From the Prosper September 2007 Newsletter:

“Prosper is pleased to introduce our new VP of Operations, Doug Fuller. Doug brings 25 years of experience to the Prosper team and will be instrumental in helping our team crack down on delinquencies and ramp up our collections efforts. We are excited to have Doug on board; he will help us to continually make Prosper a safer and more reliable marketplace for all users. Doug is a huge asset to the Prosper team and we look forward to updating you on his systemic improvements in Prosper operations.”

This sounds like good news, hopefully it will translate into results as well. Penncro collection rates on Prosper have gone up recently from 12%ish to 13%ish. Hopefully the trend is up.

Just got an email today that Prosper will be eliminating all group rewards for group leaders on future loans. I think this is a huge step in the right direction since under the old format groups were not providing any useful functionality at all except to increase costs for Prosper, borrowers and lenders.

This should actually increase the average ROI for lenders on all future loans and eliminate any sort of ponzi schemes based on community payments and group ratings. The email as originally received is copy/pasted below.

” At Prosper, we have been listening to your feedback regarding groups and group leader rewards.

The original philosophy behind Prosper Groups was to enable borrowers in close-knit communities to leverage the reputation and peer pressure of their group to attract more bids from lenders, resulting in potentially lower interest rates for borrowers, and lower default rates for lenders. We have found, after nearly two years of experience, that the strongest groups are comprised of close networks of friends and associates, where compensation is not the dominant motivation for the group leader’s services.

As a result, we are making changes to Prosper Groups. In the next month, Prosper will discontinue payment rewards on new loans for group leaders. Group leaders will continue to earn payment rewards on all eligible loans originating before the change. Group leaders can also receive referral rewards for referring borrowers or lenders to Prosper under our Referral Program.

We hope this change will encourage group leaders to grow their groups by inviting new members from their pre-existing social networks, turning Prosper Groups into a more powerful community development tool and making Prosper simpler for both borrowers and lenders.”

A few people have inquired about how the “Consensus Rating” is being generated on the Listing Picker page under Lending Strategies. The idea behind the Listing Picker is to identify listings bid on by lenders who have good estimated ROIs. The more lenders with good ROIs the higher the consensus rating becomes.

The formula that generates consensus ratings is as follows: Look for all lenders with an average portfolio age of greater then 4 months on a listing. If there are more then 3 such lenders then get the average estimated ROI of these lenders. Only listings that have an average estimated ROI of > 5% will be shown on the Listing Picker page.

Qualifications for a lender to be included in generating the ratings are as follows:
1) Portfolio age weighted of greater then 4months.
2) 100 Loans made or $5000 invested

Consensus Rating Breakdown:

0 Stars = 5% - 6% Avg. Estimated ROI
1 Stars = 6% - 7% Avg. Estimated ROI
2 Stars = 7% - 8% Avg. Estimated ROI
3 Stars = 8% - 9% Avg. Estimated ROI
4 Stars = 9% - 10% Avg. Estimated ROI
5 Stars = 10%+ Avg. Estimated ROI

Definitely don’t use this tool blindly to place bids, but I find it helpful for quickly sifting through the thousands of listings on Prosper.

So I logged into my Prosper account today and found that my standing order had actually won a bid today. I have had this standing order running for 3 months now and it has only placed 5 bids with this the only winning one. This is telling me that either the listing quality on Prosper has increased recently or lenders are less willing to lend out money now.

Digging a little deeper we can see that Borrower/Lender Ratio is creeping up and the amount of loans being funded has been dropping off since peaking in April 2007

From a risk/reward perspective I think this is a positive for active lenders.

I was looking through the forums today and decided to write a quick guide for new lenders. Hopefully this will save new lenders time and money.

1) Don’t invest in HR rated loans.

You will lose money in them. Here is a month by month breakdown of HR loans and delinquency rates. HR Delinquency Rates

2) Do not fall for sob stories, pretty pictures or empty promises.

This one is extremely hard to do. I’m guilty of this on multiple occasions. If you ever need a reminder of why just look at these 2 loans I made Listing 3151, Listing 4038.

3) Do a lot of research before you start investing. If you found this website then you are on the right track. Another nice place for information is the Prosper Forums.

4) The Experian Default Rates on Prosper are best guess estimates so take them with a grain of salt.

5) Set up minimum interest rates for every credit grade you want to bid on and stick to them.

This means you should not chase good loans down to ridiculously low interest rates. Whatever value there was in the loan would evaporate if the loan gets bid down too low. A good loan might even turn into a bad loan once the rate drops to low.

6) Make sure you account for Prosper loan servicing fees and Group fees when you bid on a listing.

7) If it’s too good to be true… Don’t bid on it.

e.g. AA credit, no delinquencies, 0% DTI, max interest rate and automatic funding.

8) Take endorsements and large bids from group leaders with a grain of salt.

If you see a large bid by a borrower’s group leader initially don’t take it as a guarantee that the borrower will pay. Often times a group leader will bid a large chunk initially on a loan in order to attract other lenders to bid on the loan. The large initial bid made by the group leader will fall off the listing once enough lenders have been sucked in. (pump and dump? not quite but close)

9) Check for inconsistencies when you are bidding on a listing.

Check to see that the story does not change from a previous listing they have made. Did the borrower change the reason for the loan from paying the rent to buying a car?

Check to see that if the numbers make sense. If the borrower says he/she makes $3000 extra a month but needs a 3 year loan for $1000 something is wrong.

10) Start investing in small amounts. You are bound to make errors at the beginning while your learning so make those losses small.

I was going through some of my old saved searches for Prosper and noticed that they were returning a lot of results. I’m not sure whether the quality of the listings have improved or that lender’s have gotten smarter. Listings are not getting bid down to absurdly low rates now and are starting to look enticing.

On a side note, I was glancing over the Penncro collection rates for delinquent loans on Prosper and they haven’t changed much since May. First month recovery rates have gone up from 7.8% to 8.08%. Second month recovery rates have gone down from 2.79% to 2.49% and 3 month+ recovery rates have gone from 2.01% to 2.05%. Basically collection has not gotten better or worse in 2 months, hopefully FirstSource will have better recovery rates once enough data is available.