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. Continue reading

Prosper faces class action lawsuit; pays 1M US$ in fines to states

The SEC cease and desist order against Prosper offered the legal arguments on a plate, now the first class action lawsuit filed against Prosper Marketplace Inc. uses the SEC filing as exhibit A to state it’s case. Regarding numbers and affected lenders the lawsuit by The Rosen Law Firm, New York, states

“…As of October, 2008 approx. $21.7 million of loan notes purchased by Class Action members have become worthless because the borrowers did not pay the loans to Prosper. Additional loan notes will become worthless as more loans are charged off as uncollectible.

there are tens of thousands, and perhaps hundreds of thousands of, loan note purchasers that are class action members…”

Prosper is required to file a written response within 30 days. The first court date is set for May 1st, 2009.

On the same issue – selling unregistered securities – but in an otherwise unrelated case Prosper agreed to pay a 1 million US$ fine in a settlement to the states to avoid individual states suing against Prosper. More information on that in the press release of the North American Securities Administrators Association (NASAA).
This is somewhat surprising to me as Prosper did obtain licenses in over 25 states and conducted lending under those, before it switched to the model using the WebBank. (see ‘Prosper riding the state-by-state roller coaster‘ and ‘Prosper goes national with 36 percent max interest rate‘). The same states that granted the licenses now wanting to sue Prosper?

Last week Zopa’s CEO Giles Andrews commented that regulation issue were the reason why Zopa did not use it’s UK model when it entered the US market.

While Lending Club has completed SEC registration and therefore is in compliance with the rules of the SEC, it might still face some risks. An article of the Oregonian on the NASAA settlement states:

“Oregon regulators also are investigating, owned by Atlanta-based 3 Guys in a Garage, and is currently reviewing a registration request by Sunnyvale, Calif.-based Lending Club, Anselm said.”

Prosper loses several lawsuits against non-payers

One of the downsides of p2p lending service are high default rates. Results from collection attempts are low.

In an attempt to test alternatives to the existing collection process Prosper in January selected 66 cases of nonpaying borrowers and turned them over to the law firm Hunt & Henriques to pursue these cases in court.

Fred 93, one of the lenders on these loans researched the status of the court cases himself, dissatisfied that Prosper did not inform him on the status, which he says Prosper initially promised to do monthly.

According to Fred93’s findings, so far lost 6 cases and won 1 case.

Reports on Prosper Days 2008

Prosper Days 2008 took place Monday and Tuesday. Judging from the impressions of attending lenders, who blogged about it, it was a well organised event, but for seasoned lenders there were few news announced. No news about the long awaited secondary market. One blogger sees the Bidding via API function as highlight. Further news is that Prosper will start suing borrowers who defaulted on their loans. This could improve results in the collection process, where effiency is low. Explanations of Prosper about which changes were tested in the collection process were appreciated
A good improvement will be Prosper's plan to change payment dates. So far the date a payment is due has been dependent on the initiation date of the loan. Soon payment dates will be matched with borrowers pay day. I am sure this will reduce lates, but I do wonder why such an obvious and easy change was not implemented much earlier. Some of the international sites from inception took into consideration at which time of the month the borrowers are likely to be liquid when setting payment dates.

I hope Prosper will publish videos of the session on their website, like they did with the Prosper Days 2007.