[I posted similar comments in a thread in the LendingClub forum (registration required), but I thought this deserved greater readership. My intent -- particularly since this is posted in "The Lobby" -- is to provide a place for serious speculation about the underlying reasons for what appear to be irrational business decisions by Prosper, rather than creating a "bash Prosper" thread.]
One factor limiting Prosper's growth is the fact that, as a finance company rather than a bank or credit union, it must comply with the licensing and usury laws of each state in which it has borrowers. The result is a patchwork of state-by-state interest rate caps, some of which make it difficult for even prime borrowers to be funded. Several of the most populous states (e.g. Texas and New York) have particularly limiting rate caps, and some states (e.g. Nevada) exclude Prosper entirely because it does not have a physical presence there.
Zopa and LendingClub have partnered with credit unions and banks, respectively, to avoid the state-by-state regulation, and offer uniform rates and fees throughout the country. (Under federal law, banks and credit unions are subject only to the regulations of their home states, even if they do business nationwide.) But Prosper clings to its state-by-state licensing strategy, despite occasional hints that it is looking at a so-called "national license".
Why?
One possibility (aside from total wrongheadedness, which can never be ruled out as a factor) occurs to me, based on the emerging pattern within the P2P lending industry:
It is possible that somewhere in the reams of regulations governing banks and credit unions there is a provision that interest rates must be set based on objective criteria bearing a rational relatonship to credit risk. (Or, at least, that banks and credit unions are sufficiently fearful of discrimination suits -- and value their licenses sufficiently -- that they are unwilling to do otherwise.) IIRC, there is a regulation like this under the ECOA which governs credit scoring systems, so it's possible that somethig similar covers banks and credit unions.
Prosper interest rates are set by a bunch of oddballs (yeah, us) whose bidding criteria are far from objective or rational. We sometimes give amazingly below-market rates to people we like and trust, even though the objective data suggests that they are horrible risks. And periodically a Muleshoes wanders through, and throws out money at well below CD rates for borrowers without a chance in hell of paying it back.
Now, imagine a bank or credit union being called before regulators to explain why it charged an AA with perfect credit and high income 12% interest, while it gave a loan at less than 1% to an unemployed HR member of MuleShoes' (now-defunct) group who has never met a debt he didn't default on. Worse yet, imagine that the two borrowers are of different races, sexes, or religions. It is possible that "because that's what our loan purchasers -- what Prosper calls "lenders" -- were willing to buy them at" isn't a good enough explanation for a bank, but works fine in the less-regulated world of "finance companies" (which is what PMI is).
On the other hand, LendingClub and Zopa, which do partner with banks or credit unions, set the interest rates for borrowers themselves, based on objective credit and income data. (Zopa allows lenders to use part of their interest income to subsidize borrowers, but, without actually reading the legal agreements, I'm willing to bet that this is structured not as a change in the borrower's interest rate, but as a gift from the lender which is applied toward the borrower's payments.)
Of course, when the platform sets the interest rate for every borrower, much of the "fun" -- and the P2P feeling -- disappears from the site, as does the double-edged sword of allowing subjective factors to enter into the lending decisions.
Please note that this is only a theory, and I have no intention of reading through reams of banking regulations to substantiate it. But perhaps one of our members who has experience as a banker (not just playing one on the Internet) will chime in.