I have been a lender on Prosper since March 2007, with about $2,400 invested. Although my projected ROI is currently about 8%, I stopped lending in October for a variety of reasons all linked to Prosper's management. Basically, the best way to summarize Prosper is that it is a wonderful concept, executed horribly due to the incompetence and arrogance of management.
There are too many serious problems with Prosper to list here, but brief review of www.prospers.org, which is the largest Prosper forums, will provide anyone interested with a long list. Here are a few:
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 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).
