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[HollowOak]

Soon after Prosper announced their portfolio plans and the new improved bidding guidance, I was all for it as a strongly positive, pro-lender initiative on the part of Prosper.

Now that Prosper has taken to tweaking the bidding guidance and are adjusting the portfolio plans, I'm becoming very confused on whether this is indeed a well thought through lending improvement,

Lately, I've been mulling this over in my mind. Perhaps some of you can refine my thinking on this, and perhaps there are methodologies to track this evolution over time. I'm pretty sure this has been touched on by other lenders in the past, but I'd like to try and concentrate the issue into one thread.

Portfolios:
Prosper advertise a rate of return, based on each portfolio's subordinate SOs. My concerns are:

• Prosper apparently can change the SOs in-flight for a portfolio. What are the implications? Why are they doing it? What about the lenders who bid with the old SOs - will they now get different returns?
• How exactly is Prosper projecting returns if they don't yet know the default rate on their loan portfolio?
• If a portfolio is comprised of multiple SOs, then do some SOs have better performance and others worse performance than the mean of the portfolio? So why would savy lenders just cherry-pick some of the same SO criteria?
• Could this mean that the performance of the loans selected by SOs will decline, simply because there is more money chasing a smaller cut of the listings?
• Will this mean that large swathes of Prosper's listing range will become  a wasteland because the SOs will be excluding those listings from funding?
• Will this in effect have a self-selecting bias to the entire Prosper landscape where loan originations are distorted?
• If that happens, will the rationale for selecting the portfolios still exist?
• In effect, I'm asking whether Heisenberg's principles of uncertainty applies to Prosper portfolios. Will their mere existence alter the marketplace to the extent where the Portfolios cannot deliver what they are said to deliver? Especially since we've had no loans mature yet on Prosper as an entity. 

Bidding guidance

• Essentially the same questions regarding the fact that past performance is being used as a guide to the future.
• With the guidance in existence, bidding patterns are certain to be affected, leading to different funding patterns.
• If Prosper can change guidance in-flight for a particular listing, where does that leave a lender that bid and then saw the guidance changed? The inverse is also true, once Prosper "knows" that the guidance needs to revised and they don't revise it, what about bidders that bid based on outdated information?

There were more, but my thoughts got interrupted.

[j9359]

all good points.

In regards to altering the landscape I would say definitely yes.  Consider listing http://www.prosper.com/lend/listing.aspx?listingID=264488as a prime example of something that would not have reached 100% funding so quickly without the PP SO's.

[gelt4u]

I think that the Portfolio Plans will definitely lower the returns in the market segments in which they fire.

Pros:
The average dimwit will be able to eke out a return on Prosper.
Other market segments will have fewer bids and, as such, should perform higher.

Cons:
Folks who had previously identified and bid on the market segments in question will have to find new ones to get the returns they want.

If you grade rates of return on a curve, I would expect the Portfolio Plans to give a 'C' performance: passing but not stellar.  To get the A or B performance one will still have to work for it.

[HollowOak]

I think that the Portfolio Plans will definitely lower the returns in the market segments in which they fire.

Pros:
The average dimwit will be able to eke out a return on Prosper.
Other market segments will have fewer bids and, as such, should perform higher.

Cons:
Folks who had previously identified and bid on the market segments in question will have to find new ones to get the returns they want.

If you grade rates of return on a curve, I would expect the Portfolio Plans to give a 'C' performance: passing but not stellar.  To get the A or B performance one will still have to work for it.

My concern with your position is that funding loans is a cooperative effort. With Prosper diverting a substantial portion of the market into a promised return that may never materialize, there is less left over to fund the areas that, in your terms "have to be worked for."

[Mark12547]

Some general concerns include:

• Prosper may be slicing the data too thinly, causing small changes in the data to have a too dramatic effect on guidance and what the Portfolio Plans select for,
• We, or at least I, don't know how Prosper figures in lates in the ROI estimates. If the ROI calculations don't consider 1+mo lates as likely defaults, the ROI calculations are likely over-optimistic.
• We still don't have a 3-year history, and even when we do, it won't be a history that includes many of the elements in the "additional credit data" that have subsequently become available.
• We are seeing the sub-prime melt-down in other areas, and it is going to take time before the sub-prime melt-down shows up in Prosper's historic data, so projections based on existing data will be too optimistic (but probably not as unrealistically optimistic as using Experian's data for "all bank card products").
• At one point, I mentioned the possibility of knowledgeable lenders cherry picking loans out of the Portfolio Plans and bidding them below the bid rates in the Plans, leaving a less desirable subset to stay in the Plan's picks. Just by publishing the criteria used, some lenders will get curious and will investigate those criteria and variations to see if other slices can produce better results. Net result: as each variable is introduced, it may introduce perturbations in the bidding process, which then may perturb the borrower pool and borrower actions.

I think it would be great to have a history of returns for the Portfolio Plans.

Meanwhile, I suspect that the Portfolio Plans are the most practical way to attract corporate funds; large accounts need some way of placing a large number of bids in a way that is likely to have a positive ROI without having to do a large amount of work, and these Portfolio Plans are one way to do it without having to do one's own analysis and craft one's own standing orders.

Like any new investment, or any new derivative over an investment, it takes time for a history to build up to know how it will behave in the future. I doubt it will be as well-behaved as Prosper promises.

[Fred93]

We, or at least I, don't know how Prosper figures in lates in the ROI estimates. If the ROI calculations don't consider 1+mo lates as likely defaults, the ROI calculations are likely over-optimistic

There's a prosper help page where they describe the calculation in detail.  They do the right thing, except that there's one little detail hidden.  They don't tell us what "roll rates" they use, ie what number they multiply the lates by in the estimate of default rate.  They tell us that these are calculated on the fly from the data sample, but they don't show them.  They do show us some backup roll rates they say they use when there isn't enough data to estimate roll rates.  Those backup numbers do look too optimistic. 

The older the data sample, the less this matters, 'cause then there'll be more loans that have made it thru to default.  For young data samples, this issue is important.

[Fred93]

Meanwhile, I suspect that the Portfolio Plans are the most practical way to attract corporate funds; large accounts need some way of placing a large number of bids in a way that is likely to have a positive ROI without having to do a large amount of work

I can't imagine Prosper attracting "corporate funds".  That's somebody's fantasy.  You heard it here first.  Won't happen.

[NewHorizon]

Are we sure there's a significant number of loans which are funded thanks to the portfolio SOs?

If not, then of course the portfolios aren't going to have a significant impact on the listing landscape.

[j9359]

I can't imagine Prosper attracting "corporate funds".  That's somebody's fantasy.  You heard it here first.  Won't happen.

Does Prosper actually accept a corp. as a lender now?  I thought lending was limited to individuals.
john.

[HollowOak]

I can't imagine Prosper attracting "corporate funds".  That's somebody's fantasy.  You heard it here first.  Won't happen.

Does Prosper actually accept a corp. as a lender now?  I thought lending was limited to individuals.
john.

Prosper has always accepted corporations as lenders. Provided you have more than $50k or $100k (the number has changed over time) and a TIN, Prosper will issue you an account.

[sb92075]

Exactly how does one identify programatically bids made via portfolio plan(s) looking at historical data?

[HollowOak]

I can't imagine Prosper attracting "corporate funds".  That's somebody's fantasy.  You heard it here first.  Won't happen.

Does Prosper actually accept a corp. as a lender now?  I thought lending was limited to individuals.
john.

Prosper has always accepted corporations as lenders. Provided you have more than $50k or $100k (the number has changed over time) and a TIN, Prosper will issue you an account.

I made the above statement based on discussions (now long past) that originated as far back as Cellardoor.  Subsequently I've received an email exchange where it was proven that Prosper declined to issue  a separate account for a  $50k investment.

So now I don't know what to believe anymore. Did that particular person ask the wrong way/the wrong person? was it never so? The plot thickens.

[HollowOak]

Exactly how does one identify programatically bids made via portfolio plan(s) looking at historical data?

You don't. Prosper has never made that data available in their download.

[traveler505]

I can't imagine Prosper attracting "corporate funds".  That's somebody's fantasy.  You heard it here first.  Won't happen.

Does Prosper actually accept a corp. as a lender now?  I thought lending was limited to individuals.
john.

Prosper has always accepted corporations as lenders. Provided you have more than $50k or $100k (the number has changed over time) and a TIN, Prosper will issue you an account.

I made the above statement based on discussions (now long past) that originated as far back as Cellardoor.  Subsequently I've received an email exchange where it was proven that Prosper declined to issue  a separate account for a  $50k investment.

So now I don't know what to believe anymore. Did that particular person ask the wrong way/the wrong person? was it never so? The plot thickens.

I recall the old discussions as well.

The Lender Registration Agreement certainly anticipates the possibility of corporate accounts:

12. Authority. You warrant and represent that you have the legal competence and capacity to execute and perform this Agreement. If you are entering into this Agreement on behalf of a corporation, partnership, limited liability company or other entity ("institution"), you warrant and represent that (i) you have all necessary power and authority to execute and perform this Agreement on such institution's behalf; (ii) the execution and performance of this Agreement will not violate any provision in the institution's charter documents, by-laws, indenture of trust or partnership agreement, or other constituent agreement or instrument governing the formation or administration of your institution; and (iii) the execution and performance of this Agreement will not constitute or result in a breach or default under, or conflict with, any order, ruling or regulation of any court or other tribunal or of any governmental commission or agency, or any agreement or other undertaking to which the institution is a party or by which it is bound.

Limits on Bids. Lenders may bid the entire amount of the loan being requested, or may bid a lesser amount, subject to a minimum bid amount of $50. If you make a standing order, you can achieve risk diversification by designing your standing order to bid your available Funds in increments as low as $50 and designating in your standing order that the incremental amount is the maximum amount that may be bid on any one listing. The aggregate amount of all of your bids, when added to the amount outstanding on all of your Prosper Notes, must not exceed five million dollars ($5,000,000) for individual Lenders, or fifty million dollars ($50,000,000) for corporate or institutional Lenders. Subject to these dollar limits, there is no limit on the amount of Funds you may commit to bids on listings.

The SEC filing, IIRC, also includes these maximum limits for both individual and corporate accounts. 

[Mark12547]

Meanwhile, I suspect that the Portfolio Plans are the most practical way to attract corporate funds; large accounts need some way of placing a large number of bids in a way that is likely to have a positive ROI without having to do a large amount of work

I can't imagine Prosper attracting "corporate funds".  That's somebody's fantasy.  You heard it here first.  Won't happen.

First, the default rates have to improve tremendously. I think Prosper helped by eliminating NC and the bottom part of HR borrowers, and more recently with bidding guidance (even though we question how good that guidance is). If the Portfolios produce anywhere close to the rate they imply, they might be a reasonable way for corporate accounts to invest.

Of course, they will need some way of retaining corporate customers that is at least as effective as their current way of alienating individual lenders.