IF everything goes against Prosper and full relief is granted, does that mean:
1) Prosper would be required to repurchase all loans issued ($274M $178M), only those outstanding, only those late/defaulted ($27M), or some combination?
No one really knows yet what the exact scope of the remedy would be. Apparently, rescission is an available remedy in unregistered securities cases. That measns Prosper would have to repurchase all of the loans tendered back to it by lenders. But someone seeking rescission has to tender back what they got in exchange for what is being tendered (for example, if I sell you something and you rescind the sale, I have to give you back the purchase price and you give me back the goods). So in the case of PIF loans, rescission wouldn't really apply, since it would be a wash -- lenders would have to return the money they received (it's not clear to me how the interest would work -- more on this in a minute).
As I've noted before, I think the major unanswered question is whether lenders would be allowed to pick and choose which loans they want to tender back to Prosper, or whenther each lender would have to make an "all or nothing" election. If the former, obviously everyone would tender back the defaulted/charged-off loans, and probably the late ones too, but many lenders would keep their current loans (assuming Prosper or someone else was going to be around to service them). If the latter, a lot of lenders would have a tough decision to make.
2) Lawsuits generally only require the Plaintiffs be made whole, plus punitive damages. If someone made loans but still had a green circle (aka Lendingstats: ABuckeye), what could they expect? Would they maybe be given an option of selling the loans back to Prosper for remaining face value with no future interest, or keep the loans and that future interest?
Rescission seeks to "unwind" the deal, returning the parties as much as possible to their pre-contracting state. Even lenders with green circles could presumably opt for rescission, since the harm is not dependant on the loan's non-performance, but the fact that the sale of the loan to the lender was illegal. And, as we all know, loans that are current today may not be tomorrow.
Taking the simplest example, a lender with 1 loan could presumably require Prosper to repurchase that loan, but would have to tender back the money received. But I think that clearly doesn't mean ALL the money received, because the lender would be entitled to interest on the money for the time that the money has been out of his/her possession. However, I'm not sure what the proper interest rate would be. It might be the contracted rate on the loan, in which case the lender would tender back the principal received in exchange for Prosper paying the original principal amount -- the net, of course, would be that Prosper would repurchase the loan for the remaining principal amount. Alternatively, it might be the case that the lender wouldn't be entitled to the contracted (often very high) rate, but rather would only be entitled to the "legal" rate (which is basically a rate set by the state that applies to things like unpaid judgments). I think that in California, the legal rate is 10%, which I think is pretty typical. If that is how things work out, then lenders tendering back high-rate current loans would receive somewhat less than the remaining principal on their loans. For loans that are late, Prosper could have to pay lenders more than the remaining principal amount, as a result of accrued interest.
Thus, the situation is very complicated, and gets even more so if lenders with more than 1 loan are considered. Aside from the major issue of whether lenders have to seek rescission on their entire portfolio or can pick and choose, there is also a question of how the interest would be handled, especially if lenders were only entitled to the legal rate, not the contracted rate. Would all of a lender's loans be lumped together in figuring out the interest owed, or would each loan be calcualted individually. For example, if a lender keeps his high-rate loans and tenders back his low-rate loans, would Prosper have to make up the shortfall in interest, or would the "excess" interest on the high-rate loans be credited to Prosper? Could the interest received on high-rate loans even reduce the principal on other loans that Prosper would have to pay? I have no idea how all of this will shake out. It would be nice if the class attorney would come here and provide some illumination.
3) Would Prosper have to make fully whole the losses, even though people should have some expectation of losses? Like would they only have to pay back losses that exceeded some expected loss, like Actual ROI - Experian ROI = Prosper's Liability?
I think that there is virtually no chance Prosper would be able to require lenders to eat losses because they should have expected some. As noted above, rescission seeks to unwind the deal.
4) Won't this destroy Prosper should they lose, IF they ever intended to continue business?
Probably yes. Certainly Prosper does not have enough money (and probably not the capacity for raising enough money) to repurchase even the defaulted/charged-off/late loans, much less all the active loans. The big unknown here, however, is that Prosper is not the only potential source of the money -- it appears that there are lots of other deep-pockets that might be tapped, including Larsen, the VC Prosper Directors, possibly insurance, and possibly the attorney who was apparently consulted by Larsen and Wichtel about compliance with the securities laws before Prosper opened.
Author
Topic: NASAA announces: National Settlement with Prosper Marketplace, Inc. (Read 73480 times)