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[bamalucky]

We face a contingent liability for securities law violations in respect of loans sold to our lender members from inception until October 16, 2008.  This contingent liability may impair our ability to operate our platform and service the borrower loans that correspond to your Notes.
 
Loans sold to lender members through our platform from our inception until October 16, 2008 may be viewed as involving an offering of securities that was not registered or qualified under federal or state securities laws.  To date, the following litigation has resulted from our prior operations.
 ·   In November of 2008, the SEC instituted cease and desist proceedings, pursuant to Section 8A of the Securities Act, against us.  In connection with such proceedings, we agreed to a settlement with the SEC and consented to the entry of a Cease and Desist order, in which we neither admitted nor denied liability, which was approved by the SEC on November 20, 2008.  The cease and desist order included a finding that we violated the registration requirements of the Securities Act, and required that we cease and desist from committing or causing any violations and any future violations in the future.

 ·   On November 26, 2008, Prosper and the North American Securities Administrators Association, or “NASAA,” executed a settlement term sheet.  The term sheet sets forth the material terms of a consent order to resolve matters relating to our sale and offer of unregistered securities and the omission of material facts in connection with such offers and sales.  NASAA will recommend that each state adopt the terms of the settlement, however, the settlement is not binding on any state.  The terms of the settlement involved our payment of up to $1 million, which NASAA will allocate among the 50 states and the District of Columbia, where we conduct business, based on the loan sale transaction volume in each state.  We will not be required to pay any portion of the fine allocated to those states that do not execute a consent order with Prosper.  The terms of the settlement require the states to terminate their investigation of our activities related to the sale of securities before November 24, 2008.  If a state does not elect to participate in the NASAA settlement, such state would not be prevented from pursuing its own remedies in connection with our sale of securities before November 24, 2008.  We have reached agreement with NASAA on the final terms of the consent order for consideration by the states.  We have accrued approximately $506,000 in connection with the contingent liability arising from the settlement term sheet in accordance with SFAS No. 5, Accounting for Contingencies.

 ·     On November 26, 2008, a class action lawsuit was filed against us the Superior Court of California, County of San Francisco, California.  The suit was brought on behalf of all loan note purchasers in our online lending platform from January 1, 2006 through October 14, 2008 and alleges that we offered and sold unqualified and unregistered securities in violation of the California and federal securities laws.  The lawsuit seeks class certification, damages and the right of rescission against Prosper and the other named defendants, as well as treble damages against Prosper and the award of attorneys’ fees, experts' fees and costs and pre-judgment and post-judgment interest.As a result of our prior operations, our lender members who hold these loans may be entitled to rescind their purchase and be paid their unpaid principal amount of the borrower loans plus statutory interest.  In addition, since our inception, the aggregate principal
 
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amount of loans purchased through our platform by purchasers not affiliated with Prosper was $177.6 million, of which $30.4 million had defaulted, $5.9 million were more than 30 days past due, $81.3 million of principal had been repaid and $66.9 remains outstanding.  Prosper is potentially liable for the remaining outstanding principal amount if the current borrowers stop making payments.  We have not recorded an accrued loss contingency in respect of this contingent liability, although we intend to continue to monitor the situation.  Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act is one year from the violation; however, the statute of limitations periods under state laws may extend for a longer period of time.  If a significant number of our lender members sought rescission, or if the class action securities lawsuit is successful, our ability to maintain our platform and service the borrower loans to which the Notes correspond may be adversely affected.

We have incurred operating losses since our inception and we anticipate that we will continue to incur net losses for a number of years as we grow our business.  For the three months ended March 31, 2009 and 2008, we had negative cash flows from operations of $2.4 million and $2.7 million, respectively.  Additionally, since our inception through March 31, 2009, we have an accumulated deficit of $33.1 million.
 
We have financed our operations, to date, with proceeds from the sale of equity securities.  At March 31, 2009, we had approximately $7.4 million in cash and cash equivalents, which we believe will be sufficient to fund our operations through 2009.  We are dependent upon raising additional capital or debt financing to fund our current operating plan.

[bamalucky]

Could you bid again after reading this?

If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped.  Although Prosper intends to grant the indenture trustee a security interest in its right to receive payment under the corresponding borrower loans, the Notes themselves are unsecured and holders of the Notes do not directly have a security interest in the corresponding borrower loans or the proceeds of those corresponding borrower loans.  The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note.

[Mtnchick]

We have incurred operating losses since our inception and we anticipate that we will continue to incur net losses for a number of years as we grow our business.  For the three months ended March 31, 2009 and 2008, we had negative cash flows from operations of $2.4 million and $2.7 million, respectively.  Additionally, since our inception through March 31, 2009, we have an accumulated deficit of $33.1 million.

I'd LOVE to see an accounting of where the heck this money went. 

[Urbi_et_Orbi]

There have been seven post charge-off loans for which, in exchange for substantial payments on the loans, Prosper has agreed to a forgiveness of principal.  The total amount of borrower principal forgiven was $45,988.13.  However, from the applicable lenders’ perspectives, the balance on these loans was reduced to $0 at charge-off, effectively terminating the applicable lenders’ interests in the loans.  Nevertheless, the subsequent payments on the loans were paid in total to the lenders in the form of recoveries against written-off principal.

I wonder where in the lender agreement Prosper found the right to handle loans this way?

[ira01]

There have been seven post charge-off loans for which, in exchange for substantial payments on the loans, Prosper has agreed to a forgiveness of principal.  The total amount of borrower principal forgiven was $45,988.13.  However, from the applicable lenders’ perspectives, the balance on these loans was reduced to $0 at charge-off, effectively terminating the applicable lenders’ interests in the loans.  Nevertheless, the subsequent payments on the loans were paid in total to the lenders in the form of recoveries against written-off principal.

I wonder where in the lender agreement Prosper found the right to handle loans this way?

IMHO (although, of course, TINLA), this constitutes theft by Prosper of lender assets.  Not only is there NOTHING in the LRA that authorizes Prosper to write down principal, IIRC there was language specifically denying Prosper that right.  And Prosper's "argument" that it didn't really take anything from lenders by writing down principal because the principal had been reduced to zero upon charge-off is pure sophistry -- nothing in the LRA authorized Prosper to charge-off loans or write-down the balance of said loans to zero.  They really have just got to be kidding.    

ETA:  Yes, I did recall correctly.  From Paragraph 5 of the February 12, 2007 LRA (which is the one I agreed to when I joined Prosper):

Servicing Standard. Prosper, as independent contractor servicer, shall service and administer the Notes in accordance with their terms and provisions, applicable law and the terms and provisions of this Agreement. In servicing the Notes, Prosper shall use the same care, skill, prudence and diligence with which prudent lending institutions service similar assets, and Prosper shall seek to maximize the timely recovery of principal and interest on the Notes. Prosper shall have full power and authority to do or cause to be done any and all things that it may reasonably deem necessary or desirable in connection with such servicing and administration of the Notes on your behalf, and you agree to cooperate with Prosper in the performance of its servicing and other obligations under this Agreement. However, Prosper shall not permit any modification with respect to any Note that would change the interest rate, defer or forgive the payment of principal or interest, reduce or increase the outstanding principal balance, or change the final maturity date on the Note.

Could that possibly be any more clear?  Prosper expressly stated, in absolutely unconditional language, that it "shall not . . . defer or forgive the payment of principal or interest [or] reduce . . . the outstanding principal balance."  

Someone REALLY needs to sue the hell out of Prosper (and I don't mean the securities class action).  

[DCS]

I believe I have a loan in my portfolio on which principal was forgiven.

http://www.prosper.com/invest/listing.aspx?listingID=39370

On Dec 30, 2008, an "OP" payment was made for $13.93 on my $50 share of the loan.  The loan was immediately charged off and the text beneath the loan was changed from "In Collections" to "No Value."

[lenderguy]

ira,

You know, if Prosper wants to take their "subject to change without notice" statement literally, why do they even bother with any sort of written document?  Apparently, if they get sued, they think they can just unilaterally change the terms right before they go to court and think they're covered.

A lot of the mis-steps can be excused, but this is just flat out... wrong.  And by that, I'm talking about their willy-nilly retroactive changes in TOS, not necessarily this specific issue.

[ira01]

ira,

You know, if Prosper wants to take their "subject to change without notice" statement literally, why do they even bother with any sort of written document?  Apparently, if they get sued, they think they can just unilaterally change the terms right before they go to court and think they're covered.

A lot of the mis-steps can be excused, but this is just flat out... wrong.  And by that, I'm talking about their willy-nilly retroactive changes in TOS, not necessarily this specific issue.

Prosper retained the right to change its agreements on a going-forward basis, but that does NOT give it the right to retroactively make changes.  When lenders purchase notes under a contract with Prosper that expressly prohibits Prosper from writing down principal, Prosper cannot later turn around and do just that.  If Prosper wanted to give itself the right to write down principal, that change would be fine for notes sold to lenders AFTER that change in the LRA was accepted by the lender.  But not on already sold notes -- that is absurd.

[xraider]

There have been seven post charge-off loans for which, in exchange for substantial payments on the loans, Prosper has agreed to a forgiveness of principal.  The total amount of borrower principal forgiven was $45,988.13.  However, from the applicable lenders’ perspectives, the balance on these loans was reduced to $0 at charge-off, effectively terminating the applicable lenders’ interests in the loans.  Nevertheless, the subsequent payments on the loans were paid in total to the lenders in the form of recoveries against written-off principal.

I wonder where in the lender agreement Prosper found the right to handle loans this way?

IMHO (although, of course, TINLA), this constitutes theft by Prosper of lender assets.  Not only is there NOTHING in the LRA that authorizes Prosper to write down principal, IIRC there was language specifically denying Prosper that right.  And Prosper's "argument" that it didn't really take anything from lenders by writing down principal because the principal had been reduced to zero upon charge-off is pure sophistry -- nothing in the LRA authorized Prosper to charge-off loans or write-down the balance of said loans to zero.  They really have just got to be kidding.    

ETA:  Yes, I did recall correctly.  From Paragraph 5 of the February 12, 2007 LRA (which is the one I agreed to when I joined Prosper):

Servicing Standard. Prosper, as independent contractor servicer, shall service and administer the Notes in accordance with their terms and provisions, applicable law and the terms and provisions of this Agreement. In servicing the Notes, Prosper shall use the same care, skill, prudence and diligence with which prudent lending institutions service similar assets, and Prosper shall seek to maximize the timely recovery of principal and interest on the Notes. Prosper shall have full power and authority to do or cause to be done any and all things that it may reasonably deem necessary or desirable in connection with such servicing and administration of the Notes on your behalf, and you agree to cooperate with Prosper in the performance of its servicing and other obligations under this Agreement. However, Prosper shall not permit any modification with respect to any Note that would change the interest rate, defer or forgive the payment of principal or interest, reduce or increase the outstanding principal balance, or change the final maturity date on the Note.

Could that possibly be any more clear?  Prosper expressly stated, in absolutely unconditional language, that it "shall not . . . defer or forgive the payment of principal or interest [or] reduce . . . the outstanding principal balance."  

Someone REALLY needs to sue the hell out of Prosper (and I don't mean the securities class action).  

Anyone here impacted by this?

[xraider]

I believe I have a loan in my portfolio on which principal was forgiven.

http://www.prosper.com/invest/listing.aspx?listingID=39370

On Dec 30, 2008, an "OP" payment was made for $13.93 on my $50 share of the loan.  The loan was immediately charged off and the text beneath the loan was changed from "In Collections" to "No Value."

DCS, saw your note after I responded to Ira's.  How angry are you about that?   

[DCS]

DCS, saw your note after I responded to Ira's.  How angry are you about that?   

Well, honestly, this borrower hadn't made a payment in six months anyway, and the $13 payment cut the remaining principal in about half.  So, for the price of Prosper possibly forgiving some of the debt, I got a $12 loss instead of a $25 loss.

So, I'm not angry about this particular loan, but probably would be troubled by this if I were actually looking to lend on Prosper again.

Actually, now that I look at the loan detail page again, I see that the loan was charged off Oct 28, then the $13 "recovery" payment was made Dec 30 and the loan was switched to "No Value."  So, maybe because the loan was already "charged off" Prosper was allowed to forgive principal without breaking their agreement with lenders?

[xraider]

DCS, the ONLY thing Prosper is allowed to do with old loan, contractually, is sell them to junk debt buyers.  Is this a pre- November, 2007 loan?

Prosper's "self-help" here is a breach of contract and a breach of fiduciary duty. 

[ira01]

DCS, the ONLY thing Prosper is allowed to do with old loan, contractually, is sell them to junk debt buyers.  Is this a pre- November, 2007 loan?

Prosper's "self-help" here is a breach of contract and a breach of fiduciary duty. 

+1.  Prosper made up the whole "charge-off" nonsense (along with its super-secret "PCOCT") out of whole cloth.  Nothing in the pre-existing LRA's allowed Prosper to do that.  Under Prosper's theory, it would be just as valid for Prosper to do the opposite -- simply declare that all of the outstanding principal balances were hereby doubled.  Does anyone think the borrowers would stand for that?

[DCS]

Is this a pre- November, 2007 loan?

Yes, the loan originated Sep 2006.

[lenderguy]

DCS, the ONLY thing Prosper is allowed to do with old loan, contractually, is sell them to junk debt buyers.  Is this a pre- November, 2007 loan?

Prosper's "self-help" here is a breach of contract and a breach of fiduciary duty. 

This is for either you or ira... if one were to sue on this issue, must one prove damages?  If so, how would one do that?  My understanding is that Prosper negotiated a less-than-full-balance payment from the borrower in exchange for forgiving the remaining balance.  Arguably, the lenders got more from this than had they had the loan sold to a JDB.