period reflects loans originated in the twelve month period ending one month prior to the observation date.

The Prosper Select Index for each month is also broken down into three smaller subsets: Prime Select (A and AA loans), Near Prime Select (B through D), and Sub-Prime Select (E). HR loans are not included on the Select Indexes.

For each month’s Prosper Select Index, the observation date is the last day of the month. For instance, the August 2007 Prosper Select Index, published in mid-September, calculated the ROI on loans meeting the selection criteria which originated from August 1, 2006, through July 31, 2007, with performance observed as of August 31, 2007. Less than one-third of the Prosper loans originated during that 12-month period (32.1% by dollar amount) are included in the calculation of the Prosper Select Index; Prosper doesn’t publicize the ROI on the remaining 67.9% of loans funded during that period.

On February 12, Prosper released its People-to-People Lending Marketplace Survey for January 2008, revealing that lender ROI on the loans included in the Prosper Select Index has declined in each of the six months since the Index first appeared.

For August 2007, the Prosper Select Index was 10.31%. By January 2008, it had dropped more than two percentage points, to 8.19%. Here are all of the published monthly Prosper Select Indices:

August 2007 – 10.31%
September 2007 – 9.75%
October 2007 – 9.28%
November 2007 – 9.13%
December 2007 – 8.34%
January 2008 – 8.19%

The decline occurred across all credit grades. The Prime Select Index declined from 9.41% to 8.75%, Near Prime Select Index slipped from 10.73% to 7.90%, and Sub-Prime Select Index plummeted from 14.95% to 4.93%.

(Interestingly, the first four Lender Market Surveys are included in the "Press Releases" section of the Prosper.com site, while the December and January versions have been relegated to its blog.)

What caused this substantial decline in lender ROI for Select Index loans? It’s hard to say, but the cause appears to be an increase in projected losses due to default rather than a drop in borrower interest rates. During the same period, borrower interest rates fell only 0.24% (10.15% to 9.91%) for prime borrowers, 0.03% (16.83% to 16.80%) for near prime, and actually increased 2.51 percentage points (25.88% to 28.39%) for sub-prime.

My best guess – and it is only a guess – is that Prosper’s increased emphasis on standing orders, portfolio plans, and numbers-based lending has led lenders to blindly fund loans whose flaws which do not appear in the credit summary data, but which lenders might have avoided had they considered all of the available information. Another possibility is that the evolution of Prosper’s algorithm for calculating projected defaults has led to more pessimistic projections for identical loans.

There's more to this story than the decline in lender ROI over the past six months; the methodology by which Prosper calculates the Prosper Select Index leads to misleadingly optimistic results, for at least three reasons.

First, as noted above, it excludes a majority of Prosper loans from its calculations, and, as such, does not reflect the ROI experienced by a majority of Prosper lenders. Second, it appears that the estimated losses due to default are a moving target, changing retroactively as Prosper acquires additional data and refines its algorithms. Third, because the observation date is only one month after the end of the loan origination period, many of the loans included in the calculation have not yet had an opportunity to go late or default, leading to overly optimistic performance estimates.

To demonstrate the effects of the second factor, I attempted to replicate Prosper’s calculation of the August 2007 Prosper Select Index using Prosper’s own performance page on February 17, and again on February 19.

Setting loan origination dates to August 1, 2006 to July 31, 2007, DTI to 0.00% to 40.00%, current delinquencies to zero, credit inquiries to zero to three, and observation date to August 31, 2007, the performance page returned the following ROI by credit grade on February 17:

AA – 8.61%
A – 9.61%
B – 8.53%
C – 8.41%
D – 13.15%
E – 14.58%

Weighting the data by dollar amount of loans for each credit grade, I arrived at an August 2007 Prosper Select Index of 9.61%, significantly below Prosper’s published figure of 10.31%. (Weighting by number of loans yielded a Prosper Select Index of 9.86%.)

There are several possible explanations here, the most charitable of which is that Prosper has changed its algorithms for calculation of default rate since August 31, 2007, and applied those changes retroactively to the data. As a result, even though the observation date stayed the same, the change in calculation date produced different results. (I confirmed this theory by running the test again, two days later. The results – for net defaults, adjustment, and average annual return - were slightly different.)

(I will defer to other, more statistically astute, observers regarding the appropriateness of the use of the term “observation date” when the data observed as of that date is subject to retroactive change. It gives me a headache just thinking about it.)

It appears that Prosper’s estimates of net defaults have become more pessimistic over the past six months, although this effect is not sufficient to account for the overall decline in the Prosper Select Index since August.

I examined the third factor by changing the observation date to February 15, 2008, but leaving all other criteria intact. (Calculation date was February 17.) The performance page returned the following ROI estimates for loans which would have been included in the August 2007 Prosper Select Index:

AA – 8.54%
A – 6.14%
B – 5.64%
C – 5.99%
D – 9.05%
E – 7.18%

Extending the observation date by 5.5 months resulted in a significant decrease in estimated ROI for each credit grade, with the most pronounced reduction in the lower credit grades.

Using the extended observation date, and weighting the data by dollar amount of loans for each credit grade, I arrived at a August 2007 Prosper Select Index of 7.03%, more than three percentage points below Prosper’s published figure. (Weighting by number of loans yielded a slightly higher figure, 7.14%.)

Again, the February 15 observation date was only 6.5 months after the end of the 12-month loan origination period, and only 5.5 months later than the observation date used by Prosper to create its published ROI of 10.13%. If the estimated ROI for Prosper Select loans dropped three percentage points during those 5.5 months, one can only wonder what the ROI would be at the end of the three-year term of the notes.

The same three factors which resulted in the overly optimistic August 2007 Prosper Select Index which Prosper published in its first People-to-People Lending Market Survey also affect the estimated ROI data appearing elsewhere on Prosper.

For instance, Prosper’s home page advertises 9.49% – 12.81% returns. But the footnote shows that this ROI is based on (1) specific credit criteria, (2) obsolete default prediction algorithms yielding data which cannot be replicated, and (3) an observation date one month after the end of the loan origination period:

Rates of return shown are the average annual returns on Prosper loans originated between 7/1/06 and 10/30/07 to borrowers with AA - C credit grades who requested automatic funding, have 0 - 1 current delinquencies and 0 inquiries in the last 6 months on their credit record, as of 11/30/07. For more information click here.

Clicking on the link takes one to the Prosper performance page, where the 9.49% - 12.81% ROI figures cannot be replicated. It is worthy of note that 2.5 months have passed since the observation date used to generate those numbers, so Prosper could have updated these advertised returns with a later observation date and its current default projections, but chooses not to.

Prosper’s Portfolio Plans, on which many lenders rely to make lending decisions, are accompanied by a similar footnote:

Estimated average annualized loss rate based on the historical performance of Prosper loans for borrowers with similar characteristics, originated between Jun-01-2006 and Oct-31-2007, measured as of Nov-30-2007.

Give that a 5.5 month change in observation date and a 6.5 month change in calculation date produces a three percentage point drop in estimated lender ROI for Select Index loans originated between August 1, 2006 and July 31, 2007, lenders should carefully consider whether the ROI figures on the home page and in the portfolio plans are similarly flawed, and should also be adjusted downward.

UPDATE: Prosper responds to MNH Reports #1 and #5

Two MNH Reports have gotten results.

On January 5, Prosper Marketplace Inc. promised to make restitution, with interest, to lenders and group leaders affected by the contractual violations outlined in MNH Reports #1 and #5.

MNH Report #1, originally posted at Prospers.org and the now-defunct official Prosper forums on October 31, 2007, revealed that Prosper Marketplace Inc. had violated the Lender Registration Agreement by deducting Servicing Fees and group leader fees (a/k/a “group rewards” or “Finder’s Payment Rewards”) from payments which were made more than 30 days after the due date.

MNH Report #5, posted here and at Prospers.org on December 26, 2007, documented that Prosper had violated the Group Leader Registration Agreement by withholding fees which should have been paid to group leaders during the first three months after loans originated.

In a post to its official blog, Prosper.com established a timetable for refunding servicing fees and group leader fees which had been deducted from late payments, and for releasing withheld group leader fees to group leaders. (Prosper’s Shira Levine had previously promised that Prosper would refund fees which had been improperly deducted from late payments, but no timetable was provided. Her promise -- along with the rest of the official forums -- was deleted shortly thereafter.) The first round of refunds was issued on January 16.

Excerpts from Prosper’s announcement are in italics:

With regard to servicing fees improperly deducted from late payments:
• Any lender who has a loan that came from a listing created before Nov 9, 2007 will receive a refund of his or her servicing fees charged in situations where the full monthly payment was not received within thirty (30) days after the due date of the payment.
• Lenders will also receive a refund of servicing fees on such loans when servicing fees were charged on partial payments received within 30 days of the due date, but where the full payment was not received within thirty (30) days after the due date of the payment.
• As of Nov 9, 2008, the Lender Registration Agreement has been updated to allow the charging of servicing fees on all payments, regardless of the amount and timing of the payment received. Lenders on loans that result from listings created on or after Nov 9, 2007 will have servicing fees deducted on all borrower full or partial payments, whenever received.
We estimate the date of the refund mid to late January, 2008.

These refunds appeared in lender accounts on January 16, 2008.

For group leader fees improperly deducted from late payments:

• Any lender who should have received a forfeited Finder’s Payment Reward will have that reward paid into his or her Prosper account.
• Group leaders who received rewards on late payments in the past will not have these rewards taken back from their accounts.
• Going forward, when loan payments that are subject to Finder’s Payment Rewards are made while a loan is 30 or more days past-due, the Finder’s Payment Reward will be paid to the lenders on the loan.
We estimate the date of the refund to Lenders in mid to late February, 2008.

None of the loans in my portfolio on which payments were made more than 30 days after the due date were originated in groups which charged fees, so I don’t know if these refunds have been made yet or not. I hope that readers of this blog will post a comment when they see credits to their accounts.

Finally, as to the group leader fees which Prosper had withheld from group leaders:

• We will pay the previously held-back rewards on defaulted loans (even though those amounts have already been distributed to lenders) to all the GLs.
• In case of future default on any of those loans, we will pay the amount of the originally held-back rewards to the lenders on those loans.
We estimate the date of disbursement of these rewards by end of February, 2008.

Once these payments are made by Prosper, the issues raised by MNH Reports #1 and #5 will be fully resolved.

A few suggested topics for discussion at Prosper Days 2008

Okay, I confess. I’ve been a very naughty blogger, with no new posts since December 26.

This week, I’ll try to make up for that dereliction of duty with a few updates on previous posts, and some new information about Prosper.com’s compliance issues, just in time for Prosper Days 2008 in San Francisco.

For those of you who don’t know, Prosper Days 2008 is Prosper Marketplace Inc.’s second annual community conference. For a day and a half, lenders and borrowers can attend workshops and presentations, and speak directly with Prosper management and staff. The event is also designed to provide a highly visible opportunity for Prosper management to announce new features and to showcase Prosper.com for the media.

Last year’s Prosper Days served Prosper well. Lenders who attended returned home with renewed enthusiasm for Prosper and P2P lending, and the media dutifully sang the praises of Chris Larsen’s company, resulting in several months of healthy growth.

That enthusiasm quickly wore off, however, as Prosper managed to alienate many of its most supportive lenders through a series of missteps. Loan originations dropped from a high of approximately $8 million per month in March-May to below $6 million, and have yet to fully recover.

(Eric’s chart groups loans by listing start date, not origination date. This eliminates the influence of origination delays within Prosper, and makes his chart less subject to intentional or unintentional manipulation than charts based on loan origination date.)

Prosper CEO Chris Larsen reportedly told lenders at the Aloha Meet & Greet that Prosper needed four or five times the existing volume to become profitable, so this sort of stagnation for a two-year-old start-up is very bad news.

While lender dissatisfaction grew during 2007, the media never caught on, and continued to present a rose-covered version to the public, regurgitating Prosper press releases without critical inquiry.

Prosper Days 2008 should be an opportunity for lenders to demand answers from Prosper management, and set the record straight for the news media. However, many of the most knowledgeable lenders are so alienated that they won’t bother to attend. It remains to be seen whether the lenders who do attend will be sufficiently informed to ask tough questions, and whether the media will present a more balanced account in future reporting.

Given its handling of the forums and other attempts to shut down independent commentary, it is also possible that Prosper will try to suppress difficult questions, rather than providing answers to them.

As a starting point for lenders and media who do attend Prosper Days 2008, here’s a fairly comprehensive summary of the concerns which lenders have raised about Prosper’s performance, written by former lender ira01, and posted on the independent P2P lending forums at Prospers.org. (As you can see, a number of these issues were documented in previous MNH Reports on this blog.) Over the course of this week, I’ll expand on some of these topics.

Here's ira01's list:

1) The default rate on Prosper is MUCH higher than advertised.

Chris Larsen, Prosper's CEO has been quoted in recent news articles saying the default rate is 2.7%. While perhaps technically accurate using Prosper's narrow definition of "default," this is utter balderdash from any real perspective. Prosper only counts a loan as defaulted when it sells it to a junk debt buyer for pennies on the dollar. However, Prosper currently has such sales only quarterly, so it is not uncommon for there to be many loans that are 5, 6, 7, or more months late. Historically, loans almost never come back from being even 3 months late, so all of these loans are defaults in everything but name.

Moreover, Prosper calculates its official default rate as the number of defaults divided by the number of loans, but because many loans are too new to have defaulted even if the borrower never made even the first payment (which happens far more often than you might think), this also tends to understate the default rate.

So far as can be seen, the real default rate appears likely to be close to 20%.

2) Another problem with Prosper’s handling of defaulted loans, is that the process completely lacks transparency.

Prosper flatly refuses to disclose the identity of any of the junk debt buyers that have purchased defaulted Prosper loans, the identity of (or even the number of) any junk debt buyers that have sought or been solicited to participate in the junk debt sales, the process Prosper uses to advertise the junk debt sales to possible buyers, or the method used to calculate the sale prices of the various defaulted loans.

Prosper lenders – who, after all, actually OWN the defaulted loans being sold by Prosper for pennies on the dollar – have no idea whether Prosper diligently and/or successfully obtains as high a price as possible for the defaulted loans, or simply sells them off to the first buyer it can find, regardless of price. For that matter, without transparency there is no way to be sure that Prosper doesn’t simply sell the defaulted loans at a favorable price to a company controlled by a Prosper insider.

Given Prosper’s many other shortcomings, there is no good reason to believe that Prosper handles the junk debt sales in an appropriate and competent manner. Moreover, there is at least one piece of evidence that it doesn’t.

Long before the last junk debt sale, a lender and forum member made a firm offer to purchase a particular loan that was headed to default. He made this offer by sending it certified mail, return receipt requested, to Prosper’s VP of collections and to its General Counsel. In his letter, he explained that Prosper owed its lenders a fiduciary duty to maximize the price obtained during junk debt sales of loans, and that he was fully qualified to purchase this defaulting loan. He also guaranteed that all collection activity he would take on the loan would be in compliance with federal and state law. Prosper completely ignored this offer for almost two months, and then sent a rejection letter at the same time it sold the loan (along with others) to a junk debt buyer for considerably less than what had been offered to Prosper. This unjustified rejection by Prosper collectively cost the almost three-dozen lenders on that loan $500, which was the difference between the rejected offer and the actual sales price to the junk debt buyer Prosper chose to sell the loan to instead.

3) One of the contributing factors to issue #1, is that Prosper's collections are anemic.

When a loan turns 1 month late it is turned over to Prosper's collection agency, but historically, only around 15% of loans in collections are brought current. There have been many anecdotal stories by late or defaulted borrowers on Prosper's old forums that they either were never contacted by the collection agency, or the contact consisted of an email or 2 and maybe a phone call or two.

Prosper's own relatively newly-hired VP of Collections admitted that the call logs from the collection agency showed that they were repeatedly trying to contact borrowers at the same time of day, such as between 3-5 pm, so if the borrower worked during the day, no contact was made.

4) Very little information about the borrowers is verified by Prosper.

Prosper selects a subset of fully-funded listings to verify employment and income, but many listings become loans without such verification. Prosper has already had to repurchase about $400,000 of loans under its ID-theft guarantee, meaning that Prosper let many fraudulent loans through its systems. Indeed, there is one case (identified by a diligent forum member) where one person obtained a dozen loans from Prosper under different identities. After the forum member outed this on the old forum, Prosper repurchased the loans and sued the borrower in Los Angeles Superior Court to get its own money back.

However, there is substantial doubt among the lending community that Prosper tries very hard to identify ID-theft loans, because when it does, it has to repurchase them from lenders.

There was one case where a different forum member conducted some excellent detective work (the borrower included enough information in the listing to enable their identity to be discovered), including determining that the "borrower" of a Prosper loan was the victim of ID-theft from other creditors, and he actually spoke with the NYPD detective investigating the case. The forum member gave all this information to Prosper, including the name of the detective, and for months Prosper apparently did nothing (the NYPD detective later told the forum member that he had NOT been contacted by Prosper). Only after a major firestorm erupted on the forum about this, did Prosper repurchase the loan from lenders (after it was about 10 months old, as I recall).

5) Although Prosper has funded a number of fraudulent loans, it has also cancelled a number of legitimate loans, apparently through incompetence.

One such loan involved the brother of a well-respected Prosper lender and very active forum participant. After claiming that faxed documents were illegible and then that Prosper couldn't open a .pdf file, it cancelled the fully-funded listing with no opportunity for the borrower to resubmit the documents.

There have been many other Keystone Kops situations involving Prosper's verification, including one case where Prosper's telephone system apparently couldn't connect to an 888 number (the employer of a borrower), so the loan was cancelled, even though the Prosper employee was able to reach the company on his personal cell phone.

6) Related to issue #5, Prosper's customer service is terrible.

Often, they let the phone just ring and ring without answering it. When you send an email, the response is often irrelevant boilerplate. Lenders used to provide a lot of Prosper's customer service for free on their old forums.

7) Prosper's advertising is highly misleading in many ways, if not downright fraudulent.

They overstate interest rates in ads directed to lenders, and understate them in ads directed to borrowers. Prosper was caught once apparently having photoshopped a screen shot of an actual listing in an advertisement about the rate (changing the actual rate to something more beneficial).

Also, Prosper has repeatedly sent out mass email ads featuring borrower and lender testimonials that were quickly proven to be false. After the first time, Prosper admitted that it hadn't verified the facts claimed by the person, and said it would do so in the future. But whoops, they promptly did it again (in a different testimonial) in the next ad.

8 ) Prosper used to have a vibrant community on its official forums, with about 400,000 posts.

These forums were an amazing learning experience for lenders, so that new lenders could avoid the mistakes of their predecessors. Prosper banned me from the forums and from lending (although I had already publicly announced that I had stopped lending due to Prosper's mismanagement) because I sent a bunch of PM's to new lenders alerting them to the existence of Prosper's own official forums.

Then, the day before Thanksgiving, Prosper deleted its entire forum with no notice, in an effort to hide the truth from new lenders. It then replaced the old forums with a super-moderated version that is completely useless (every post must be approved before being posted, which often takes days even when the moderator lets it through, which is rare except for cheerleading posts).

9) When another forum member made an archive of the old forums available on www.prosperreport.com, Prosper had its lawyers send a threatening letter seeking to take the domain away on baseless trademark, unfair competition and cybersquatting grounds.

Undoubtedly, Prosper figured this person would cave in and take down the site. Instead, he retained a lawyer from Public Citizen, who responded to Prosper's letter by explaining how Prosper's claims are entirely without merit. Both letters are posted on the site. Prosper has yet to respond.

(10) Prosper has also misappropriated thousands of dollars of lenders' money by charging its servicing fee on loans that were more than a month late, contrary to Prosper's own legal agreements.

This too was discovered by yet another forum member. Prosper admitted that its action was "in error," but only recently returned this money to lenders despite having promised to do so months ago.

(11) Another significant issue is whether Prosper will even survive as a company for the three-year term of its loans.

As can be seen on www.Lendingstats.com, loan originations have been essentially flat for the last six months, and Prosper’s CEO has admitted that loan originations need to increase 400%-500% in order for Prosper to turn a profit. Given that, clearly the outlook is troubling.

Although the Prosper Lending Agreement specifies that if Prosper goes out of business the loan servicing will be taken over by another servicing company, there is no guarantee that any such company can and will be found, or that the transition will go smoothly, or that the new company won’t require higher fees in order to do the servicing.

The above issues are really just the tip of the iceberg. If anyone is considering lending on Prosper, do your due diligence. Read www.prospers.org, and check out the actual performance of lenders on www.lendingstats.com.

For example, you will see that looking at ALL moderately seasoned lenders on Prosper (those with >20 loans and >6 month average loan age), the median projected ROI is around a mere 4.5%. That is close to what E-Loan is offering on its FDIC-insured, 100% liquid savings accounts. And the tax treatment of Prosper loans is also worse (for one thing, you have to pay income tax on the servicing fee that you pay Prosper due to the way it is collected).