Prosper Marketplace, Inc. is a San Francisco, California-based company that operates Prosper.com, an online auction website where individuals can buy loans and request to borrow money. Borrowers set the maximum interest rate they wish to pay, and loan buyers, called "lenders," bid on specific loans by committing a portion of the principal and setting the minimum interest rate they wish to receive on a particular loan. Prosper manages the reverse dutch auction, assembling bids with the lowest interest rates in order to fund the loan.
Prosper verifies selected borrowers' identity and personal data before funding loans and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.
Prosper publishes performance statistics on the website; these are available to the public at large. All transactions are in US dollars; lenders and borrowers must be US residents.
Prosper opened to the public on February 5, 2006. Prosper was founded by Chris Larsen, who also founded E-loan, and John Witchel and is backed by Accel Partners, Benchmark Capital, Fidelity Ventures, Omidyar Network, DAG Ventures and Meritech Capital Partners.
In April 2008, Prosper aligned with the Utah-charted Web Bank. Previously, Prosper operated under individual lending licenses issued by various states, and was subject to each state's maximum interest rate laws. By afiliating with Web Bank, Prosper borrowers nationwide (except in Texas and South Dakota) can offer a maximum interest rate of 36%, which lenders can then bid down.
Prosper rates prospective borrowers for creditworthiness by assigning a "credit grade" based on the borrower's Experian's Scorex PLUS credit score. Prosper credit grades are (starting with the highest) AA, A, B, C, D, E, and HR (high risk). Lenders considering a bid on the borrower's loan listing have access to the borrower's credit grade, along with summary credit data from the prospective borrower's Experian credit history, including number of current delinquencies, amount currently delinquent, delinquencies in the past 7 years, and other data.
Equivalent credit scores for Prosper credit grades are:
In addition to credit data, lenders also see the borrower's group membership, if any, friendships with other Prosper members, endorsement from those friends, past listings and prior Prosper loans. Both borrowers and lenders are anonymous (identified only by screen names) to protect their privacy.
Prosper has a transaction-based business model, in which the company collects revenue by taking a fee on its customers' transactions. Borrowers who receive a loan pay an origination fee of 1-3% depending on the borrower's credit grade, and lenders pay a 1% annual servicing fee. Prosper's initial product is an unsecured 3-year loan for up to $25,000.
Liquidity of purchased loans
Lenders are a party to the loan for the full 3 year term. As the borrower repays over the life of the loan, the payments accumulate in the lender's Prosper account. This money may then be bid into new loans, or transfered to the lender's bank account once it reaches a minimum of $25. There is no secondary market for Prosper loans, and lenders have no access to funds invested in loans until borrowers repay.
False Court Filings
In May 2008, Prosper made a filing with a United States bankruptcy court in which it denied ever having originated a loan to the man declaring bankruptcy. Prosper claimed, instead, that it merely acted as an agent of the man to obtain small loans originating from many lenders. This filing is directly contrary to Prosper's statements in its legal agreements (Lender Registration Agreement) which state that Prosper itself would originate all loans and then sell pieces of them to the system's "lenders".
As of August 2008, approximately 18.5% of all money loaned on Prosper from inception (February 2006) through June 2008 are in some form of delinquency. Also, more than 35% of all loans that originated in February 2007 are in some form of delinquency.
Prosper sent a cease and desist
letter to a third-party commentary website, Prosper Report, for using the word "prosper" in its domain name. On December 24th, 2007, Public Citizen Litigation Group
responded on behalf of Prosper Report.
Delayed Debt Sale
On 5/2/08 Prosper announced on their "official blog" the delay of selling some $6 million of defaulted loans to junk debt buyers, which has been put on halt indefinitely. Debt Sale Update
Deletion of Official Forums
Lenders have criticized Prosper for the deletion of all content on its own official forums which contained a large amount of data, analysis, and lender/borrower interaction.
Finance blogger Jim Bruene predicted, in a blog post when Prosper first opened to the public and before any data about actual results became available, that Prosper's business model would result in adverse selection
. He suggested that the market-clearing rates on Prosper would turn out to be higher than the ones offered by lending institutions, which he hypothesized would result in filtering out borrowers intending to pay back the loan and leaving non-credit worthy borrowers willing to agree to above-market rates.
Interest on deposits, transfer speed
Prosper does not pay interest on idle funds due to rules associated with pooled accounts. Persons transferring money to Prosper wait 4 business days before transferred funds can be bid, and then from 1 day to 2 weeks for the auctions to complete and loans to be funded for interest income to begin accrual. A lender's cash balance in his or her Prosper account can be transferred at any time to a linked external checking or savings account.
In response to customer complaints, Prosper began allowing "instant transfers" of amounts between $500 and $20,000 for established lenders with at least one active loan. Prosper has begun a new campaign which allows individual lenders with a facebook account to install a Prosper.com lender application within their facebook profile. This will enable instant transfer of amounts between $50 and $20,000.