Banker Invests 1 Million US$ VC Money into Prosper

Nigel Morris, co-founder of Capital One, has invested 1 million US$ into via his venture capital company QED Investors.

The investment comes in form of a convertible promissory note for the amount of 1 million US$, which is due in one year and carries an interest rate of 15%. QED Investors may elect to convert the note into shares of Prosper’s preferred stock.

VC funding for Prosper now totals 41 million US$. Nigel Morris joins Prosper’s board of directors.

(via, sources press release & other)

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

First Note up for Trade on Trading Platform picked up speed again fast after the relaunch. As of today there are already more than 500 loan listings open for bidding. 5 loans already originated, despite the short timespan since re-opening.

Today I saw the first note for resale on the note trading platform. It is sold in auction mode where lenders can bid (sealed bids) during a seven days auction. Currently there are four bids. Would the auction end right now, then the buyer would purchase the note at a steep discount (40.4 Cents on the dollar). But I am sure bid prices will rise fast when more lenders discover that there is now activity on Prosper’s secondary market.

What changed on Prosper?

Following up on my last post here are the largest operational changes  at the new

  1. Minimum credit score requirement is now 640 (up from 520)
  2. Prosper calculates expected defaults (‘loss rate’) now by using the two factors: the credit score obtained by an external agency and the internal Prosper score (in the past the fore-casted value was based only on external data and way to low)
  3. There is a hard bid floor (a minimum interest rate set by Prosper) on each loan listing
    The bid floor is the minimum yield a lender can bid on a listing. It’s not possible to bid any lower. This also affects the minimum rate a borrower can possibly receive.The bid floor for each listing is calculated by adding the national average 3yr CD rate to the minimum estimated loss rate assigned to each Prosper Rating. For example, a B-rated listing with a minimum estimated loss rate of 4.0% is added to a national average CD rate of 2.27%*, resulting in a bid floor of 6.27%.
  4. Minimum bid amount is now 25 US$, instead of 50 US$
  5. There are several legal changes affecting lenders (e.g. ‘In the unlikely event that we receive payments on the corresponding borrower loans relating to your Notes after the final maturity date, you will not receive payments on your Notes after maturity.‘ – this seems to mean that, if a late borrower who paid more than a year after the date the loan was supposed to be paid back in full, the lender is not credited that amount – but check yourself I might be misinterpreting the meaning)

New Lenders should read the SEC prospectus. Some disclosures might make them wary. Quotes:

  • You assume the risk that information provided by borrowers may be intentionally false.
  • Status information given on loans between inception and March 31, 2009 shows 31.3% of loans had been at least 15 days late at least once, and 20.1% had defaulted.
  • The fact that Prosper will have the exclusive right and ability to investigate claims of identity theft in the origination of loans creates a significant conflict of interest between Prosper and the lender members

That might we necessary legal disclaimers – but if Prosper performs in future like in the past, the risk for lenders will be high and by the prospectus Prosper will exclude liability for all risks spelled out.

I read that Prosper makes all lenders re-sign 6 new legal agreements.

Prosper Reopens with SEC Approval – Starts Secondary Market has reopened – now with the long sought approval of the SEC which was granted last Friday. In his blog statement “We mean it this time!” CEO Chris Larsen sheds light on what was delaying SEC approval. It was auction bidding on loan requests:

… the first Internet auction-based P2P loans marketplace and trading platform to have its SEC registration declared effective, which means the SEC is permitting Prosper to facilitate auctions in a way that has never been done before.

Selling securities by auction is not new and critical to greater efficiency in fair price discovery for both sides of the transaction. However, the SEC has never permitted Wall Street investment banks or any other institution to run a true auction where investors could make an irrevocable bid that committed funds prior to the establishment of a final rate….

Prosper introduces a secondary market. The internet auction priced trading platform for Prosper Notes is operated by FolioFN (like Lending Club’s Note Trading platform). Only loans (‘notes’) issued after July 13th can be traded.

At the moment lenders from California, Colorado, Delaware, Georgia, Illinois, Minnesota, Montana, Nevada, New York, South Carolina, South Dakota, Utah, Wisconsin and Wyoming can use Prosper, if they fulfill state set financial suitability requirements. Prosper is open to borrowers from almost all states.

With the PR Prosper will likely build up a large selection of loan listings again fast (as of now there are 10). The interesting question will be if Prosper lenders will continue to have faith investing via Prosper after extremely high default rates and low collection results in the past. Furthermore disappointed (former) long term lenders are critisizing risks for lenders embedded in the latest SEC filing.

With the likely press coverage of the relaunch all p2p lending companies in the US can expect to see a rise in traffic.