After online riot Prosper restricts some lenders, bans others from forums

Last month Matt wrote a post about how difficult it is to make money on Prosper by taking out a Prosper loan and then lending that money on Prosper. Banks make money on the spread between the interest rates they pay and the interest rates they receive, but for a variety of reasons it is very difficult for lenders on Prosper to achieve positive returns this way. That hasn't stopped thousands of people from trying, however. Many of those lenders are now late or defaulting on loans. According to a number crunch by Rateladder in February, 133 borrowers who are also lenders (nicknamed blenders) were late on their loans representing over 5% of all blenders.

As reported by WiseClerk and Rateladder, there has been an uprising in the official Prosper forums over the last couple of days over this issue. Lenders have asked repeatedly for Prosper to force these blenders to repay their own loans with the payments they receive from their borrowers. The issue became heated in the forums over the last two weeks as one of Prosper's top lenders, who goes by the screen name leporello, called Prosper's move "financially idiotic" and started a near riot in the forums. He was eventually banned from the forums but his auto signature reads, "After $100K, I have stopped lending. Why? Prosper doesn't care about lenders."

Yesterday, Prosper responded to the issue by putting the accounts of late blenders on hold. This means they cannot place new bids and must contact Prosper before withdrawing funds. Here's the official announcement:

"Thank you for raising the issue of late Lender-Borrowers to us.

As of today, all accounts of Lender-Borrowers who are 30+ days past due have been put on hold. This means these Lender-Borrowers won’t be able to place bids or send out group invitations on Prosper until their loans are brought current.

By the end of this year, we expect to have this process automated, but until then we will manually put 30+ days past due delinquent Lender-Borrower accounts on hold.

We are exploring whether and under what conditions state law will allow us to automatically apply lender funds if the lender is a delinquent borrower. We also expect to have an answer to that question by the end of the year.

Beginning with our next site update, borrowers who are also Prosper lenders will be able to apply their Prosper balances to their existing loans themselves, rather than have to move the money to their bank account first."

A later clarification added this:

"At the present time, we feel we cannot keep a person from their money. However, all transfers on held accounts must be initiated by Prosper. It’s the same issue as the state law conditions: we are exploring whether state law allows us to truly hold funds or apply them to delinquent loans. I’m sorry if this is an unsatisfying answer. As I said above, we expect to have an answer to this issue by the end of the year. As for group leaders who are also delinquent on their loans, they will also be addressed in the automated solution we are working on for year-end."

The reaction to this announcement was mixed. Ran-ran called it, "This is the best news I have heard in a long time." Another lender, Ira01, was disappointed on how long it would take, "Being a lawyer, I certainly understand Prosper's need to research the legalities involved...however, this should NOT take another 4.5 months."

This is not the first time top lenders have been dissatisfied with Prosper. Fred93 is a top lender with over $700,000 invested. He has soured on Prosper and has published a couple open letters to Prosper (1, 2). Months ago he wrote, "Sadly, I have to report that my disappointment with Prosper’s management has continued to increase month after month, and my enthusiasm has continued to decline. I’m pretty sure that the majority of things that are wrong can be fixed. However my confidence that Prosper’s management will fix them has simply declined with time as I’ve witnessed their response."

Others think the controversy was unwarranted and remain optimistic about the potential returns on Prosper. Rgf said, "The only reason I'm pro-Prosper, is the hope that it is possible to achieve stable 10% returns over time. This is an amazingly tantalizing prospect. There is no other investment opportunity out there that gives a stable 10%. The stock market gives 10% long term, but with gut-wrenching volatility...In general, I've become tired and perhaps somewhat defensive of these forums becoming a litany of complaints against Prosper. I sometimes think people are not realizing the diversification potential at stake here. I really think this is an amazing opportunity, a totally new asset class."

Lending Club, the only active competitor to Prosper in the U.S., does not allow users to borrow and lend at the same time.