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[Fred93]

In the January issue of Inc magazine, the SEC comments on Prosper.com .

http://www.inc.com/articles/2009/01/loans.html

For its part, the SEC says it is simply trying to protect the lender-investor, according to Laura Josephs, an assistant director with the commission's enforcement arm who led the case against Prosper. "Generally, we are always cognizant of new companies trying to do something innovative," she says. "It's in nobody's interest to stomp out innovative products."

It is interesting that an SEC official would comment on Prosper, because the SEC has rejected recent FOIA requests related to prosper.com by claiming that the investigation is ongoing.  The SEC is obviously acting in a self-contradictory fashion.  SEC officials would not be allowed to comment on ongoing investigations.  Either these comments are in violation of SEC policy, or the SEC has lied about the ongoing investigation as an excuse to avoid FOIA disclosure.

[BigCowboy]

She didn't say anything specific about the SEC case against Prosper, just platitudes.

-BigCowboy

[Tokyo Joe]

Yeah, she referred to "new companies" and "innovative products" in her statement; that's about as general as you can get...

[Investar]

If the FOIA (Freedom of Info) request asks anything beyond the "Cease and Desist" matter the SEC would be correct, everything else is ongoing. Not that they've cross-checked, but discovery precedent to that order referenced in current discussion (by either party) would be cause (good excuse) to deny an FOIA.

Uhmm, what do you know about rejected FOIA's you're not telling (or I have missed in another thread)?

[zapp05]

The SEC is obviously acting in a self-contradictory fashion.

no part of our government would ever do such a thing!

[nonattender]

The SEC ruled that peer to peer lending loans were to be treated as securities, and, in so doing, brought
the P2P lending companies under their regulatory control.  Functionally, this is the result of such a ruling:

Before SEC ruling/registration:   Lenders <-> Borrowers
Lenders own debt obligations of individual borrowers.  The risk is that borrowers do not re-pay the loans.

After SEC ruling/registration:  Lenders <-> P2P Company <-> Borrowers
Lenders own debt obligations of the P2P Company, P2P Company owns the debt obligations of borrowers.
The risk is now that borrowers do not re-pay the loans, and that the P2P Company will stay in operation.

For those of you who remember "Too Big to Fail", this is how SEC regulation can lead to such temptation.

Rather than leaving well enough alone, the SEC stepped in, and, since it can only step in and regulate IF
it decrees that the underlying issue is a "security", it decreed that the individual loans should be treated
as being "securities", which necessitated that the P2P lending companies now put themselves in the fray,
since they're now forced to issue "traditional" securities, which are obligations of the P2P companies, not
direct obligations of the borrowers who actually, you know, borrow the money that lenders lend to them.

So much for "not stifling innovation"...

-t

[bamalucky]

Poof..forgot this was the lobby

[bankomatic]

The SEC ruled that peer to peer lending loans were to be treated as securities, and, in so doing, brought
the P2P lending companies under their regulatory control.  Functionally, this is the result of such a ruling:

Before SEC ruling/registration:   Lenders <-> Borrowers
Lenders own debt obligations of individual borrowers.  The risk is that borrowers do not re-pay the loans.

After SEC ruling/registration:  Lenders <-> P2P Company <-> Borrowers
Lenders own debt obligations of the P2P Company, P2P Company owns the debt obligations of borrowers.
The risk is now that borrowers do not re-pay the loans, and that the P2P Company will stay in operation.

For those of you who remember "Too Big to Fail", this is how SEC regulation can lead to such temptation.

Rather than leaving well enough alone, the SEC stepped in, and, since it can only step in and regulate IF
it decrees that the underlying issue is a "security", it decreed that the individual loans should be treated
as being "securities", which necessitated that the P2P lending companies now put themselves in the fray,
since they're now forced to issue "traditional" securities, which are obligations of the P2P companies, not
direct obligations of the borrowers who actually, you know, borrow the money that lenders lend to them.

So much for "not stifling innovation"...

-t

Even if you took SEC completely out of the picture prosper would still be not making any money. If lenders can't make a decent profit the whole thing is not viable, and by decent profit I mean something in the area of 7% pre taxes. I am not seeing that. Step 1 prosper should take is be a little more honest on their advertisements.

[mothandrust]

Why blame the SEC for this? 

Prosper could have issued the Notes as senior secured obligations of the company, but it didn't.

Prosper also could have put in the prospectus that the company cannot incur additional debt or only debt that is junior to the Notes, or prohibiting itself from using the Notes as collateral for future borrowings, but it didn't.

[bankomatic]

Why blame the SEC for this? 

Prosper could have issued the Notes as senior secured obligations of the company, but it didn't.

Prosper also could have put in the prospectus that the company cannot incur additional debt or only debt that is junior to the Notes, or prohibiting itself from using the Notes as collateral for future borrowings, but it didn't.

That's a good point, why didn't they make the notes senior secure obligations that are secured by the payments from the borrower?

[Urbi_et_Orbi]

Nonattender's flowchart above isn't 100% accurate.  In Prosper 1.0, Prosper originated loans as the lender, held the loan for a fraction of a second before it turned around and broke the loan into many pieces and sold it off to a bunch of loan-purchasers.

Probably just a minor technical oversight on Nonattender's part. I am pretty sure Nonattender knows exactly how Prosper works, considering he joined Prosper before it went public and all.

[nonattender]

Prosper could have issued the Notes as senior secured obligations of the company, but it didn't.

That seems like a good question.  The notes themselves are structured in such a way as that cashflows
are dependent on borrowers making payments on loans, so, they are in effect pass-through instruments,
and not what one might traditionally call an "obligation" (but they're not what one might traditionally call
"securities", either, so, perhaps you see the rub, which ties back into all the above regulatory confusion).

If you give the borrower-dependent notes seniority, you open the door to claims, against the companies,
which would essentially make it impossible for the companies to secure any type of operational financing,
since the event of failure as a going concern would mean that holders of senior secured notes ("lenders")
would, or, at least, could attempt to, swoop in and claim that their notes are longer member-dependent,
and that their claims should not only rank as senior, but should have all the "traditional" seniority benefit.

On the other hand, if you leave them as general obligations you can finance the operation of a company,
but you leave "lenders" (holders of member-dependent notes) open to, in the event of liquidation, similar
types of claims of seniority, against the notes, from the people who are financing a company's operation.

So, I don't know, but I'm thinking that they probably chose the latter option, because it means business.

It's an interesting (for me, anyway) topic...

-t

[nonattender]

Nonattender's flowchart above isn't 100% accurate.  In Prosper 1.0, Prosper originated loans as the lender, held the loan for a fraction of a second before it turned around and broke the loan into many pieces and sold it off to a bunch of loan-purchasers.

It's 100% accurate from a functional perspective, though it's true that the actual origination flow differed.

One of the other horrible results of the SEC intervention is that the lawsuit of which you're a lead plaintiff
has, as its target, not only Prosper, but, due to the SEC forcing Prosper into adopting this structure, also
the member-dependent notes, which are general obligations of Prosper, and which, whether you realize it
or not, you're threatening, to the detriment of lenders who selected good loans, while you selected badly.

I've been curious for a long time whether anyone here realized that, as a number of these lenders "cheer"
you on, even many who have loans/notes that were originated after the SEC-necessitated restructuring.

-t

[bankomatic]

That seems like a good question.  The notes themselves are structured in such a way as that cashflows
are dependent on borrowers making payments on loans, so, they are in effect pass-through instruments,
and not what one might traditionally call an "obligation" (but they're not what one might traditionally call
"securities", either, so, perhaps you see the rub, which ties back into all the above regulatory confusion).

You are making it sound like this type of arrangement is something unique to prosper. Where the payment on the note depends not only the on the issuer being solvent (in this case prosper), but also on something else (in this case the borrowers). For example take ticker SPC. It is not only dependent on Bank of America being solvent, but also on the performance of S&P 500.  http://quantumonline.com/search.cfm?tickersymbol=SPC&sopt=symbol  It's a very similar arrangement to what prosper has. The big difference is that bank of america is a lot less likely to go belly up.

If you give the borrower-dependent notes seniority, you open the door to claims, against the companies,
which would essentially make it impossible for the companies to secure any type of operational financing,
since the event of failure as a going concern would mean that holders of senior secured notes ("lenders")
would, or, at least, could attempt to, swoop in and claim that their notes are longer member-dependent,
and that their claims should not only rank as senior, but should have all the "traditional" seniority benefit.

Why shouldn't the lenders be upfront of regular unsecured creditors? Prosper is essentially forcing the lenders to be in the same exact line which wouldn't be a big deal if they were in  a very strong financial position, but there are reasons to think that they are going collapse. Prosper goes through a great deal to tell you what your potential losses are when you bid, but how about they throw in the risk of their very own collapse.

If the borrower is paying then the lender should get paid, period. Prosper solvency should not be something lenders have to account for. You can in fact structure securities that way even though it may require additional paperwork. For example: http://quantumonline.com/search.cfm?tickersymbol=XKK&sopt=symbol These are bonds of Goodyear Tire that Lehman brothers repackaged up. Lehman is long gone but XKK is still paying. Prosper should package up their securities in the same way.

On the other hand, if you leave them as general obligations you can finance the operation of a company,
but you leave "lenders" (holders of member-dependent notes) open to, in the event of liquidation, similar
types of claims of seniority, against the notes, from the people who are financing a company's operation.

So, I don't know, but I'm thinking that they probably chose the latter option, because it means business.

I am wondering if the regular bondholders who just finance prosper day to day operations can tap into borrower payments if prosper goes insolvent. After all why not? Their securities are ranked the same as the lenders. This is another example of prosper putting lenders 2nd.

[JammingJAY]

One of the other horrible results of the SEC intervention is that the lawsuit of which you're a lead plaintiff
has, as its target, not only Prosper, but, due to the SEC forcing Prosper into adopting this structure, also
the member-dependent notes, which are general obligations of Prosper, and which, whether you realize it
or not, you're threatening,

Good point NA, you are an idiot if you lend on prosper given the horrible result of the SEC intervention. I also see you have no active bids.