Print

[traveler505]

From a financial standpoint, Option One is a familiar one. Your loans are sold to a junk debt buyer (which, in this case, would be Prosper itself) for pennies on the dollar.  You get a pre-disclosed amount right away.

The downside is that, if the litigation strategy succeeds, this provides Prosper with an incentive to continue to screw up pre-default collections.  The more loans go into default, the more loans Prosper buys for pennies on the dollar, and the more money it makes from litigation.  (When Doug Fuller originally announced the litigation test, Option One was the only option, and a number of lenders pointed out the conflict of interest problem.)

[ETA:  Ira01 and xraider have persuaded me that the italicized paragraph is probably incorrect, and that all net proceeds from the litigation test will go to the lenders who opt in.]

Option Two gives you a stake in the outcome of the litigation.  You get paid if and when the law firm extracts money from the defaulted borrowers in the pool, and the amount lenders receive (amount collected less court costs and attorney fees) is likely to be more than lenders would receive under Option One. (At least, that's the theory under which JDBs operate.)   But there is no guarantee, and the money would trickle in over a period of years.

The issue here, IMO, is the pooling of the loans.  This means that lenders who bid on homeless unemployed borrowers with lots of cleavage get just as much money from the litigation project as lenders who carefully selected borrowers with good jobs and attachable assets.  This strikes me as a bit unfair.  

The reason for the pooling, I assume, is to ensure that Prosper doesn't get stuck with any out-of-pocket expenses for this project.  For simplicity of math, assume that there are 100 cases, each costing $300 for service and filing.  20 lawsuits are successful, yielding $10,000 each, 25% of which goes to the law firm.  The other 80 borrowers have no attachable wages or assets.  (The total portfolio would be $1 million -- 100 times $10,000.)  (Ordinarily, the $300 in costs would be added to the judgment and collected from the 20 who pay the judgments, but since I'm going for simplicity here, I'm ignoring that.)

Prosper fronts $30,000 in costs to cover service and filing in all 100 cases.  Under the pooled system, the first four successful collections (net amount of $7500 each after attorney fees) go entirely to reimburse Prosper.  Lenders don't see a penny until the fifth collection.  Eventually, another $160,000 is collected, with $40,000 going to the lawyers.  That leaves $120,000 for the lenders, or a 12% recovery.

If the loans were not pooled, lenders on each of the 20 loans which were succesfully collected would get $10,000 minus $2500 in fees and $300 in costs, or $7200.  That would be a 72% recovery.  Lenders on the uncollectible loans would get nothing, nada, zip.  And Prosper would be out the $24,000 it paid for costs on the 80 lawsuits against judgment-proof borrowers.

If I were confident that I had used good judgment in selecting borrowers (at least by comparison to the rest of the poor schlubs with defaulted loans in the pool), I'd obviously prefer a non-pooled system (not that Prosper gave lenders that choice).  And, since this is an experiment intended to "create awareness of consequences" and increase payment performance for all Prosper loans, I'd argue that Prosper should eat the $24,000 in costs, either as R&D expense or loan servicing expense (creating fear among all deadbeats is a reasonable loan servicing expense) which should be spread across all Prosper loans.

I don't have any loans in the  New Agency Test.  If I did, I'd probably tell Prosper that both options are unacceptable, and that they should use a non-pooled system where lenders get paid based on the quality (collectibility) of their loans.  (Unfortunately, there's little to be gained by making a huge stink, since Prosper has the option of abandoning the litigation project and selling off the loans to an unaffiliated JDB for the same pennies that they are ofering in Option One.)

[msava]

I'm glad this is all happening for 2 reasons: 

1.) Prosper is showing they really are trying to do something about the default situation.  Hopefully, details of the consequences will be splashed all over the news and the internet.

2.)  I don't have any loans in the test experiment and don't have to decide how to vote.  Like Mtnchick, I have no idea the best way to go, and would sheepishly follow the herd. Now I can just sit on the sidelines, be a kitchen quarterback and second guess every decision. 

[The text of this letter is now in a thread in the registered forums titled Collections letter." - HollowOak]

Edited to add in a copy of the blog that shows none of mt loans are included.

[xraider]

Trav, the one thing you're not factoring in is the likelihood of settlement (which I assume Prosper will control), which may well include payments over time.  When I handled collection cases, one outcome is payments over 6 months (or some other period) essentially "secured" by a stipulated judgment in a higher amount.  This, or garnishment, is likely why Prosper is anticipating the payout may be 18-24 months.

[snake]

poof

[jsreider]

I am going to take the payout.  Prosper very rarely seems to be able to make decisions that is in the best interest of the lenders.  I would rather take the measely payout and agree with the conflict of interest of Prosper buying the loan and be done with Prosper sooner rather than later.

There is a chance that people who opt in will go through this "test" with Prosper and their "wonderful" attorneys and end up with less money 2 years from now.  I don't trust Prosper to be able to act in my best interest, since they have yet to show me that ability.  I would rather be done and take my losses.

[traveler505]

The other point to consider is that, for lenders who opt in, Prosper will be the owner of the notes, and any funds collected by Prosper on these loans will be Prosper's property.  Prosper's obligation to pay this amount to the lenders who opted in will be an ordinary debt, subject to disclarge in bankruptcy (should Prosper pull a Red Gorilla). 

This is different from the usual arrangement, where lenders own the notes, payments from borrowers belong to the lenders, and Prosper merely manages the lenders' money.

[beerbud1]

I got my e-mail early this morning and have already agreed to go forward. Like someone else said we were screaming for this and i believe a judgement on someones record and being able to tell others this is what happens when you don't pay may well send a strong message to other would deadbeats who are thinking of trying to screw us.

[misssalaska2000]

I was a deadbeat to my credit card company (I ended up settling the account)... I was TERRIFIED of being sued in those months leading up to the settlement.  What a hassle!  You'd have to go to court (hello, more time off work), and pay all those attorney's fees (if necessary).

Call as often as you'd like.  Write letters.  A deadbeat will likely ignore them.  But threaten suit?  That should bring in the dough.

[ira01]

From a financial standpoint, Option One is a familiar one. Your loans are sold to a junk debt buyer (which, in this case, would be Prosper itself) for pennies on the dollar.  You get a pre-disclosed amount right away.

The downside is that, if the litigation strategy succeeds, this provides Prosper with an incentive to continue to screw up pre-default collections.  The more loans go into default, the more loans Prosper buys for pennies on the dollar, and the more money it makes from litigation.  (When Doug Fuller originally announced the litigation test, Option One was the only option, and a number of lenders pointed out the conflict of interest problem.)

Although (as usual) Prosper's email is not a model of clarity, I don't think this is correct.  The email says that one of the costs that participating lenders must cover is the purchase price paid by Prosper to the non-participating lenders.  Thus, it appears (and any participating lender should scream bloody-murder if not) that it will be the particpating lenders, NOT Prosper who own the non-participating lenders' shares.  Thus, if the litigation strategy is successful, participating lenders, not Prosper will profit.  Indeed, it should be possible (if the litigation is sufficiently successful and enough lenders choose not to participate) that the participating lenders would receive MORE than 100% of their money back.  This is so because as I read it, the participating lenders are purchasing the non-participating lenders' share of the pool at JDB prices, but may well reap the benefits of far higher payments on their own shares and the shares of the non-participating lenders.

Someone who has a loan in the test should email Doug Fuller for clarification about this.  But I really don't see how Prosper can require the participating lenders to repay Prosper for the money paid to non-participating lenders, without letting the participating lenders reap the benefit of the non-participating lenders' shares.
Option Two gives you a stake in the outcome of the litigation.  You get paid if and when the law firm extracts money from the defaulted borrowers in the pool, and the amount lenders receive (amount collected less court costs and attorney fees) is likely to be more than lenders would receive under Option One. (At least, that's the theory under which JDBs operate.)   But there is no guarantee, and the money would trickle in over a period of years.

The issue here, IMO, is the pooling of the loans.  This means that lenders who bid on homeless unemployed borrowers with lots of cleavage get just as much money from the litigation project as lenders who carefully selected borrowers with good jobs and attachable assets.  This strikes me as a bit unfair.  

This struck me exactly the same way.  A lender chose to tie his/her fortunes to those loans bid upon; not to some other collection of loans that he/she chose NOT to bid on.  That shouldn't change as a result of the litigation project.

The reason for the pooling, I assume, is to ensure that Prosper doesn't get stuck with any out-of-pocket expenses for this project.  For simplicity of math, assume that there are 100 cases, each costing $300 for service and filing.  20 lawsuits are successful, yielding $10,000 each, 25% of which goes to the law firm.  The other 80 borrowers have no attachable wages or assets.  (The total portfolio would be $1 million -- 100 times $10,000.)  (Ordinarily, the $300 in costs would be added to the judgment and collected from the 20 who pay the judgments, but since I'm going for simplicity here, I'm ignoring that.)

Prosper fronts $30,000 in costs to cover service and filing in all 100 cases.  Under the pooled system, the first four successful collections (net amount of $7500 each after attorney fees) go entirely to reimburse Prosper.  Lenders don't see a penny until the fifth collection.  Eventually, another $160,000 is collected, with $40,000 going to the lawyers.  That leaves $120,000 for the lenders, or a 12% recovery.

If the loans were not pooled, lenders on each of the 20 loans which were succesfully collected would get $10,000 minus $2500 in fees and $300 in costs, or $7200.  That would be a 72% recovery.  Lenders on the uncollectible loans would get nothing, nada, zip.  And Prosper would be out the $24,000 it paid for costs on the 80 lawsuits against judgment-proof borrowers.

If I were confident that I had used good judgment in selecting borrowers (at least by comparison to the rest of the poor schlubs with defaulted loans in the pool), I'd obviously prefer a non-pooled system (not that Prosper gave lenders that choice).  And, since this is an experiment intended to "create awareness of consequences" and increase payment performance for all Prosper loans, I'd argue that Prosper should eat the $24,000 in costs, either as R&D expense or loan servicing expense (creating fear among all deadbeats is a reasonable loan servicing expense) which should be spread across all Prosper loans.

I don't have any loans in the  New Agency Test.  If I did, I'd probably tell Prosper that both options are unacceptable, and that they should use a non-pooled system where lenders get paid based on the quality (collectibility) of their loans.  (Unfortunately, there's little to be gained by making a huge stink, since Prosper has the option of abandoning the litigation project and selling off the loans to an unaffiliated JDB for the same pennies that they are ofering in Option One.)

Well said.  I agree completely.

[ira01]

A little while ago, I posted the text of the Prosper email, to ensure it doesn't disappear in the future.  Somehow, that post itself disappeared from here.  Anyway, here it is again:

[The text of this letter is now in a thread in the registered forums titled Collections letter." - HollowOak]

[ira01]

Of the original 74 loans in the legal test, 68 remain (6 loans have fallen out due to such things as curing or bankruptcy filings).

I could have sworn that Prosper previously hyped some good results of the New Agency Test -- Yet only 6 of the 74 loans have either declared BK or have been cured?  That doesn't sound too promising so far.

Since this is a test, we have not yet designed the system to track these revenues within the normal statement process. As such, the loans will be defaulted at zero value and the accounting provided on a monthly basis in a supplementary statement.

This is also very troubling.  Prosper's track record on statements has not been very good, and a special case like this has a high likelihood of getting all screwed up.  I would also want to know how much transparency Prosper is planning to provide to the participating lenders (who, after all, are the benefical, if not legal, owners of the Pool).  If I had a loan in the New Agency Test, I would want to know, for every loan in the Pool (not just my own), the principal amount, the status of the litigation (i.e., complaint filed, defendant served, defendant defaulted, etc.), the value of any judgment entered (including court costs), and the status of collections activities.  Unfortunately, given Prosper's tendency towards secrecy, I would guess that the participating lenders will be left in the dark, and will have to simply trust that Prosper handles this test litigation and its accounting in a competent manner (a trust that Prosper has not earned, IMHO).

[Caladia]

A little while ago, I posted the text of the Prosper email, to ensure it doesn't disappear in the future.  Somehow, that post itself disappeared from here. 

Sorry, Ira, that was me.  The power went out in my office just after I split off your post, before I had a chance to post an explanation. 

Anyway, there was a report that the letter was copyrighted, so I moved it to Moderator Discussion pending... discussion. 

[ira01]

The other point to consider is that, for lenders who opt in, Prosper will be the owner of the notes, and any funds collected by Prosper on these loans will be Prosper's property.  Prosper's obligation to pay this amount to the lenders who opted in will be an ordinary debt, subject to disclarge in bankruptcy (should Prosper pull a Red Gorilla). 

This is different from the usual arrangement, where lenders own the notes, payments from borrowers belong to the lenders, and Prosper merely manages the lenders' money.

This is also very troubling (and maybe the deal-killer if I had any loans in the test), because I doubt Prosper will last for the two years that it says the test might take.  Prosper should find a way to keep the Pool assets legally distinct from its own, perhaps with some sort of trust of which Prosper is the trustee (but not the beneficiary).  

[RateLadder_com]

@Ira

IANAL

I read it as you own your portion of the pool based on the amount of the lender dollars in the opt in pool.  Hence, the pool needs to reimburse Prosper for the expense of buying the junk debt from the opt out lenders.

Please remove my letter from this thread.  It is duplicate content from google's point of view (bad for RL and prospers) and as the copyright holder of rateladder.com I do not grant reprint.

A copy of someone else's letter can be found here (not in the lobby): http://www.prospers.org/forum/collections_letter-t5293.0.html

[Urbi_et_Orbi]

So, how do you claim copyright on your incoming mail, authored by someone else?

ETA: why do you think this is your letter in the first place?