More creative accounting from Larsen -- how typical:
Attractive Risk-Return Tradeoff: For purposes of this survey release, listings are considered to have attractive returns if, based on historical loan repayment performance of Prosper borrowers with similar characteristics, they are priced sufficiently to compensate lenders for risk. Risk includes both the risk of non-payment by the borrower and other risks associated with people-to-people lending.
Does he include as P2P risks: the risk of Prosper going out of business in less than 3 years; or the risk that Prosper's loans will be found to be unregistered securities? Somehow, I doubt it.
In general, as the credit quality of the borrower declines, the range of possible returns widens, requiring a larger risk premium to compensate the additional uncertainty. The amount of risk premium required to compensate for a given level of risk is a subjective judgment. The following formula is used by Prosper to determine if a listing is priced adequately to have an attractive risk adjusted return: Maximum Borrower Rate > Risk Free Rate1 + 3.25% + (Expected Annual Default * 1.5) + Prosper Servicing Fee. All lenders should make there [sic] own judgments with respect to what constitutes an adequately priced listing.
1 Risk Free Rate = 2-year CD national rate on BankRate.
Why in the world would Prosper choose the 2-year CD rate, considering that Prosper loans are 3-year loans (other than the obvious answer, that 3-year rates are higher)? Similarly, why is Prosper multiplying the Expected Annual Default by 1.5, again considering that Prosper loans are 3 years? And, of course, the biggest shennanigans in this whole calculation is the effect of Prosper's manipulation of the data in determining the Expected Annual Default without accounting for the $6.6M of Late-4's that should have already been defaulted, and the disappearance of the 66 NAT loans (which are all defaults in everything but name) from the data.
Lastly, although a minor point, you would think that when the CEO of the company posts on the official blog, that even if he doesn't know the difference between "there" and "their," that someone who does would proof-read his submission before posting.
