Prosper.com - 10/15/08 late loan stats update

Here's the october 15th, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

These curves show loans that are >1 month late, however, you can read them as "default curves" because almost all Prosper.com loans that go 1 month late move on to default.  See my discussion of Prosper's collections performance in earlier blog entries.

We continue to see horribly misleading newspaper and magazine articles saying that the default rate on Prosper loans is 3% or 4% or something like that.  Investors can only make reasonable investment decisions after understanding the default behavior of Prosper.com loans.  Prosper loans default at about 20% per year.  You can clearly see this from the charts.  Pick your favorite month.  Look how high the curve has gone after the first year.  About 20%, eh?  Prosper loans default at about 20% per year, on the average, considering all Prosper loans.  There is considerable variation from month to month.  Look at the final chart, where the curves are slid to a common origin.  Just look at the vertical line labelled 390 days.  (That's 30 days after 360 days, because loan payments can't be 1 month late until you wait 30 days after.)  You will see curves cross that line anywhere from 18% to 26%.  (Some of the more recent months look like they will come in a little lower.)  That's how many loans went bad in the first year.  Pretty simple really.  Journalists seem to get it wrong time after time.  Somebody must be feedin' them bad info, eh?  Perhaps they just copy bad data from each other.

At the time of this writing, prosper.com has shut down due to some not fully specified regulatory problem.  Meanwhile, the ongoing loans still evolve, and the data is still available, so I will continue to update this charts.

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

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Be careful what you say to the judge.  It can get you into lots of trouble. 

On July 25, 2007, prosper.com issued a loan to "Oakland Gaerke" for $25,000.  (We know this from public bankrutpcy court records.)  A couple of payments were made, but then payments stopped, and the loan is now long overdue (by something like 9 months).

Six months later, on Jan 23, 2008 Mr. Gaerke entered a chapter 13 bankruptcy proceeding in the Northern district of Ohio bankruptcy court.  As part of that proceeding he filed complaints with the court claiming identity theft.  (Gaerke's amended complaint of Apr 29, 2008.)  He says his wife "Ashley Gaerke" took out the prosper loan (as well as a lot of other credit) without his knowledge.  He says he's not responsible for these loans, and he wants the court to let him off the hook.  (He wants the court to tell Prosper.com to go pound sand.)  There's also a divorce in process.  In short, this is now a complex mess.

Whether this is or is not identity theft is of great interest to prosper's lenders, because of prosper's identity theft guarantee.  Prosper guarantees that it will repurchase loans from lenders in cases of verified identity theft.  If this is identity theft, then lenders must be made whole.  If this is not identity theft, then maybe lenders get nothing. 

Prosper essentially stopped buying back such loans about a year ago.  Lenders wonder whether there has magically been no identity theft in the past year, or the cases are simply hidden in the obscurity of non-public facts and ignored by prosper.  There are very few cases where the facts become public.  This is a case where facts are public, so lenders are watching closely.

I don't know whether identity theft occurred or not.  I wasn't there.  I don't know who's telling the truth.  However I do want to delve into one small aspect of this mess: How prosper has chosen to respond.

As part of Mr. Gaerke's claim that the Prosper loan was identity theft, he says that Prosper never contacted him, and never verified his identity prior to originating the loan.  I would have expected Prosper to defend itself against this charge, producing or at least offering to produce records showing how and when the fellow was contacted and his identity verified prior to loan origination.  This verification is Prosper's duty, so I figured maybe they kept records, and could produce them.  Maybe sworn statements from the verifier person, or recordings of phone calls.  They didn't produce any of these things.  Here's what they did...

Prosper chose to deny that Prosper ever made a loan!

Prosper's answer was filed with the court on May 30, 2008, by Prosper's lawyers Patricia Fugee and Gregory Nuti.  The meat of the document says:

Loans in a total amount of $25,000.00 were extended to the Plaintiff by individual bidders using Prosper’s website (“Lenders”) and the funds were disbursed to the Plaintiff by Prosper through direct deposit to the joint checking account of Defendant, Ashley Gaerke, and the Plaintiff. Prosper acted as the Plaintiff’s authorized agent to procure loans in the total amount of $25,000.00 from various Lenders on behalf of the Plaintiff.  

By way of further answer, it is denied that Prosper loaned any money directly to the Plaintiff or Defendant, Ashley Gaerke.

They're claiming that Prosper never loaned money to Gaerke!  They're claiming that the Prosper members who bid on the loan (those folks Prosper calls "lenders") actually loaned the money to Gaerke, and Prosper only acted as an agent to procure these loans from "lenders".  In other words, they're effectively saying to the judge, "Hey, this guy has named the wrong defendant in this action.  We're not the right guys.  This guy  should have named the 50 lenders as defendants, not poor little us.  We're just the middleman."

I guess you'd call that a "technical defense".  Lawyer's soft shoe.  Instead of engaging on the issues, you find some techncal point that the plaintiff got wrong, like "He hasn't proved that I'm the guy who should answer for that."  There are several problems with this position that Prosper thru its lawyers Fugee and Nuti have taken.  The most blatant problem is that it isn't true.  This position is the exact opposite of rather clear language in written legal agreements between Prosper and its lender members.

Lets examine some of those legal agreements, so we'll know how Prosper actually works.  We can then compare that with Fugee and Nuti's statement above.

The most important agreement is called the Lender Registration Agreement (LRA).  It defines how Prosper's "lender" members and Prosper interact, and each parties roles.  Prosper has changed this agreement many times, but with a little digging, I believe I've found the version of the agreement that was in use mid-2007. 

We don't have to look far to find wha the LRA has to say about this issue.  It is so important that it is discussed in the very first paragraph at the top of page 1.

Note: Your role as a Prosper "lender" is that of a loan purchaser, and your rights and obligations as a purchaser or prospective purchaser of Prosper loans are set forth below. Although you are referred to in this Agreement and on the Prosper website as a "lender," you are not actually lending your money directly to Prosper borrowers, but are, instead, purchasing loans from Prosper.

Well that's pretty darn clear.  Prosper "lender" members buy the loans.  We don't lend the money to the borrower directly.  Us "lenders" just purchase them.  In case there's any ambiguity, they go on and explain who does the lending, and who sells the loans to us.

All loans originated through Prosper are made by Prosper Marketplace, Inc. from its own funds, and then sold by Prosper to the winning bidder or bidders on the listing.

Explicit.  Prosper makes the loans from its own funds, then sells 'em to us.  If that weren't explicit enough, they go on to tell us why it is done this way. 

Prosper is the originating lender for licensing and regulatory reasons and is licensed in all states where licensing is required. Prosper uses the term "lender" instead of "loan purchaser" for the sake of brevity and simplicity, and for the convenience of Prosper users who appropriately view Prosper as a marketplace for connecting individuals who wish to borrow money, with people who have money and the desire to fund loans to other individuals.

Ok, so not only is it done this way, but it has to be done this way, because of lending regulations.  It couldn't get much clearer than this. 

The next agreement of interest is the "promissory note".  Several of these are drafted for every loan that Prosper makes.  One contains the name of each "lender" member.  Prosper also changes the form of these documents from time to time, so I examined one from mid-2007.  The first three llines of the document tell the story.  Prosper writes:

Promissory Note
Borrower: xxxxxxx (Real name and address not displayed)
Lender: Prosper Marketplace, Inc. (Assigned to: xxxxxxx)

The Promissory note clearly identifies "Prosper Marketplace" as the lender, and goes on to say that the note has been assigned (ie sold) to the lender member.  (I've x'd out the names of the actual borrower and lender members.  Prosper has issued many thousands of these documents, and they all identify Prosper Marketplace as the lender.  This could not be more clear.

With these facts clear, how can it be that Prosper's lawyers have told the court the exact opposite?

If Prosper's statement to the court is truthful, then Prosper loans would appear to be in violation of various lending regulations, and Prosper would have acted in violation of its legal agreement with its "lender" members.  If on the other hand, Prosper's statement to the court is not truthful, then ... I don't want to say the word, but you get my drift.

In summary (and with apologies to Ricky Ricardo) :
Prosper, you got some 'splainin' to do!

Reference materials:
Documents that were filed with the bankruptcy court are available to the public via www.pacer.gov  I have copied here a few documents relevant to this discussion for your convenience..

Mr Gaerke's amended complaint 
Prosper's response to Gaerke's amended complaint 
Ms Gaerke's response to Gaerke's amended complaint 
Prosper LRA, circa mid-2007 

Prosper also filed an 'S1' with the Securities and Exchange commission on Oct 1, 2007, disclosing the Prosper loan process in great detail.  I haven't quoted it here, but on the matter at hand it is consistent with the LRA.  You can find the Prosper 'S1' at www.sec.gov .

Notes:
I have avoided mentioning the Prosper listing# or loan# or the borrower's Prosper screen name here, to comply with Prosper's wishes that borrower's screen names remain anonymous, in other words not be associated with the borrower's name. 

PS: I don't take credit for finding this.  I learned about it in an active online discussion about this loan among prosper lenders.

In early 2008, $735,000 of late prosper loans disappeared from lender's statements.  On 01/15/08, prosper promised monthly "supplementary statements" to lenders covering these loans.  Hasn't happened.  No statements have been produced.  By my count, Prosper.com is now 7 months late on delivery of these statements to lenders, on the status of OUR loans.

This is simply one example of a much larger problem.  Prosper management refuses to accept their responsibility to lenders.  Once loans go late, they don't lift a finger.  In this case, that includes not even telling lenders the status of collection efforts on these loans.

Shame.  Over and over again.  Shame.

For a more detailed explanation, see http://www.prospers.org/blogs/Fred93/2008/08/03/prosper_com_lender_statements_6_months_l

Prosper told us they would take legal action against the 68 late borrowers in this "legal test" group of loans.  Today, eight months after they started the "legal test", many of the defendants have not even been served (with legal papers initiating a suit).  We can tell that by observing the county court web sites, some of which display this information.  Judging from the filings we can observe, it looks like about half of the suits haven't been served yet, eight months after the program began.  You could never tell this by looking at statements provided by prosper, of course, because there are no statements, even tho they promised them!  There aren't even excuses!

Shame.   What a way to run a company.

Where do they get the chutzpah to act this way?

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org

Supplemental statements tracking $735,000 of loans were promised monthly, and are now 6 months overdue.

On 01/15/2008, Prosper.com sent an email message to many lenders, explaining that 68 very late loans were being moved to a new category, a "legal test".  In this test, Prosper would try taking legal action against very late borrowers, instead of just doing nothing.  I thought at the time that it was a good move. 

Prosper's 01/15/2008 email promised ...

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.

However, Prosper has never bothered to send lenders any of these promised supplemental statements!  $735,000 of loans have simply disappeared from lender's view.

That's right.  No statements.  No reporting.  Prosper has kept lenders completely in the dark on the status of these loans.  I figure January's promise of monthly statements should have produced one in  February, and another in March, April, May, June, and July.  That makes them now 6 months late. 

Fact is, with great effort lenders can track the status of some of these lawsuits.  This happens because many courts make some lawsuit status details public via their web sites.  (Not all courts make status available online, so we can't see the status of all of them, without travelling around to the various county courts, and checking the records manually.)  The visible status isn't pretty.  Most of the suits weren't filed until April.  Four months later, many of these suits have not even been served against the borrowers.  Among the suits that have been served, it appears that none has yet come to trial. 

It looks like the entire legal test has been horribly underfunded by Prosper.  Now seems more likely that it will be aborted rather than serve as a symbol of Prosper's strength and a deterrent to deadbeat borrowers.

Here's the August 1st update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

These curves show loans that are >1 month late, however, you can read them as "default curves" because almost all Prosper.com loans that go 1 month late move on to default.  See my discussion of Prosper's collections performance in earlier blog entries.

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Collections on late prosper.com loans are getting worse.  Prosper simply doesn't take  their responsibility to lenders seriously.  Along the way there have been words from Prosper saying they were going to improve this or that, but they've all been hollow.  Ding ding .. nobody's home.

Here's the latest data on collections performance, direct from prosper.com.  Most late Prosper loans are sent to the collection agency Amsher.  To keep things simple, I've graphed only Amsher's performance here.  I've shown the fraction of loans sent to Amsher that have been cured.  These numbers come directly from Prosper's web site, with no manipulation whatsoever.  Prosper breaks this statistic down into three categories, according to credit grade, and that's what you see in the graph.

Prosper switched to Amsher, and dumped a bunch of loans on them, on 2/23/08, so of course the fraction of those loans that Amsher had cured on that date was zero.  It took a couple of months for the stats to recover from that initial impulse, and to climb the learning curve, in other words learning how to collect Prosper loans.  Well, according to this data, the honymoon is over.  Since 6/1/08 Amsher's stats have been going down.

It wouldn't be so bad if there had ever been any good performance here, but Amsher never did anything good (according to the stats Prosper.com has published).

In fact, according to Prosper's stats, Amsher has never done as good as Penncro, the collection agency it replaced.  Now how the heck can that be?  In some of my earlier posts on this subject I've included a graph showing combined Penncro+Amsher performance.  This is the all-time performance of loans worked on by either or both.  This representation eliminates the startup impulse problem in the above graph.  However, it involves some manipulation of the data, which confuses some folk.  Here's an update on that graph:

This curve changes from blue to red when the handoff from Penncro to Amsher occurred.  As you can see, Penncro got up to over 17% cured, and Amsher has been mostly downhill from there.  As the number of loans handled by Amsher has increased, their lower cure rate has started really pulling down the combined curve.  The explanation of how the data is combined can be found here.

How (expletive deleted) could things be this bad?  Prosper management has made comments over the past few months about how collection statistics are improving.  The stats Prosper.com gives us, on the other hand, are getting worse.  What's the deal?

I put this question to Prosper management in mid-June.  They said they'd have to look into the numbers and get back to me.  I'm sure they ment to do just that, but no answers have been forthcoming.  Perhaps higher priorities intervened.  Ain't it always the way.

One possibility is that the numbers Prosper displays on the web site may be faulty.  It wouldn't be the first time.  Prosper used to display a statistic they called "net collected".  There's still a row with this label on the web site, but they no longer fill in the numbers.  I used to graph this statistic vs time, and as a result, I knew it was ... well ... I suppose the polite word is "bogus".  This was discussed at length in the old prosper.com forum.  Here's a chart I made about a year ago:

The red curve jerked up and down faster than was physically possible.  From that I knew it was bogus.  Prosper never did admit there was a problem.  They just deleted the statistic from their web site.  Well maybe that is an admission.

With that precedent in mind, is it possible that the collection statistics they provide for us now are just wrong?  I don't know.  I look forward to some feedback from inside Prosper.

If the numbers correctly reflect collection activity, then how the hell could it be that they are so horrible?  When a loan goes 1 month late, I'd expect it to recover a significant fraction of the time.  Amsher's 6% is not my idea of a significant fraction of the time.  In fact, I'd expect more than 6% of 1-month-late loans to recover all by themselves, without any collection activity at all. 

Something is horribly wrong.

Nobody seems to be doing anything about it.  Seems like nobody cares.

Prosper, you have forsaken us (lenders).

See my prior writings on this subject, including:
Written 05/06/07: Collections is broken
Written 05/04/08: Collections is not improving