Prosper.com, The Only P2P Player on the Beltway?

If anyone has dealt with the brunt of regulation on the P2P lending space, it’s Prosper. They’ve been through all kinds of regulatory hurdles, and as mentioned earlier, are once again in a quiet period after a brief re-launch last month.

I was surprised to come across a lobbying report filed by their firm, Podesta Group, a major player in the Beltway scene showing a $60,000 expenditure on lobbying for first quarter of 2009.

What surprised me most is the figure--$60,000 over three months—not an outrageous figure, but remarkable, as they appear to be the only P2P lender that has any lobbyist presence in DC. Why so much when nobody else in the business seems to think it's a worthwhile expense?

As a former lobbyist myself (on the state and local level), I would have actually expected all of these firms to be lobbying, but when I checked in with Lending Club and Pertuity Direct, I was told, respectively “no comment” and “We are currently not supporting any active lobbying on behalf of the P2P space. Not sure what Prosper is doing.”

Most companies seeking changes to improve their business’ regulatory environment have a presence in DC somehow. Often this is through a trade association or contracted firm such as Podesta. The lobbyists for the agency would be working with the agencies and officials that would be regulating their business space, in this case, the Commerce Department, SEC, and any Congressional committees that deal with banking and finance.

However, as I read through the Podesta Group’s report (publicly available at http://www.opensecrets.org/), I see that Prosper hasn’t been lobbying the expected committees and agencies alone, but also lobbying the Exec. Director to the Congressional Black Caucus, and the DOL Employment Standards Administration , the Secretary of Labor’s office, and in the House of Representatives, the Budget, Appropriations and Oversight committees. An interesting combination for sure.

Why Appropriations, Budget and Labor? I can’t help but wonder if Prosper is working on a new initiative? As Prosper is still in a quiet period, so they aren’t answering questions yet, but once they’ve re-launched, I for one will be excited to hear what they’ve got in the works.

Jessica Ward is a freelance writer and blogger based in Seattle. She writes about finance, business and family. You can follow her on Twitter as @jessc098 or visit her Web sites at www.jessicaward.me or www.pennywisefamily.blogspot.com.

PhD candidate publishes empirical analysis of Prosper

Sanjeev Kumar, a Doctoral Candidate at the University of Michigan, has written an interesting paper about Prosper called Bank of One: Empirical Analysis of Peer to Peer Financial Marketplace. He just presented the paper at Americas' Conference on Information Systems and has made a copy of the PowerPoint presentation here. It's a fascinating academic study on Prosper and may be the first of it's kind. Here is the paper's abstract:

Peer to peer financial marketplaces provide a platform for individual lenders and borrowers to interact and transact. These marketplaces disintermediate the traditional financial services business models. In this exploratory paper we study the operation and effectiveness of one such marketplace: Prosper.com. We analyze six months of lender, borrower and loan repayment data to answer preliminary research questions about lender behavior, market effectiveness and antecedents of loan default. We show that lenders mostly behave rationally and charge appropriate risk premiums for antecedents of loan default. We also show that there are mismatches between risk premiums charged and relative importance of factors that drive loan default. We then explore the dynamic process of lenders adjusting their lending strategies to reduce these mismatches. We analyze the effectiveness of the group reputation used in the marketplace and show that it is not effective in promoting good borrower behavior. Our analysis provides a base for future research in this exciting and evolving context. Our results provide directions for practice applications as well as future research in design of financial marketplaces, investing and risk mitigation strategies and improving the effectiveness of peer-to-peer financial marketplaces.

Kumar attempts to answer the following research questions:

• Do lenders follow rational lending practices while lending on the marketplace? That is, what factors affect their lending strategy and whether they are in line with rational expectations?
• Do lenders follow efficient lending practices while lending on the marketplace? That is, what are the antecedents of loan default and whether lenders charge appropriate risk premiums for factors that drive loan defaults?
• What is the impact of group reputation systems on borrower and lender behavior?
• Is the marketplace evolving to achieve higher lending efficiency? That is, are lenders adjusting their lending strategies and charging appropriate risk premiums as more information becomes available on antecedents of loan defaults and the relative importance of these factors that drive loan defaults?

Here's a look at a portion of his results:

The results are certainly interesting. One thing that catches my eye is the homeowner determination. Based on Matt's analysis, homeowners are actually a greater risk of default than non-homeowners. Yet, according to the dataset Kumar used, being a homeowner is not a significant variable but Prosper lenders bid down homeowner loans. A careful look at Kumar's dataset could help increase returns for lenders.

Later this week I intend to provide a deeper look at Kumar's paper but for now check out his PowerPoint.