Thursday, July 5, 2007

Prosper warns lenders of high risk credit grades

Prosperousland points out an interesting change in the bidding page for the riskiest credit grades. When you click to bid on E and HR credit grade loans you are now greeted with a large banner - Warning: Very low credit grade.


The disclaimer shows that E borrowers with 2 or fewer delinquent accounts have a default rate of 9.2% and E borrowers with 3 or more delinquent accounts have a default rate of 35.3%. High risk borrowers with 2 or fewer delinquent accounts have a default rate of 17.5% and high risk borrowers with 3 or more delinquent accounts have a default rate of 52.1%. This data is for loans with origination dates of Jun-Nov 2006 and as of Jan 2007.

There have been complaints in the forums that many lenders, especially new lenders, do not fully understand just how risky HR and E credit grades are. A
lender who goes by the username thisguy has been the most vocal proponent of warning new lenders about the risk associated with E and HR borrowers. He has posted several messages such as this one, "If nothing else I still think there should be a 30 day ban from day 1 thru 30 of your lending life here where you are banned from bidding on HRs - then at least you will have had some time to build up your knowledge base, and see the 'reality' of the site." Other veteran leaders agree. In an open letter to Prosper in April Fred93, one of Prosper's largest lenders, accused Prosper of misleading lenders about potential returns and default rates.

This move by Prosper appears to be an attempt to respond to the criticism. It helps increase visibility of the likelihood of default on E and HR loans and will help new lenders fully understand the risk associated with lower credit grades.

While I think this is a great move for Prosper, it is also likely to make it harder for E and HR borrowers to get loans. As I mentioned in an earlier article, nearly 7 of 10 listings are from E and HR borrowers but very few of them get funded. Six months ago lenders aggressively funded low credit grade loans, but they have backed off due to the high default rate.

Analyzing the data using Prosper's Marketplace Performance, it appears that Prosper presented the most brutally honest, worse possible data. It also appears they included the rate adjustments in the default amount to come up with their percentages. If you move the range of dates forward or back the default rate gets slightly better or stays about the same.

2 comments:

thisguy said...

In response to: "While I think this is a great move for Prosper, it is also likely to make it harder for E and HR borrowers to get loans. As I mentioned in an earlier article, nearly 7 of 10 listings are from E and HR borrowers but very few of them get funded."

The answer is: not everyone deserves a loan. Even the very respected StaciM of EverydayPeople has said this numerous times in numerous posts, and she is one of the GLs who gives hard luck cases 2nd/3rd/4th chances.

To those in rate capped states, I feel their pain. To those whose credit is so poor no bank will touch them with 100 foot pole, and expect lenders here to take the risk - no sorry. However there is a place here for borrowers who a bank won't touch with a 2 foot pole... thats the middle ground which Prosper is made for, missed by the banking system's 'hard and fast' rules but just a few points away from a higher grade or a few months away from achieving a 'length' of credit history that banks would than magically say 'you are now worthy of a loan' - thats the niche Prosper can fill and truly generate nice ROI for lenders.

80% of listings on Prosper are borrowers who don't deserve a loan - its as simple as that. Not at 29% risk premium at least.

Matt said...

I think that move will help new lenders. I think a lot of new lenders jump in without really understanding the risk at the low end of the credit grades. There is a really huge difference between a D and an HR. thisguy - I agree with most of your comments. A lot of these HR borrowers may be better off not getting the funding because in many cases it digs them that much deeper into a hole they may not be able to dig out of.