Here's the update that I've posted on my blog at:
http://blog.traveler505.com/2008/02/update-prosper-responds-to-mnh-report-4.html* * *
In MNH Report #4, I described my attempt to purchase a Prosper loan (Loan No. 4018) which was 4+ months late and eligible for sale to a debt buyer.
On November 7, 2007, I wrote to Doug Fuller, Prosper Marketplace Inc.’s Vice President of Operations, and offered to pay 20.00% of the outstanding principal at the time of purchase for the notes and servicing rights associated with this loan. (One of the notes – in the original amount of $109.89 – already belonged to me as a lender on the loan; technically I would have been purchasing that note from myself, through Prosper as the servicing agent.)
As I explained in my offer,
As servicing agent for the lenders on this loan, Prosper Marketplace, Inc., (PMI) has a fiduciary duty to maximize recovery of the lenders’ investment through the loan sale process. After reviewing the results of past sales of comparable loans, I expect that this offer will be significantly more advantageous for lenders than the offers which PMI will receive from other debt buyers. If so, it would be a violation of PMI’s fiduciary duty to the lenders to reject this offer.
On December 26, 2007, Prosper sold Loan No. 4018. But not to me, and not for 20.00%.
The loan was sold to an anonymous junk debt buyer (Prosper does not reveal the identity of the debt buyers who purchase our defaulted loans) for just 8.1% of the outstanding principal balance. As a result, the lenders on this loan received about $500 less than they would have gotten if Prosper had accepted my offer.
On December 31, I received an email from Dr. Fuller, formally rejecting my offer to purchase Loan No. 4018.
He offered two reasons for the decision to go with the low bidder:
First, he defended Prosper’s practice of selling defaulted loans as “a reasonable accommodation” of competing interests, including “regulatory and practical concerns” and Prosper’s obligation to be “sensitive to the rights of borrowers.”
Second, he contended that Section 14 of the Lender Registration Agreement (LRA), which prohibits lenders from engaging in collection activities, prevented Prosper from selling loans to registered lenders. “[A] sale of the loan to you at any price would be in violation of the LRA,” he wrote, since I was offering to buy the loan for the purpose of collecting on it.
My reply to Dr. Fuller was quite lengthy (what, you’re not surprised?), but the key points were:
(1) There were no practical obstacles to accepting my bid. My offer was made nearly a month before the cut-off date for inclusion of 120-day late loans in the sale; all PMI had to do was add an asterisk indicating that an offer had been made on Loan 4018, and notify other prospective bidders that Loan No. 4018 might be sold separately. Each loan is priced individually in the bidding process, so an extra bid on one loan would not have affected bidding on the other loans in the sale.
(2) By acknowledging that Prosper gave greater weight to its philosophical predilections in favor of large debt buyers and to the interests of the defaulted borrowers than to the interests of the lenders who own the notes, Dr. Fuller effectively admitted that Prosper had violated its fiduciary duty to the lenders. While the law imposes certain duties on creditors, it does not give borrowers the right to determine who a debt is sold to. On the other hand, Section 5 of the LRA requires Prosper to service the loans in such a way as to “maximize the timely recovery of principal and interest” for the lenders.
(3) Any reasonable reader of Section 14 would understand it to restrict the actions of a lender when he is acting in the capacity of a lender, not when he is acting in another role, such as that of debt buyer. (Section 14 also prohibits registered lenders from claiming to speak on behalf of Prosper. Under Dr. Fuller’s interpretation of that section, neither he, Chris Larsen, nor John Witchel could ever speak on behalf of Prosper, in any context, since they are all registered lenders.)
Even if the contract between me and PMI were interpreted to prohibit Prosper from selling a loan to me, my letter of November 7, 2007, offering to purchase that loan, would have acted as a waiver of that contractual provision.
I went on to explain:
PMI’s authority to act as servicing agent for the Lenders is limited by the Lender Registration Agreement (LRA), by its fiduciary duty, and by the instructions which it receives from the owners of the Notes.
Section 5 of the Lender Registration Agreement defines the extent of PMI’s authority to act on behalf of the Lenders as their servicing agent, providing in part that “Prosper shall seek to maximize the timely recovery of principal and interest on the Notes” when acting as servicing agent for Lenders. Prosper does not have the authority to bind the Lenders to an agreement with a low bidder which intentionally minimizes the amount recovered by the Lenders.
As I pointed out in my letter of November 7, 2007, PMI has a fiduciary duty to act in the best interest of the Lenders whose Notes it services. PMI’s rejection of my offer in favor of the low bidder caused a collective loss of approximately $500 to the Lenders who had entrusted PMI with responsibility for servicing their Notes, and was certainly not in the best interests of the Lenders involved.
My letter of November 7, 2007, also made it clear that any offer of less than 20% would be unacceptable to me as a Lender, and served as a specific directive to PMI not to sell my Note for less than that amount. PMI’s violation of that specific directive from principal to agent provides an additional basis for my conclusion that PMI exceeded the authority which had been delegated to it.
Since PMI lacked the authority to act on my behalf when it purported to sell my Note, I regard the sale agreement as null and void. I specifically reject the offer of $7.82 from the debt buyer, and choose to retain ownership of my Note.
(Since borrowers are on notice that their loan is in fact a collection of individual notes, each of which is assigned to a separate lender, there is no legal requirement that all of the notes associated with a particular loan be sold together. I lacked standing to assert the rights of any lender other than myself, so I couldn’t block the sale of the entire loan, but I could assert my rights as to the note which I purchased.)
Enclosed with my reply to Dr. Fuller was a money order for $7.82, refunding the money that the junk debt buyer had tendered for my share of the loan. (I would have sent the money to the junk debt buyer directly, but Prosper refuses to disclose the buyer’s identity.)
In my letter, I gave Prosper an opportunity to correct its violation by notifying the junk debt buyer that it had made an error and retrieving the whole loan from the junk debt buyer, or by resuming its servicing responsibilities as provided in the Lender Servicing Agreement for my $109.89 share of the loan. Otherwise,
Since PMI has abandoned its obligation to service this Note, in breach of the LRA, I can no longer be bound (as to this Note) by the provisions of the LRA which assign exclusive servicing rights to PMI. Accordingly, PMI’s abandonment of its servicing responsibilities leaves me free to assign the note to another servicing agent, or to service it personally, collecting the amount due me on this Note by lawful means, including, but not limited to, the filing of a lawsuit against [the borrower].
In a letter dated January 17, 2008, Doug Fuller returned my money order, stating that the sale of Loan No. 4018 to the junk debt buyer was “not open to renegotiation or review.”
He added a third justification for Prosper’s rejection of my offer: The current version of the LRA (Section 6.f.) specifies that defaulted loans must be sold to an “unaffiliated” debt buyer. “The use of the term ‘unaffiliated’ applies to both parties to the LRA, including the lender, such that neither Prosper nor a lender is eligible to purchase a charged off loan,” he wrote.
I found this a rather strange argument, coming from someone who is currently engineering the purchase of 66 defaulted loans by Prosper itself, as part of the litigation test.
Fortunately, my latest letter to Dr. Fuller provides him with the obvious solution to this inconsistency in his position:
Section 6 of the LRA specifies PMI’s obligations with regard to delinquent loans, not the obligations of Lenders. Read in context, the reasonable interpretation of the word “unaffiliated” is that it, like the rest of the section, relates to PMI, not to the Lenders, and precludes only PMI, or a company affiliated with PMI, from purchasing defaulted loans.
Even assuming, arguendo, that the requirement that debt buyers be “unaffiliated” precludes the sale of defaulted loans to Lenders, this language did not appear in the LRA at the time Loan No. 4018 was originated and the associated Notes were purchased by Lenders. A prohibition on sale of defaulted loans to Lenders would materially impair the value of Loans previously purchased by Lenders, by limiting the universe of potential purchasers. (As I noted previously, PMI’s refusal to accept my offer reduced the value of the notes associated with Loan No. 4018 by approximately $500.) As a result, such a provision cannot be applied retroactively without the consent of both parties to the contract.
As you know, PMI has announced that it will be purchasing selected defaulted loans for the purpose of litigation. If the insertion of the term “unaffiliated” in Section 6 were to be applied retroactively, the LRA would preclude PMI from conducting the so-called “legal test”. Accordingly, I must assume that PMI shares my view that this amendment is not retroactive, and that loans originated prior to October 31, 2007, including Loan No. 4018, are exempt from the requirement that the debt buyer must be “unaffiliated.”
I have returned the $7.82 once again, explaining that:
I am sorry that Prosper Marketplace Inc. (PMI) has chosen to reaffirm its decision to violate its contractual and fiduciary duties to the Lenders on Loan No. 4018 by rejecting my offer to purchase the associated notes and servicing rights.
It appears, however, that you misunderstood my position regarding the Note which I purchased from PMI. As I noted in my previous correspondence, PMI lacked the authority to act on my behalf when it accepted the debt buyer’s offer to purchase my Note, and I, as owner of the Note, have rejected its offer. As a result, I retain ownership of this Note, regardless of the fate of the other Notes associated with this Loan. Because PMI has breached the Lender Registration Agreement (LRA) by abandoning its servicing obligations and refusing to acknowledge my continuing ownership of the Note, I am left with no alternative but to mitigate my damages by assigning my Note to another servicing agent or servicing it personally.
As of this writing, the other lenders on this loan have lost approximately $500 as a result of Prosper’s refusal to sell Loan No. 4018 to the highest bidder. (In my opinion, Prosper owes them compensation for this breach of its contractual and fiduciary duties.) A junk debt buyer has paid Prosper for a loan that Prosper had no authority to sell. And two parties – the junk debt buyer and this lender – now claim ownership of – and the right to collect on - the same note. (The debt buyer believes that it owns all of the notes associated with the loan, because Prosper has failed to inform it of my rejection of its offer, while I assert continued ownership only of the one note which I purchased from Prosper for $109.89 when the loan was funded.)
This whole mess could have been avoided so easily, if only Prosper had chosen to act in the best interests of the lenders on Loan No. 4018, and accepted my original offer to purchase this defaulted loan.
Author
Topic: Trav's Do-It-Yourself Secondary Market & Panaderia (Read 28102 times)