Prosper’s Legal Collection Test Result Fail Expectations

Prosper has published a review of the results of a legal collection test. In November 2007, Prosper had selected 74 loans with an outstanding principal balance of approx. 704,000 US$ to conduct a test for a legal collection strategy instead of including them in a debt sale (which at that time was the usual Prosper procedure for bad debt).

The cases were handed over to the law firm Hunt & Henriques.

Since then there was none or little official communication about the progress. Relying on other sources, reported last year that several of lawsuits in these cases were lost.

The new blog post by Prosper describes in detail which steps were undertaken and what results the measures yielded. The only step that can be counted as somewhat successful was the pre-legal phase of letters threatening lawsuits which recovered about 40,000 US$ payments. 66 accounts then went into the legal process.

Surprisingly 16 cases (24%) had to be closed because the debtor moved out of state (3) or Prosper was unable to obtain service.
On a sidenote: Interested parties have raised the questions why Prosper did not apply to the court to allow service by publication, which seem to legal and often used in California as was told. In this case, after other measures failed the plaintiff runs an classified ad in a newspaper. It does not matter if the defendant actually sees this newspaper ad.

The remaining 50 cases further dwindled when Prosper deducted cases with bankruptcies and lowered credit scores which it deemed not worthwhile.

To sum it up: Aside from the pre-legal phase the legal test failed the expectation of Prosper and the lenders. But Doug Fuller of still thinks, the effort was worth it for the future

At this point, I have no expectation that this legal test is going to be the financial success that I had predicted. However, there is still value in getting the courts used to dealing with the enforcement of peer-to-peer loans.

My conclusions from this:

  • It took Prosper surprisingly long to realize (or admit) that the legal test was a failure (at least from the financial standpoint)
  • It is vital for P2P lending service to ensure that the validation process of the borrower’s identity and address bears quality
  • Furthermore so far p2p lending services concentrate of verifying the address of the borrower at the moment of application. The results above show that equal thoughts must be given in implementing processes to keep the borrower address on file up to date during the loan term
  • On the US market homeownership (even if verified), should maybe not be seen by lenders as a factor that reduces risk in an unsecured p2p lending loan
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