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[traveler505]

[This report was originally posted in the Lenders - General forum on November 1, 2007.  Extensive discussion can be found at http://www.prospers.org/forum/index.php?topic=3685.0 (registration required).

MNH Reports are also posted to my blog:  http://blog.traveler505.com.]


MNH Report #2

In her infamous “snippets” post, Prosper_Shira attempted to justify Prosper’s crusade against public posting of Personally Identifiable Information (PII) on the grounds that Prosper’s anti-fraud department was aggressively protecting lenders against borrower dishonesty. 

Prosper’s fraud detecting abilities are much more sophisticated than snippets of information coming from snooping lenders here and there. We have bank records, address records, phone records, IP addresses, and other copious amounts of information about the borrowers that lets us do a much more thorough and definitive assessment of risk and fraud. Your snippets (which are additive to the data we already have) are more valuable coming through your “Report this listing” reports than being posted on the forums.

http://forums.prosper.com/index.php?showtopic=30759

On October 30, 2007, Prosper went one step further in obstructing the efforts of lenders to detect fraudulent activity by borrowers when it hid almost all closed listings from view.  So, more than ever before, lenders are forced to rely solely on “Prosper’s fraud detecting abilities.”

At the time Shira posted about “snippets,” Section 7 of Prosper’s Lender Registration Agreement (based on my hard copy printout from August 25, 2007) provided that:

Prosper makes the following representations and warranties to you that, with respect to each Note sold to you under this Agreement, as of the date the Note is funded by Prosper and transferred to you:

*  *  *

c.  Prosper has made commercially reasonable efforts to authenticate the identity of the borrower and verify information provided by the borrower in connection with the loan evidenced by the Note.  Based on such authentication and verification, to the best of Prosper’s knowledge: (i) the borrower had full legal capacity to execute and deliver the Note, and (ii) each Note sold to you by Prosper is the legal, valid and binding obligation of the borrower, and is enforceable in accordance with its terms.

[Emphasis added.]

Under the terms of this agreement, if Prosper failed to use “commercially reasonable efforts” to “verify information provided by the borrower in connection with the loan,” it would be in breach of its warranty, and would be required to cure the defect, repurchase the loan, or indemnify lenders against all losses (including losses due to delinquency or default).

Since Prosper expects (demands) that lenders rely solely upon “Prosper’s fraud detecting abilities,” one would expect that this warranty would be strengthened to demonstrate Prosper’s confidence in its own anti-fraud efforts, right?

Wrong.

In the new version of the Lender Registration Agreement, with changes effective October 30, 2007, Prosper no longer promises to make “commercially reasonable efforts” to prevent any form of fraud other than identity theft:

From the new Section 7:

Prosper makes the following representations and warranties to you that, with respect to each Note sold to you under this Agreement, as of the date the Note is sold, assigned and transferred to you:

*  *  *

c. Prosper has made commercially reasonable efforts to authenticate and verify the identity of the borrower on the loan evidenced by the Note. Based on such authentication and verification, to the best of Prosper's knowledge: (i) the borrower had full legal capacity to execute and deliver the Note, and (ii) each Note sold to you by Prosper is the legal, valid and binding obligation of the borrower, and is enforceable in accordance with its terms.

In case any lender is confused as to Prosper’s intent in making this change, a brand new paragraph has been added to Section 9, which covers Prosper’s right to verify information and cancel listings:

e. In most instances, Prosper does not verify the income, employment and occupation or other information provided by borrowers in listings. The borrower's income, employment and occupation are self-reported, and the borrower's non-housing debt-to-income ratio is determined by Prosper from a combination of the borrower's self-reported income and information from the borrower's credit report. The credit data that appears in listings is taken directly from a credit report obtained on the borrower from a credit reporting agency, without any review or verification by Prosper. Prosper does not verify any statements by borrowers as to how loan proceeds are to be used and does not confirm after loan funding how loan proceeds were used. In most instances homeownership status is derived from the borrower's credit report, but is not verified by Prosper; if the report reflects an active mortgage loan, the borrower is presumed to be a homeowner. In connection with Prosper's identity and anti-fraud verification of borrowers, Prosper verifies the borrower's deposit account to determine that the borrower is the holder of record of the account.

(Prosper still “reserves the right to verify all information provided by borrowers,” (Section 9.a) but, by making these changes in the Lender Registration Agreement, it has relieved itself of any obligation to do so, and of any consequences arising from its failure to do so.)

One could argue, of course, that this change has no real significance (other than as a symbol of Prosper’s lack of commitment to protecting lenders from fraud).  It is possible, after all, that Prosper never made “commercially reasonable efforts” to protect lenders from fraud and never intended to honor this part of its representations and warranties to lenders.  In MNH Report #3, I’ll explore this possibility, with a close (but PII-free) look at Prosper’s handling of a loan (now defaulted) where a borrower provided obviously false information. 

*  *  *

The elimination of Prosper’s commitment to make “commercially reasonable efforts” to combat fraud (other than identity theft) is, I think, the most significant change made in the Lender Registration Agreement on October 30, 2007.  Two other changes which might be of interest (or at least pathos) are:

(1)  The addition of the Xraider Clause.  Last month, lender xraider contacted Penncro to discuss their unsuccessful efforts to extract funds from a delinquent borrower.  Prosper’s response was to tell the Penncro employee not to talk to her, and add a new paragraph to Section 14, which lists Prohibited Activities for Lenders:

g. Contact any collection agency or law firm to which your Note has been referred for collection;

In another thread, xraider has put Prosper on notice that she declines to be bound by this change in terms, as it was not part of the Agreement which she originally accepted not art of the Agreement at any time that she placed a bid.

http://forums.prosper.com/index.php?showtopic=32056

(2)  In past versions of the Lender Registration Agreement, the non-discrimination clause in Section 2 began with this sentence:

THE PROSPER MARKETPLACE IS INTENDED TO FOSTER IDEALS OF COMMUNITY SERVICE, CONNECTION, AND RESPONSIBILITY.

   

That language has been deleted. 

*  *  *

Final disclaimers:  I am not a lawyer, and nothing in this post constitutes legal advice.  If you are interested in reading previous installments in this series, search for “MNH Report”. 

[Greebo]

Please note that links to xraider's notice to Prosper are unreachable because Prosper canned the previously existing forums.

[xraider]

Trav, once again my blood pressure is rising....

Correction, though.  I put Prosper on notice that I decline to be bound by ANY of the surreptitious retroactive changes to the TOS, including the additional risk I believe is presented by the new ability of borrowers to seek second loans.

I also notified Prosper that in my opinion, the secret changes were not binding on users.  That resulted in Prosper's effort to send redlined amended agreements to users.

Of course, since I'm no longer lending, I will continue to operate under the old TOS.  I advised Prosper that if it declined to permit me to operate under old TOS it could buy me out.  I think we've agreed I can call Penncro whenever I want to.  Of course, since Prosper told Penncro not to talk to me, there's no point in my calling further.

[bankomatic]

My opinion is that prosper found it very costly to do all the verification they were obligated to do under the old agreement, so they may be doing it to some borrowers but not others to save money for current listings.

[cowdog]

My opinion is that prosper found it very costly to do all the verification they were obligated to do under the old agreement, so they may be doing it to some borrowers but not others to save money for current listings.

Perhaps not so costly, but certainly time consuming and a bottleneck to the process of pumping up numbers.