Thursday, January 10, 2008

Will double fees reduce the number of borrowers on Prosper?

As was reported last week, Prosper increased origination fees for borrowers for new loans initiated after January 4th. Prosper announced it on their blog as a pricing change and a few blogs (including us) reported the change. For us it was largely overshadowed by the improvement in collections which Prosper also announced at the same time.

It wasn't until I read the article about the rate increase on Netbanker that I realized just how significant this rate increase is. Borrower origination fees have doubled. From Netbanker:

"As noted in our recent research report on the P2P lending market (here), the exchanges need to boost revenues to remain viable. Even with scale, a 1% borrower fee and 1% servicing fee just doesn't provide enough revenue with the relatively small loan sizes currently being funded.

For example, using Prosper's previous pricing on a typical $7,000 loan, it would earn about $130 in the first year, then another $50 for the remaining two years of the loan (see note 1), for a maximum of $230 in lifetime revenues per loan.

So until loan sizes increase dramatically as secured notes become more common, Prosper has raised its prices for the core portion of its loan demand, the alt-prime and subprime portion. The company left its superprime, class AA price alone because it competes with banks and credit unions for this type of borrower.

...most loan origination fees increased by 1 point, although C and D loans were increased 2 points. Looking at the company's mix of business during the first half of 2007, the new pricing would have doubled its loan origination revenue from about $500,000 to just over $1 million. The weighted average fee under the prior pricing was 1.2%, compared to 2.4% under the new formula."

Matt's article on how Prosper makes money gives us some insight on what Prosper's expenses and revenue might be. Prosper has also raised $40 million in venture capital. How much have they burned through? Do they need to raise fees?

How do Prosper borrowers feel about the rate increase? Why has the Prosper community, which is normally very critical of Prosper missteps, not complained about the change? Is this a natural evolution as P2P lending matures? (Lending Club has raised lending rates .5% but the money goes to lenders, not Lending Club.) Will this, over time, reduce the number of borrowers who are funded on Prosper? Will it force lenders to reduce their rates in order to make up the difference? Lots of questions and few answers...

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