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[NewHorizon]

Now, Prosper (WebBank) originates a loan and sells investors notes which are liabilities solely of Prosper and not of the borrower.

I'm apparently missing something rather fundamental...

If the v3.0 notes are the sole liability of Prosper, and if payments on those notes become delinquent, wouldn't lenders be able to engage in collections activities against Prosper?

[ira01]

Now, Prosper (WebBank) originates a loan and sells investors notes which are liabilities solely of Prosper and not of the borrower.

I'm apparently missing something rather fundamental...

If the v3.0 notes are the sole liability of Prosper, and if payments on those notes become delinquent, wouldn't lenders be able to engage in collections activities against Prosper?

No, because Prosper's payment obligations to the "lenders" are conditional -- they only arise if the borrower pays Prosper. 

[blue]

So I think I am hearing in the event of a BK:

- Old Notes should continue to be serviced without threat
- New Notes could be serviced after the recent Prosper 'Bridge' funding is subtracted?

[Fred93]

So I think I am hearing in the event of a BK:
- Old Notes should continue to be serviced without threat
- New Notes could be serviced after the recent Prosper 'Bridge' funding is subtracted?

Perhaps, but there is no reason to believe the bridge loans would come first.

In the case of a BK, a judge would have to decide how to share available funds among the various stakeholders, including all creditors (unpaid employees, professional services, landlords, etc etc), and loan and note holders.  The legal documents do not place the bridge loans either ahead or behind the notes sold to investors.  He might say "Ok, everybody wait 3 years, then split up what has come in proportionally", or he might even favor the note holders and separate them from the other creditors, giving them a better deal. 

[blue]

Same with the Old Notes or do I understand they offer a bit more protection?

[Fred93]

Same with the Old Notes or do I understand they offer a bit more protection?

Hugely different.

Under the old scheme, they sold the loans to us.  We owned them.  They were no longer assets of Prosper, so could not possibly get tied up by a prosper bankruptcy.  Lenders own obligations of the borrower.

Under the new scheme, prosper retains ownership of the loans, thus they can get tied up in a bankruptcy.  Prosper issued payment-dependent-notes, which are obligations OF PROSPER, to the lenders.

[havastat]

For old note holders-

 I think the key question in the event of a Prosper bankruptcy is whether we can ask the bankruptcy judge to order Prosper to give us the identities and contact information of the borrowers so we can service the loans ourselves or transfer the servicing to someone else.

If Prosper only has the right to keep the identities and contact info of the borrowers from us so long as it is performing on its side of the contract, and breaching its contract or going out of business ends its right to keep those identities and info secret from us, then we really and truly are the owners of the loans, because we'll have the ability to terminate the servicing contract and take our servicing business to someone else if we want.

However, if Prosper has the right to keep the identities and contact info of the borrowers from us even if it breaches and fails to perform on the servicing contract and can take that info to its grave, then it owns the loans for all intents and purposes. Without the identities and contact info of the borrowers we have no ability to collect on the loans. Without an ability to collect on the loans ourselves if Prosper is unable or unwilling to do so for us, we wouldn't own them in any meaningful way.

It's as simple as that.

[blue]

1) Hasn't Prosper already hired a company to service notes in case of BK?

2) If so - would that company only be able to service old notes?

[Fred93]

1) Hasn't Prosper already hired a company to service notes in case of BK?

Depends on what you mean by "hired".  There's supposed to be some sort of arrangement, but I doubt that Prosper has paid them anything.  Therefore I suspect it's just "talk".

2) If so - would that company only be able to service old notes?

In a bankruptcy everything is up to the judge.  I expect that the judge will see the value of continuing to service the loans, in benefit of the lenders.  Whether he assigns that job to the company prosper has "talked" with or somebody else is anybody's guess.

[kenL]

With the new notes belonging to Prosper. Would it actually be in the VC's interest to keep prosper going until they have made 43+ million in v3.0 loans? Then in the case of BK the VC's could get most of their investment back.

[Fred93]

With the new notes belonging to Prosper. Would it actually be in the VC's interest to keep prosper going until they have made 43+ million in v3.0 loans? Then in the case of BK the VC's could get most of their investment back.

I don't think so.

If the thing were to fail, the VCs would get very little (most likely nothing) back.  Most of the VC investment is equity.  The last few million are structured as bridge loans convertible to equity, but the judge might not even respect that distinction. 

If one of the guys who made the bridge loans tried to play the game you describe, the only way he could do it is to invest even more money, which he would probably lose.  A failing business uses up cash every day it is alive.  Once used up, the cash is gone, and doesn't come back thru the bankruptcy. 

The only reason for a VC to invest is if he thinks the business can succeed.

[ira01]

For old note holders-

 I think the key question in the event of a Prosper bankruptcy is whether we can ask the bankruptcy judge to order Prosper to give us the identities and contact information of the borrowers so we can service the loans ourselves or transfer the servicing to someone else.

If Prosper only has the right to keep the identities and contact info of the borrowers from us so long as it is performing on its side of the contract, and breaching its contract or going out of business ends its right to keep those identities and info secret from us, then we really and truly are the owners of the loans, because we'll have the ability to terminate the servicing contract and take our servicing business to someone else if we want.

However, if Prosper has the right to keep the identities and contact info of the borrowers from us even if it breaches and fails to perform on the servicing contract and can take that info to its grave, then it owns the loans for all intents and purposes. Without the identities and contact info of the borrowers we have no ability to collect on the loans. Without an ability to collect on the loans ourselves if Prosper is unable or unwilling to do so for us, we wouldn't own them in any meaningful way.

It's as simple as that.

I disagree.  I think that a judge would NOT order the release of borrower information to lenders -- that would violate the borrowers' privacy rights, since they entered into the loans with the understanding that lenders would not know who they were (unless the borrowers volunteered that information on an individual basis).  However, I think that a judge WOULD rule that the Prosper 1.0 loans are the property of the lenders, not Prosper.  Those positions are not at all contradictory.  You can own something despite having given up certain rights that are normally included in ownership.  The obvious way to harmonize these principles is that I think the judge would simply appoint a new servicing agent to service the lenders' loans on their behalf if Prosper went BK.  That might or might not be the company that Prosper has supposedly lined up as a backup.  That way the loans get serviced (albeit possibly at higher cost to the lenders than the current 1% fee), but the borrowers' privacy is protected.  Win-win.

[bamalucky]

There's no reason prosper can't just take borrower payments to operate on now.  Why file bk?

[Senator]

By their own admission. borrower payments wouldn't nearly cover their operating expenses.

[bamalucky]

By their own admission. borrower payments wouldn't nearly cover their operating expenses.

How so?