From the PFL S-1:
The PMI Management Rights will not be separable from the Notes offered on the platform and will not be assigned a value separate from the Notes.
When you purchase Borrower Dependent Notes from PFL, you will also be purchasing PMI Management Rights.
Investors [of PMI Management Rights] will have limited contractual rights, collectively through the indenture trustee, to enforce Prosper Marketplace Inc.’s contractual obligations under the Administration Agreement.
Does this mean that a "lender" can't ask PFL for recision of a Borrower Dependent Note if PMI completely botches its loan servicing duties?
Only the indenture trustee, not the holders of the Notes, has a security interest in the above collateral. [...] There can be no assurance, however, that the indenture trustee, or ultimately the Note holders, would realize any amounts from the collateral.
The Notes will not represent an obligation of borrowers, PMI or any other party except Prosper Funding, and are special, limited obligations of Prosper Funding. The Notes are not guaranteed or insured by PMI, any governmental agency or instrumentality or any third party.
Note holders can't seek PMI's money in the event of a PFL bankruptcy.
[...] there can be no assurance that if it [PFL] is obligated to repurchase a Note or indemnify a Note holder, that it will be able to meet its repurchase or indemnification obligation. If Prosper Funding is unable to meet its indemnification and repurchase obligations, you may lose all of your investment in the Note.
PFL doesn't have enough money to cover the possibility of a large number of recisions. If such is required, a "lender" may lose all of their investment even if PMI does have enough money to cover the recision.
Holders representing at least 25% of the combined total of the outstanding Notes offered hereby and the PMI Notes, collectively, will have the contractual right to cause the indenture trustee to take action as a third-party beneficiary of the Administration Agreement to enforce PMI’s loan servicing obligations under the Administration Agreement.
Arrangements for back-up servicing are limited. If PMI fails to maintain operations or the Administration Agreement is rejected or terminated (in bankruptcy or otherwise), you may experience a delay and increased cost in respect of your expected principal and interest payments on your Notes, and Prosper Funding may be unable to collect and process repayments from borrowers.
Since PMI is doing the servicing, not PFL, if/when PMI goes BK, all of the general "what happens to loan servicing" still exists in this new setup.
Moreover, PMI owns and is not transferring to Prosper Funding ownership of the computer hardware that it currently uses to host and maintain the website or agreements with third parties relating to the hosting and maintenance of the website.
Since PFL doesn't have the hardware to do the servicing, they can't take over in the event of a PMI BK.
If Prosper Funding becomes subject to a bankruptcy or similar proceeding a holder of a Note may not have any priority right to payment from the corresponding borrower loan, may not have any right to payment from funds in the deposit account, and may not have any ability to access funds in the account maintained for the benefit of lender members.
In a bankruptcy or similar proceeding for Prosper Funding, the holder of a Note may be delayed or prevented from enforcing Prosper Funding’s repurchase obligations.
Although Prosper Funding has been organized in a manner that is intended to prevent it from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if Prosper Funding were substantively consolidated in this manner, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped. The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note.
PMI, in its capacity as servicer, has the authority to waive or modify the terms of a borrower loan without the consent of the Note holders.
PMI has the authority to forgive loans and thus prevent lenders from receiving additional payments, all without consent of the lenders and you can't go back to PFL looking for the lost money.
PMI faces a contingent liability for securities law violations in respect of PMI Borrower Loans sold to its lender members from inception until October 16, 2008. This contingent liability may impair its ability to perform its obligations under the Administration Agreement.
If PMI goes BK because of the class action lawsuit, then loans may go unserviced.
if the class action securities lawsuit is successful, PMI’s ability to perform its obligations under the Administration Agreement may be adversely affected and, in such event, Prosper Funding’s ability to continue to make payments on the Notes could be materially impaired.
And thus unpaid.
Purchasers of Notes will have no control over Prosper Funding or PMI and will not be able to influence their corporate matters.