An Open Letter to The Big Money: Retract Your Story
01/19/10 posted by Prosper Blog
Today, The Big Money, an outlet we and many others respect, published a disappointingly inaccurate story about Prosper and the peer-to-peer lending industry.
I didn't see anything inaccurate about it; it just wasn't flattering to Prosper while using Prosper's own provided numbers. Or is Prosper saying that they themselves are providing inaccurate numbers to their customers?
It’s unfortunate that the author’s data analysis and perspective relied almost entirely on a hodgepodge of anonymous sources.
They mean Prospers.org. But Eric was actually named with full first and last name. And most of the data actually comes straight from Prosper's own published numbers.
If higher reporting standards had been upheld, the reality that Prosper has shown great promise and performed well on a relative basis over the last three-years would have been self evident.
So, the only accurate reports are fluff pieces.
We’ve requested that the editors at The Big Money retract Mark Gimein’s erroneous perspective on Prosper and the peer-to-peer lending industry.
It isn't erroneous, it is just different from your own.
We look forward to their response. In the meantime, we’d like to set the record straight.
Let's set it straight with a load of doublespeak.
Mr. Gimein discusses Prosper’s loans in the context of only cumulative unit default rates rather than in terms of the average annual returns lenders have earned.
Actually, no he doesn't. He also talks about estimated annual lender returns per EricsCC.com which is the most accurate way available to those outside of Prosper to estimate returns.
For example, Mr. Gimein states that 39% of loans that have had a chance to come to maturity (originated prior to 12/31/2006) have defaulted. What he doesn’t say is that the annual yield on these loans was 16% and the annual loss experienced by lenders was actually 20%, resulting in an annual average return of negative 4%.
I'm sorry, I'm not math or finance major and even I know that that calculation is extremely wrong. Prosper here is using APY = APR - DR but in reality the correct formula is APY = APR - DR - (APR * DR). Using this formula actually yields an annual average return of -7.2%, not -4%. The misuse of this formula has been pointed out to Prosper time and time again all the way back to 2006.
Although this return is negative, put in the context of the largest recession in generations, and the performance of other asset classes during the same time period, this paints a very different and more accurate picture of how lenders have fared on Prosper.
CDs (the asset class most similar to old Prosper's offering) never went negative on their returns during this time period.
Mr. Gimein continues to use his flawed methodology to state that 54% of loans with an interest rate of 18% or greater have defaulted,
He doesn't use a false methodology to state Prosper's own numbers.
leaving the impression that lenders on these loans have lost over half of the funds that they lent, and that losses ran roughly three times the interest rate on loans. Again Mr. Gimein is equivocating annual interest earned with cumulative default rates over a three year period. Lenders on these loans lost 10% on an annual basis,
Again, Prosper is using the incorrect formula and when using the correct formula, the higher the interest and default rates go, the more incorrect the wrong formula is.
and while not positive, it’s a far cry from the 54% loss that Mr. Giemein flawed analysis leads the reader to believe.
He never lead anyone to believe that it was a 54% loss.
After quoting these cumulative loss results out of context, Mr. Gimein’s bottom line is “After you take defaults into account, investors have lost money on most of their Prosper lending.”
Which is true.
Mr. Gimein makes this statement without providing any actual returns data,
Yes he does; he points you to EricsCC.com which itself feeds directly from Prosper's own published data.
again leaving the false impression that lenders have lost 39% to 54% on their Prosper lending.
He never left that impression.
The truth is that the median return across all Prosper lenders was negative 3.2%.
Congratulations on being proud about having a median negative return. Can you please tell us how you came up with that number? Was it across this same time period? Does it include loans that haven't had time to default yet?
In addition, 39% of lenders have made money on their Prosper investment.
Congratulations on being proud about a minority of your users making any profit at all. Again, can you tell us how you came up with this number as it doesn't jive with the numbers EricsCC.com is pulling from Prosper's own published data. And what exactly would these numbers be for "seasoned" lenders (those that actually have a significant portfolio with significant age)?
While we would have preferred all of our lenders to have made a profit, a low single digit loss for Prosper lenders in the context of the worst recession since the Great Depression shows great promise for peer-to-peer lending as an alternative asset class for investors.
Again, the asset class most similar to old Prosper's offering (CDs) never went negative throughout the entire recession and credit crisis.
Even a broad index like the S&P 500 saw an annualized loss of 6% in the past three years. Most individual investors have experienced performance substantially worse than this in their investment portfolios and 401k accounts. Something Mr. Gimein fails to discuss.
Why do we even need to specifically discuss an asset class that is in no way shape or form anywhere even remotely related to the old Prosper's offerings?
Mr. Gimein also fails to mention that historically there has been a significant amount of social lending through Prosper’s marketplace. Social loans are deliberately underpriced relative to their stated risk by lenders in order to benefit borrowers with unique or challenging circumstances. Although we do not have a way to isolate the impact of these loans on performance, there is no doubt that they have had a downward impact on some lender returns.
The number of social loans in Prosper's history is relatively very low compared to the rest of the volume and an inordinately high percentage of those defaulted. Even just bringing this up shows how far Prosper has to stretch to try to spin things more their direction. The epitome of doublespeak.
Mr. Gimein also seems to find fault with the steps Prosper has taken to improve the lending process and provide lenders with additional information to improve their lending decisions.
I will admit that Prosper has done quite a bit to improve information flow in some areas, but Prosper has time and time again proven that it despises giving information to lenders because the more information lenders have, the less comfortable they are lending. How many times has Prosper banned lenders for doing research and due diligence?
Prosper has instituted a minimum credit score requirement of 640 to request a loan from Prosper’s lenders as well as a bid floor.
Thus getting rid of all the social loans mentioned above.
Prosper also introduced a new rating system in July 2009 that incorporates the historical performance of over 29,000 Prosper loans into the rating of new borrowers looking for loans.
Certainly anything is better than the Experian crap grades that meant absolutely nothing at all, but there has been no proof that this is in any way accurate either.
Although the new rating system uses the same letter grades to rank order risk, the meaning of the letters has changed significantly.
Thus making it impossible to truly analyze the data by grade since Prosper doesn't properly deliniate the differences between the old and new grades.
This has resulted in a change in the composition of Prosper’s listings, which allows lenders to more accurately assess risk and set prices for prospective borrowers. This change in rating methodology is well documented on Prosper’s site and lenders can easily compare the impact of Prosper’s new rating system on loans originated under the older system.
Except that they can't because the old loans don't have enough information to apply the new system to them.
The early results from the new rating system are excellent. Prosper is estimating returns for lenders above 10% for loans originated since our July re-launch and the early data supports these expectations. Below is a graph comparing the delinquency performance of loans originated by year with the loans originated in the third quarter of 2009. As you can see, the proportion of loans that are 31 to 120 days past due for the loans originated under the new rating system are dramatically lower.
Does this graph contain loans that are greater than 120 days past due? You specifically say that it doesn't. Any graph without such loans is totally bullshit.
Prosper was launched to the public in February of 2006 and was about 18 months old when the credit crisis turned our economy upside down.
Then why do the first 12 months of 2006 and 2007 loans look exactly like the first 12 months of 2008 loans per your graph?
The crisis that followed saw a dramatic increase in defaults for all classes of consumer loans.
Except for Prosper loans. Fred93's graphs clearly show that there was no significant increase or decrease in default rates due to the credit crisis.
Large banks with years of lending experience saw a dramatic increase in consumer defaults and posted significant losses.
If those guys with tons of experience couldn't hack it, why do you think that completely inexperienced people with a serious lack of data could do significantly better?
Prosper was clearly not immune from the economic environment, but looked at in the proper context, peer-to-peer lending has weathered the storm relatively well and as a result is well positioned for a bright future.
If you mean that growth in origination rates fell through the floor and erased any chance of profitability for any P2P Lending provider, then, ok.
At a time when financial markets are in upheaval and consumers are facing a dwindling set of credit alternatives, Peer-to-Peer lending deserves better than a flawed, out of context evaluation from a seasoned journalist, and a respected Web site, that should hold themselves to a higher standard.
You're right, it deserves exactly what it got. A true researched outside non-fluff point of view.
