Fred93's blog

Here's the June update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the  same data in which each curve has been slid to the left to a common origin.  The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog .

You can plainly see that Prosper loans are going bad at about 20% per year.  Just look at the 360 day point on that last chart.  As I've reported before, you will see many references in various newspaper and magazine articles that the Prosper loan default rate is 3% per year.  These statements are just completely wrong.  It is amazing how often this incorrect statement has been reprinted.  Prosper's own data (as seen above) shows the correct number is about 20%/year.

The most recent repeat of the lie can be found in Lendoza's blog
http://www.lendoza.com/2008/05/28/marketplace-protection-collections-a-closer-look/ where he wrote:

we will assume that Prosper?s numbers are accurate?.in which case there is a default rate of 3%

He obviously hasn't actually looked at the data.  He must have simply copied that from one of the newspaper articles.  Prosper's data does NOT show "a default rate of 3%".  The only polite word for that is "wrong".

Zcommodore recently showed us another way to look at this same data.

http://www.prospers.org/blogs/zcommodore/2008/05/22/loan_aging_a_study_of_loans_over_time

You can read from his graphs a default rate of a little less than 2%/month.  That's about the same as 20%/year I've repeatedly described.

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans.  Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken

Written 05/04/08: Collections is not improving

Prosper has recently advised us that the most recent auction of old bad loans has failed, and as a result they no longer intend to auction off old bad loans.  Failed.  Dead.  Nobody wants to buy the stuff!  As a result of this, Prosper has told us that they intend to stop selling such loans, and instead apply "post charge-off collection techniques" while us lenders still own the loans. 

This could be a very positive development.  The old auction/sale process was very bad for lenders, as no one ever tried very hard to collect before the loans were sold, and the sale triggered very bad tax consequences for lenders.  As I wrote about a year ago in  Collections is broken I think this is an appropriate thing to do ... IF Prosper takes this responisbility seriously. 

My concern, and the concern of many other lenders, is that Prosper will not take it seriously, as they have never taken their responsiblity to lenders with any seriousness.  I recently wrote about how slowly Prosper is proceeding with the legal test against 66 deadbeat borrowers.  Will they proceed more gusto against 1000 or 2000?  Or does "post charge-off collection techniques" mean letting old loans gather dust on a back shelf? 

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com is often sloppy when servicing loans.  I'm going to show you an example.  Its an anecdote to be sure, but there are many such anecdotes in the naked city.

Loan #2139 originated July 27, 2006.  The one and only payment made by the borrower occurred a few days later on August 6, 2006.  The loan is still hangin' around, now about 22 months late. 

Prosper, by its stated policy, is supposed to sell loans when they are 4 months late.  This one fell thru the cracks.  It is unclear whether there has ever been any attempt by prosper to collect.  Seems that during much of the past 2 years, Prosper assumed this borrower was in bankruptcy, when in fact he was not.  Once a loan is coded as "in bankruptcy", it gathers dust on Prosper's back shelf, no collection attempts are made, and the lenders lose their money.

Back to the story.  A lender, who shall remain nameless, sent me a copy of this dialog with prosper.  The lender quoted below waited patiently 1.5 years and then begain a dialog with Prosper.

From:
To: support@prosper.com
Subject: Re: Other (I am a lender): Please explain below

Could someone please explain why this loan has not ever been included in the JDB sales? They have made ONE payment and that was a month after the loan originated and was over 1.5 years ago. If it is possible fraud, it seems that would have been discovered by not.

https://www.prosper.com/secure/account/lender/lender_loan_details.aspx?id=2139

Thank you

Here's Prosper's initial response.

From:  "\"Prosper customer support\" <support@prosper.com>
To:
Subject: Re:Other (I am a lender): Please explain below [ ref:XXXXX:ref ]
Date: Jan 2, 2008 2:45 PM

Dear XXX,

Prosper recently selected some 4+ month late loans to be included in a new collections test. This test is still ongoing and therefore these loans were not sold. More information on the test will be release as soon as it is available in January. Thank you for using Prosper Marketplace.

For future reference, your Prosper support case number is XXXXXXXX.

Sincerely,
Prosper Customer Support
Join us for Prosper Days 2008: Prosper community members and...

Well, that response is incorrect.  This loan wasn't in the new collections test.  That's just a stock answer that the CS person grabbed for a quick response.  That happens sometimes.  Our friendly lender tries again...

From: XXX [XXX@XXX.com]
To: support@prosper.com
Subject: Re: Re:Other (I am a lender): Please explain below    [ ref:XXXXX:ref]

Here's what I said the first time you sent me this email:

I don't think you understand. This borrower has not made a payment since AUGUST 06. That's over a year ago and it was the only payment they have made. Your  new collections test wasn't instituted until the last few months. THIS WAS 120+ DAYS LATE OVER A YEAR AGO. Right now it is showing at Penncro, not the new agency and it's showing it has only been at Penncro for 2 months. Surely you see that there's a problem with this loan???

Not making progress with customer service, our lender sent a message directly to a prosper employee...

From: XXXX [mailto:XXX@XXX.com]
Sent: Friday, January 04, 2008 2:48 PM
To: aprosperemployee
Subject: Fw: Re:Other (I am a lender): Please explain below [ref:XXXXXX:ref ]

Hi XXXXXX - ... I'm hoping maybe you can get to the bottom of this. I can't tell if this is someone who filed BK, then had it canceled, got lost in the cracks, is a possible fraud case you guys were working on, knows someone who knows someone who knows someone or what. But obviously the response I received didn't address the issue.

To reiterate - they have made ONE payment. That was in August 06 - well over a year ago. It's never been sold and it's showing that it's only been in collections for 2 months.

Any illumination you can provide will be greatly appreciated since I'm pretty sure you're the only one there who knows what's going on, lol

Thanks,
XXXXXX

This time our lender got a response that actually tells us something about what happend to this loan...

From:  Prosper customer support <support@prosper.com> 
To:
Subject: Re: Re:Other (I am a lender): Please explain below [ ref:XXXXX:ref ]
Date: Jan 4, 2008 6:45 PM

Dear XXX,

This was a borrower who told us she was going to file bankruptcy, which kept her out of a couple of debt sales. Once we realized that she was not actually filing bankruptcy, we took the bankruptcy tag off of the loan, but it was too late to be included in the latest sale. According to our debt sale folks, we're going to try to include it retroactively in the last debt sale. Failing that, we'll include it in the next one.

For future reference, your Prosper support case number is XXXXXX.

Sincerely,
Prosper Customer Support
Join us for Prosper Days 2008: Prosper community members and...

Whoa!  It appears that when a borrower tells Prosper that they're going to file bankruptcy, Prosper ceases trying to collect.  This apparently happens whether the borrower has indeed filed bankruptcy or not.  Then, when they discover their error (over a year later) they send the loan to the junk debt buyers.  Well

You might be inclined to think that Prosper's collection agents are hard at work on this loan, but I'm not so sure.  The customer service message above says the bankruptcy flag was removed but, even to this day, this loan is still flagged in Prosper's database as "in bankruptcy". 

http://prospers.org/blogs/media/blogs/Fred93/2139prosper.jpg

If I were the collection agent for this loan, and I saw that flag, I would not call the borrower.  It is reasonable to assume that Penncro and now Amsher have ignored this loan because Prosper's database shows it in bankruptcy, and that no collection attempts have ever been made.

Lenders have no transparency into the handling of late loans.  This makes it difficult for lenders to check up on Prosper's handling of our loans.  Only in extreme cases such as this do we learn a bit about what actually goes on.

Prosper, please take lenders seriously.  Improve your handling of late loans.  An external audit of the entire late loan handling process might be an appropriate jesture . 

When we invest in prosper.com loans, we make a deal with prosper.  The lender buys the loan, and prosper retains the right to service the loan and charge a fee for that service.  This would be fine if prosper did a good job of servicing loans, but they don't.

Don't get me wrong.  Prosper has done many things right.  The idea was great.  They built an incredible web site.  They just don't service loans well, which unfortunately is a critical thing.

In any other situation I can imagine, if I owned a loan, I could decide who services the loan.  That way there would be competition.  If my loan servicing guy proved to be incompetent, I could move to another loan servicing guy.  This sort of competition drives everyone to be serious and pay attention to business.  (Economics 101)

If you're locked in to one loan servicing guy, then what's his incentive to actually care about your loan? 

In the case of Prosper, you might think the incentive would be that their survival ultimately depends on this.  If, over time, the world learns that their product is bad, then no one will want their product.  I'm not the only one who has said things like this.

John Witchel (Prosper CTO) wrote (in private correspondence) on 05/09/2007:

Prosper is heavily motivated to keep defaults in line.  If they aren't tractable everyone's returns go to the dogs and Prosper fails, and there's no amount of "new blood" that will keep that problem at bay

Today 3,215 of Prosper's loans have gone in the toilet (ITT).  I'm counting loans that have defaulted, as well as loans that are at least 2 months late, which by past Prosper performance means they will almost certainly end in default.  In other words, these are loans where the lenders have been stiffed.

Prosper has originated 18,819 loans that are now at least 3 months old (ie old enough to be at least 2 months late).  For the record, those 3,215 loans in the toilet are 17.1% of Prosper's total 18,819 loans old enough to be ITT.  (Gosh I hope I don't read any more of those newspaper articles that say Prosper has a default rate of 3%.)

(You can get all these numbers for yourself from Prosper's performance web page, or from one of the third party stats sites, etc.)

But that 17.1% is not the really interesting fraction.  Prosper has insulated itself from the loan-making decision, so some would say the high default rate is not entirely Prosper's fault.  Read on.

For almost all of those late loans, all Prosper ever did was send the borrowers emails and phone calls, asking them to pay.  In other words, Prosper did almost nothing.  To be certain, there have been some small improvements.  For example here's an improvement announced earlier this year:

Doug fuller quote (from prosper blog)...
http://blog.prosper.com/2008/01/04/doug-fuller-on-collections-1/

One of the many activities aimed at improving collections undertaken in the last couple of months was the testing and implementation of an ?Early Delinquency? letter series.  Although borrowers were already receiving reminder emails and phone calls during the early delinquency period (1 -30 days past due), we thought it worth seeing if an actual letter might drive additional payments.

Oh boy!  Now they send a letter.  An improvement.  But ... Frankly, a letter ain't much, and Prosper's collections is still super-wimpy.  Prosper management just doesn't take this stuff seriously.  They don't take handling your money seriously.

When Prosper was conceived, the founders didn't realize that bad loans, deadbeat borrowers, defaults and collections would be such a bad problem.  They had a notion, now proven to be incorrect, that the "community" aspects of Prosper would create loans which went bad at a lower rate than other consumer loans, credit cards, etc.  That aspect was widely hyped to lenders.  (Remember those web pages where they talked about Joe the fireman, and how after he joined the fireman's Prosper group he would feel an obligation to all other firemen, so would keep his loan current?)  Turns out: It ain't so.

I don't fault the founders for getting this wrong.  In every startup the founders envision some future business, an act which forces them to predict how the future will turn out.  As the saying goes "Predicting is really difficult.  Especially the future."  Some part of the vision is always wrong.  You have to adapt.   Prosper management hasn't adapted. 

(And for the record, I still believe there is value in the community aspects of Prosper.  Its untapped.  I'll write about that in a future blog.)

To be fair, they have made changes which attempt to reduce the rate at which loans go bad.  They added a post card to verify the address of the borrower.  They increased the lower bound on credit score for HR borrowers, to cut off some of the really bad credit risks.  Finally they added bidding guidance in an attempt to scare naive lenders away from high risk loans.  Good stuff... but no real improvements in the collections department, where thousands of loans sit rotting.

Because the Prosper founders didn't think collections would be much of a problem, they didn't devise a good method to fund collection activities.  The existing legal documents (lender agreement, borrower agreement) don't provide mechanisms that would fund legal action against borrowers, even when it is clearly in the interest of lenders.  In other words, we have lenders willing to pay for action, but Prosper unable to act.  Prosper could have adapted, and changed these agreements, inventing the new mechanisms to fund the functions they now saw were needed, but they have not.  They're still tryin' to run collections on the cheap.

More discussion about funding collections can be found in my Open letter #2 to Prosper management, written almost exactly a year ago.  Much of it is still on point.

Lets get back to those 3,215 loans in the toilet.  1,458 of those have already defaulted, ie were sold to junk dealers, so they're gone, and there's nothing we can do about them.  The remaining 1,757 in the toilet loans are still in Prosper's hands, and they could do something about those, if they had the desire to act.

They have taken some action, but I want to show you how tiny that action is.  Back in January '08, Prosper started a "legal test" where they took 66 very late loans, in California only, and initiated legal action.  Oh boy!  There are several small problems.

First, that's 66 out of (1757+66) = 3.6% !   They only initiated legal action against 3.6% of the late loans in their hands that are in the toilet. 

Are you a lender on some of the other 96.4%?  Sorry.  Your loans are going to default.  Nothing is being done.  The "legal test" should be 10 times larger.

Second, I said they "initiated" legal action, but that's almost too strong a word.  Remember the project started in January.  In May they filed the first "proof of service" documents with some of the courts, meaning that the complaints have actually just now been served against some of these deadbeats.  Slooow.  No requests for summary judgement have yet been filed.  No court dates have yet been set.  If we run at this pace, it will take a year before we have any results.  During that time, more thousands of loans will default due to Prosper's inaction.  This is irresponsible.  This may be the most economical way to proceed, but it is not the most responsible.

Here's my request of Prosper's management:

You have, in your hands, 1,272 loans that are 4+ late.  (For the record some of this group are as much as 10 months late, such as loan #901.)  Establish objective criteria to pick half of those loans that are worthy of legal action, in other words about 660 loans, ten times the size of the existing legal test, and begin legal action on them immediately.  Take lenders, and your obligations to them, seriously.

Make the changes in the legal documents required to allow you to fund this legal activity while complying with the terms of the documents.  This won't help you for the existing loans, but at least it gets you straight with the lawyers for future loans.

Oh, and please make the process transparent.

Here's the mid-May update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the  same data in which each curve has been slid to the left to a common origin.  The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog .

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans.  Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken

Written 05/04/08: Collections is not improving

If you're a DIGG member, here's a link to this story on DIGG, where you can digg it .

Grant Wanapat, Jerald Teixeira, Holly Brown, Valentino Raboteaux, Ricardo Barboza, Crystal Moffett, Shi Li Park, Louis Collet, Robert Riviera, Christopher Carr, Chinyere Woke, Carlos Delgado, Diana Davis, Victoria Crawford, Mario Villanueva, Brandi Fitzgerald, Josephine Sharaba, Jermaine Massey, Teresita Spreen, Karen Rozier, Coleen Alexadria Dacey, Krag Pappas, Teresa Calvert, Lovel Hoxie, Deniece Todd, Kimberly Jones, Vickie Brown, Michelle Wiese, Rory Manning, Jeremy Brom, Lynn Horton, Del Phillips, Mark Dionne, Chona Dionne, Oscar Monge, Gregory Kolesar, Roger Treskunoff, Lavina Lewis, S. White ***

Question: What do these people have in common? 

Answer: They have all been sued by Prosper.com, for not paying back their loans.

I have good news and bad news for lenders. 

The good news is that legal action is finally happening.  We've waited a long long time for this, and its good to finally see some serious action against deadbeats who have stiffed us.  Prosper's collection activity up to this point has consisted of phone calls, with the recently added modern technological innovation of a letter asking deadbeats to repay. 

The bad news is that the legal test project is very small, and is moving at a snail's pace.  Lets review the schedule, so you can see what I mean.

01/15/08 -- Prosper sent many lenders an email message asking them to "opt in" to this project to allow Prosper to sue borrowers on the lenders behalf.  I opted in.

02/17/08 -- Prosper repurchased the loans from lenders, to simplify court proceedings.  Prosper didn't pay anything to the folks who opted in.  Payment will come later, depending on success in the lawsuits.

02/25/08 -- First suit filed.  In Riverside county.  Prosper vs Cline
02/26/08 -- Second suit filed.  In Orange County.  Prosper vs Rozier

Its now 05/06/08 and neither of those two cases has yet had proof of service filed with the court.  You can't get very far until you tell the court that you have served the complaint to the defendant! 

A great many more cases were filed 04/01/08, and a few more later in April.

So after starting the project on 01/15/08, four months later we only have proof of service for one defendant.  That's movin' kinda slow.  How many months must we wait to serve the other 65 defendants? 

If the very first step takes four months, imagine how long the other steps are gonna take!  In what year might we have verdicts?   We have to move more aggressively than this.

Second problem is that Prosper is only suing 66 nonpaying borrowers in this project.  They think of it as a test.  If it goes well, maybe they'll do more someday.  Today there are 1187 more Prosper loans that are more than 4 months past due (not counting the 66 in this test).  These loans are on a fast track to nowheresville.  If Prosper follows its standard procedure, these 1187 loans will be auctioned off for pennies on the dollar.  This could happen to the majority of them within days. 

Pennies on the dollar ain't good.  In a recent note from Doug Fuller to lenders, he told us that the bids he received on the current set of 4+ late loans was about 1/3 the price they've received in earlier auctions.  That means $0.03 or $0.04 on the dollar I think.  This $0.03 or so is what lenders are going to get for most  bad Prosper loans for the foresable future, because the legal test program is tiny tiny tiny, and slow slow slow. 

Doing a "test" for a year or so on a small number of loans sounds prudent if its not your money that was lent and is now being washed down the drain.  If it is your money, you have a different view.  Prosper has simply never taken collections seriously.  The lawers need to put some of these cases in high gear.  Get them served for heaven sake!  Learn what we need to learn in a few cases, and then greatly expand the program.  This must be done, because the status quo sucks.

You can't be a successful loan company if you don't try real hard to get borrowers to pay the money back.  "Try real hard" doesn't mean "phone calls and one letter".  Most of Prosper's management effort is focused on making a better website, or "Are we a Web 2.0 company?"  (the title of a real session at Prosper Days '08 ... I kid you not).  Get real.  You're a loan company.  Your success depends on the value of your product.

*** This is not a complete set of names of folks being sued by Prosper.  I obtained these names by looking up the suits in public court records in the large counties of California.  You may obtain this information, and also status of each case from the county court websites.   .