Wednesday, September 5, 2007

Prosper Eliminates Group Leader Rewards

Prosper announced today a major change to their group structure.

Here is the text of Prosper's announcement:

"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.

For more details on these changes, please visit our Group Changes Frequently Asked Questions (FAQ).

Thank you for helping us become the Internet’s leading community lending site."

Lenders have been asking for this change for a long time. The reaction to the news on the Prosper forums was very supportive of the change. A lender who goes by FitzND said "what a great change", while Loan Chimp said HALLELUJAH!! in big bold blue letters.

There are several reasons why lenders did not like the prior group structure. One complaint was that they earned up to 2% of the loan payments for doing something that didn't add overall value to the loan. A second complaint was that some lenders would "pump and dump" loans. They would aggressively promote the loans before they funded, but do little to help keep the loan current other than making some early community payments to make their group rating look better than it really was. Several lenders described the group leaders' promotion of poor quality loans as "putting lipstick on a pig." Some even worried that unscrupulous group leaders might try to steal someone's identity, although no actual instances of that have been alleged or reported.

Overall, this is a welcome and sensible change. Groups will continue to exist on Prosper, but with this change group leadership will be on a 100% voluntary basis. Prosper will no longer have group leaders whose sole motivation is turning a quick profit from members of their group.

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