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[lenderguy]

FYI since few of you know me.  I am on the BOD of a local community bank.  I am very pleased with Fuller's answers in general but one thing bothers me.  In talking to our legal department we have never spent more than four hundred dollars securing judgements and liens again defaulted borrowers. (average is less than two hours of legal)  I find it disturbing he quotes a figure of up to 15K+.

Bottom line that is total bull.  These are not complicated cases involving expert witnesses and forensic scientists.  Any rep of Prosper can walk in to court and say to the judge here is the signed agreement, here is proof of default, here is our requested action, done.

My legal team says in any state the filings and court appearance can be handled by a first year attorney and getting a lien in any court should never be more that 2 hours work with appearance and most don't contest and appearance isn't even necessary.  Once the word gets out there is zero tolerance then life is better for lenders AND legitimate borrowers since I can lower my rates.

I agree that most of these cases will never go to trial, and that Prosper should have an easy time getting a default judgement.  HOWEVER, filing fees in California are not cheap.

There are three tiers of civil courts in the California Superior court.  Which tier you get is dependent on how much the suit is for.

1.  Unlimited Civil Court: For any suit between $10,000 and $25,000, filing fee is $320.

2.  Limit Civil Court: For any suit not eligible for small claims court, and less than $10,000, filing fee is $180.  For the purposes of Prosper, this is going to be any suit over $2500 and less than $10,000.*  You will note for the longest while, the California minimum to borrow was $2550.  I wonder why?

So, while I figure that the fee of $15k that Fuller quotes is a bit on the high side, I also think the comments from the poster who works at a bank who says "legal never spent more than $400" on a case is going to be unrealistic here.  ANY time Prosper sues a borrower in California for more than $10k, it's an automatic $320.

*In limited exceptions, it is possible to sue for more than $2500 in California small claims court.  However, these exceptions are limited to twice per year, so they really won't have an effect on the "average" fee paid to file suit.

[Urbi_et_Orbi]

If they're going to buy the loan for pennies on the dollar and then sue, they would quickly build up a nice pot for legal fees.

In this context, spending $10K on a well-chosen suit is pocket-lint.

I, for one, would be happy to sell off a few more loans for pennies to help kick-start the legal fund.

[traveler505]

In most (all?) states, the filing fee is a cost which is added to the judgment.  So if one pays a $320 fee on a $10K suit, and wins, the judgment is for $10320.  (There are other costs that are added into the judgment as well; I'm oversimplifying here.)

The expenses that normally aren't recoverable are attorney fees (again, oversimplifying), but, for a default judgment, the amount of time and legal talent required is minimal.  

I'm also not persuaded that Prosper's model is so unique that a law firm would have to throw out everything and start from scratch, or that no firm would handle these cases on contingency (or some sort of modified contingency).

[ira01]

In most (all?) states, the filing fee is a cost which is added to the judgment.  So if one pays a $320 fee on a $10K suit, and wins, the judgment is for $10320.  (There are other costs that are added into the judgment as well; I'm oversimplifying here.)

In California, the filing fee (and I'm pretty sure the cost of service as well) IS indeed a cost that is awarded to the prevailing party.  So Prosper would recover this (assuming Prosper can successfully collect on the judgment, of course).

The expenses that normally aren't recoverable are attorney fees (again, oversimplifying), but, for a default judgment, the amount of time and legal talent required is minimal.  

In California, attorneys' fees ARE recoverable in a suit on a contract IF the contract so provides.  I can't recall (and am too lazy at the moment to check) if the prommissory note contains an attorneys' fees provision, but if not, it probably should.  One thing Prosper would have to consider is that in California, if there is an attorneys' fees provision in a contract, it is applied bilaterally (whichever party prevails recovers their attorneys' fees, even if the attorneys' fees provision is expressly written to only give attorneys' fees to a prevailing plaintiff, for example, or a prevailing creditor).  Thus, if Prosper added an attorneys' fees provision, it would have to pay the borrower's attorneys' fees if the borrower prevailed.  Because Prosper (like other businesses) has money and many borrowers (like consumers in general) often don't, the prevailing wisdom is that it is often better for businesses NOT to include an attorneys' fees provision in their contracts (because when they lose, they have to pay up, but when they win, they might not be able to collect).  However, it seems to me that this probably is not applicable here.  These collections cases should be no-brainer easy victories for Prosper, so the likelihood of losing many (if any) of these cases seems very slim.  And Prosper will be selecting the cases on which to sue based on the likelihood they will actually be able to collect on a judgment, so adding attorneys' fees to the prommissory note would seem to be a good idea.  However, I am not sure if that would run into any regulatory issues (i.e., I'm not sure if any states have specific rules about attorneys' fees provisions in prommissory notes for creditors of Prosper's type).  Definitely something Prosper should look into.  And if the regulatory question was too difficult to untangle, since Prosper is planning on starting by suing California deadbeats, it seems to me that Prosper should immediately consider if there were any California regulatory issues regarding attorneys' fees for California borrowers.  If not, Prosper could have a California specific prommissory note that had an attorneys' fees provision. 

I'm also not persuaded that Prosper's model is so unique that a law firm would have to throw out everything and start from scratch, or that no firm would handle these cases on contingency (or some sort of modified contingency).

I agree with this.  Prosper loans money to borrowers who sometimes default.  Nothing unique about that.  Sure there are a few complications, but nothing that immediately jumps out at me as being sui generis.  Although there are actually fill in the blank form complaints drafted by the Judicial Conference in California that could be used, probably Prosper would draft up its own complaint, which would have a few paragraphs explaining the nature of Prosper and how it works.  But once a standard complaint was drafted, it would become a fill in the blanks model, since every lawsuit in California would basically be identical except for the borrower's name, city, date, rate and amount of loan, and repayment history.  So even if Prosper spent $10K on the first complaint, each additional one would cost around $1.95 (give or take  ). 

It seems to me that the liability issue in these cases would be virtually cut and dried.  Here's the prommissory note, here's the repayment history, the borrower is in default, owes this much money, now pay me my money down.  The only real question IMHO is whether a judgment would be collectable.  And collections attorneys' are quite good at figuring that out.  Thus, I don't see why there wouldn't be attorneys who would take these cases on some sort of contingency. 

[xraider]

Could our California attorneys comment on Fuller's claim that the only way Prosper can be the plaintiff in a lawsuit is to buy back the loans from the lenders for a pittance?  Could it sue in its capacity as servicing agent?  Could it buy the loans for an price based on the net amount ultimately recovered?

I may be the last remaining cynic here, but it seems to me that this is no better for lenders than letting the JDBs buy them, since JDBs will likely sue the same people.  (Prosper could periodically check court records to see if the JDB has filed suits against Prosper borrowers, and publicize those judgments.)  And it creates a major conflict of interest, where ineffectual collections could become a major profit center for Prosper.  If Prosper collects effectively, it makes about $150 in servicing fees (assuming 1%) over 3 years on a $10000 loan.  If Prosper lets loans default, then buys the cream of the crop for 5% and litigates, it stands to make $9500 (less litigation costs) on that same $10000 loan.

Trav, you raise a good point.  Prosper is the servicing agent but not the holder of the note.  However, I don't see why Prosper couldn't change the TOS and be our agent in any lawsuit against the borrower, as well.  That way, the net amount recovered in a suit would be distributed to the lenders instead of profit to Prosper.

I also don't see why a lender couldn't buy a defaulted loan and sue on it himself or herself.

[xraider]

I find it disturbing he quotes a figure of up to 15K+. 

Me too.

Fuller justifies it by saying no one will take these cases on a contingency basis.

BS.  This is one of the few areas where I'm unhappy with his answers.

Fuller claims that a new complaint would have to be drafted and because no one has experience in collecting Prosper loans, the cases would have to be hourly.

First, there are form complaints in California, where you can spend five minutes checking boxes.  Any competent collection firm will have its own complaint in its form file where you change the name of the plaintiff, the name of the defendant, the name of the court, and the amount due.  Again, no rocket science here.  If Doug is talking to the "top collection law firm in California" I'm sure it has an appropriate form it can use.

Second, a deadbeat is a deadbeat.  I can't see that there would be much difference between a deadbeat who defaults on medical bills, or a deadbeat who defaults on a credit card debt, or our deadbeats.  If firms would take credit card or medical deadbeats on contingency, why wouldn't they take Prosper deadbeats on contingency?

Third, choose your test cases.  (Duh.)  Sue deadbeat homeowners.  Not so difficult.
 

[bamalucky]

Uhhh,there are different classes of deadbeats..Those with assets & those without

As he answered,2/3 of prosper loans should have never been make..I would argue closer to 90%

[xraider]

bama, do you deliberately misunderstand me?  I'm talking about credit card deadbeats v. medical deadbeats v. Prosper deadbeats.  The collections analysis for each should be the same.

[bamalucky]

prosper deadbeats are in a class of their own..

They come here as a last resort..You can't expect any judgment to have an effect on someone who already has previous DQ's

ETA:  Some of you act like collecting on  these loans is cut & dried..

[zcommodore]

A few observations...

Doug says he's near a 100% rate at getting judgements against people he chooses to sue.  Does that mean he's actually received the payments or just that the judge agreed the borrower owed the lender?  If a borrower is sued and gets a judgement against them, they still won't pay if they don't have money even if Prosper decides they "ought to" based on whatever analysis they do to decide to sue in the first place.

When a JDB buys loans from Prosper, I understand they pay a percentage based on how likely they think they can get these deadbeats to pay up.  Based on the pennies on the dollar lenders received, this is fairly low.  The only conflict of interest I see for Prosper is that they're offering pennies on the dollar for loans they think they can get judgements/payments on which means they might be skimming the cream off the top.  This will likely cause all the rest of the loans to be worth less to the JDB I would assume.

Lenders are complaining earlier in this thread and on .com that Prosper is paying pennies for loans and then collecting on them.  Still, I don't see that Prosper is going to make a whole lot on these deals.  Even if Prosper buys this junk debt and gets judgements on 100% of them.  Will they manage to collect enough to cover their legal costs and junk debt purchasing costs even with skimming the cream off the top?  I'm interested in finding out but I'm willing to wait and see.

To me, part of the point of paying pennies on the dollar to lenders for the loans, a JDB basically hopes to recover enough on some of the loans to make the purchase of all of them worthwhile.  In the case of Prosper purchasing some loans, I don't have a problem with them doing a pilot program and purchasing some at JDB rates hoping to recover some funds and make a point to deadbeats.  I don't see why lenders should be complaining if Prosper manages to collect 100% on a few of those it purchases.  It will make up for the ones they purchase but don't manage to collect on.  However, if this pilot becomes the standard practice, then there might be issues if they don't distribute the proceeds appropriately.  I don't really see that happening though.

[Teddie33]

FYI since few of you know me.  I am on the BOD of a local community bank.  I am very pleased with Fuller's answers in general but one thing bothers me.  In talking to our legal department we have never spent more than four hundred dollars securing judgements and liens again defaulted borrowers. (average is less than two hours of legal)  I find it disturbing he quotes a figure of up to 15K+.

Bottom line that is total bull.  These are not complicated cases involving expert witnesses and forensic scientists.  Any rep of Prosper can walk in to court and say to the judge here is the signed agreement, here is proof of default, here is our requested action, done.

My legal team says in any state the filings and court appearance can be handled by a first year attorney and getting a lien in any court should never be more that 2 hours work with appearance and most don't contest and appearance isn't even necessary.  Once the word gets out there is zero tolerance then life is better for lenders AND legitimate borrowers since I can lower my rates.

So if your bank ran into problems would they take a stand or just drop the lein? I would agree the 15K figure is shocking but in this day it could be very well cost that kind of money.

[droolingelmo]

So if your bank ran into problems would they take a stand or just drop the lein? I would agree the 15K figure is shocking but in this day it could be very well cost that kind of money.

As some have covered fees are different by state.  We only loan to MD, VA, NC and WV and our fees are a fraction of what has been quoted for CA.  In our states, if we win, the court and legal fees are added to the judgement and to date we have never lost.

This is not to say we have recovered 100%, but, we have just gotten the judgement in every case.  In many cases we don't see a penny until the homeowner sells and that can be a long time but if the borrower is not a homeowner then we pursue wage garnishment, even if the initial legal expense > the loan amt. 

We believe that without a zero tolerance policy some in the community will see us as an easy mark.  Second, with legal and fees getting added to the lien/garnishment we eventually get not only the loan amount back and the rest too.  Our writeoffs for bad loans are tiny, but remember "community bank", we know our borrower better than a web-listing.

Fuller's idea of 'shaming' borrowers into paying is worthless but if my staff calls a late and says if you want to get another loan at this bank get your sh-t together, it often works.

I also think there is very little short term incentive for Prosper  to persue, they've made their money.  If they are looking for the long-term they need to start protecting lenders or it will dry up and there will be no Prosper.  Right now they are under pressure to show the model works in the short-term and they will worry about the future later.

[Mtnchick]

I also think there is very little short term incentive for Prosper  to persue, they've made their money.  If they are looking for the long-term they need to start protecting lenders or it will dry up and there will be no Prosper.  Right now they are under pressure to show the model works in the short-term and they will worry about the future later.

In a nutshell.

[droolingelmo]

In a nutshell.

Touche!

[stonesculptor]

Size or organization? Number of employees? What a pompous ass.  How about return rate of my money? Anybody ever quantify this guy on that?  Talk is cheap.