Pennsylvania borrowers avoid Prosper

If you are a lender on Prosper you can bid on loans from any state. The story is much different for borrowers. Each state has a different maximum authorized interest rate which can be found on the Prosper state licenses and lending limits chart. This has slowed the growth of peer to peer lending and angered borrowers from rate capped states.

Pennsylvania, for example, is the sixth most populous state with over 12 million people. Based on their state lending laws, Prosper only allows loans to borrowers residing in Pennsylvania at 6% and below. Rather than helping borrowers get a good interest rate the practical effect of this legislation has been to prevent borrowers from obtaining a loan. According to LendingStat's loan breakdown by state, only 21 loans have been made to Pennsylvania borrowers ranking them a distant #42 despite their large population. Almost all of these 21 loans are for the minimum loan amount - $1,000.

Pennsylvania's Pittsburgh Post Gazette interviewed Prosper founder Chris Larsen and published an article about the loan caps and Prosper in today's paper - Peer-to-peer lending sites a growing presence on the Web. Here's the excerpt dealing with Pennsylvania's rate cap:

"For Prosper.com, business has been hampered so far in Pennsylvania by a state statute that sets a maximum interest rate of 6 percent annually on loans of less than $50,000. That makes it hard for Pennsylvania borrowers to attract lenders on the site, Mr. Larsen said.

State and federal laws have carved out exemptions that allow banks and other entities in the state to charge more than 6 percent, but Pennsylvania regulators are still determining whether Prosper.com qualifies.

'We're trying to work with regulators, but it takes time,' Mr. Larsen said.

CircleLending said the 6 percent ceiling 'has not come up as an issue' because lenders know borrowers and are more interested in helping out than making a hefty return.

The Pennsylvania Department of Banking had little to say about the peer-to-peer lending business, other than the agency has noticed significant growth recently.

Officials are examining whether this new type of lending operation should be required to be licensed in the state, spokeswoman Heather Tyler said last week.

For now, she said, 'As always, the banking department urges consumers to use caution and do their homework in selecting a financial service provider.'"

The Pennsylvania loan cap has frustrated many borrowers who have vented in the forums. Borrowers have asked, "Is it possible to get a loan in PA?" Another borrower, Gibsound, started a thread called Pennsylvanians against PA STATE CAP of 6%. He said, "Now don't get me wrong. I love Pennsylvania. However I don't like the state cap of 6%." Jack Talalai who is active on the Prosper forums and works in Pennsylvania's banking industry explained the legislation behind the rate caps is based on the Loan Interest and Protection Law. From the tone of borrowers, it looks like they are tired of being 'protected'.

Update (4/15/2008): Prosper raised the rate cap for all states to 36%
Update (9/2008): Pennsylvania lenders booted from Prosper

Facebook, Lending Club and Microsoft

A little over a month ago TechCrunch made an argument that Facebook could be the next Microsoft. I thought it was an overly bold headline and I countered with an article of my own - Why Facebook is NOT the next Microsoft: Lending Club example. Peer to peer lending through Lending Club is only available to Facebook users.

Wired has just published a glowing article about Facebook that makes the same Microsoft comparison - How Mark Zuckerberg Turned Facebook Into the Web's Hottest Platform.

"And by turning itself into a platform for new applications, Facebook has launched a whole new branch of the software development industry, just like Bill Gates did with MS-DOS in the 1980s. By allowing developers to charge for their wares or collect the advertising revenue they generate, Zuckerberg set up a system for every programmer to get paid for their efforts. Now venture capitalists like Bay Partners are scrambling to fund almost anyone who has an idea for a Facebook application."

According to the article, Facebook turned down a $1 billion dollar from Yahoo. I've heard the claim before but not the details:

"...Zuckerberg disagreed, but when Yahoo came calling with a bid of $1 billion in cash, the pressure became too much. He relented in July, verbally agreeing to sell Facebook to Yahoo. Strategically, it seemed like a good match. Yahoo had hundreds of millions of users, but its foray into social networking was struggling. Facebook had cool tools and was looking for a mass audience.

The timing, however, couldn't have been worse. In the days after Zuckerberg agreed to sell, Yahoo announced it was projecting slower sales and earnings growth, and that the launch of its new advertising platform would be delayed. Its stock price plunged 22 percent overnight. Terry Semel, Yahoo's CEO at the time, reacted by cutting his offer from $1 billion to $800 million. Zuckerberg, who had been warned about Semel's reputation for last-minute renegotiations, walked away. Two months later, Semel reissued the original $1 billion bid, but by then Zuckerberg had convinced his board and executive team that Yahoo wasn't a serious partner and that Facebook would be worth more on its own. He rejected the offer and became famous as the cocky youngster who turned down $1 billion.

Today, Zuckerberg, 23, is famous for other reasons. For one thing, analysts think he could be the nation's richest man under 25, with a net worth estimated at $1.5 billion. But more important, he has transformed his company from second-tier social network to full-fledged platform that organizes the entire Internet. As a result, Facebook is the now most buzzed-about company in Silicon Valley, and Zuckerberg is constantly compared to visionaries like Steve Jobs and Bill Gates."

The comparison between Zuckerberg and Gates is probably a better one to make that Facebook and Microsoft. Both dropped out of school to build a technology company. Gates built an empire and became the richest man in the world. Zuckerberg is estimated to be the richest man under 25. It's a wonderful story and I'm a big fan of Facebook. Lending Club was very wise to start on the Facebook platform. But Facebook is still not the next Microsoft.

If Facebook is the next Microsoft what does that make Lending Club?

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.

Prosper's Product Manager seeks loan on Prosper

Prosper's Product Manager, known as Prosper Andrew on the Prosper forums is seeking a $10,000 loan on Prosper to replace a leaky patio. His listing is attracting a lot of interest in the forums. The loan was quickly funded, and has been bid down from 15% to 7% with 6 days and 9 hours remaining.

Andrew is also a lender on Prosper, and has made about $7,000 in loans. His lending portfolio is not doing very well. 5.65% of his loans have defaulted, and another 3.5% of his loans are late. He should have followed the advice of staying away from HR and E borrowers, but many of his loans were made before reliable statistics were available.

Prosper Andrew has been active in the forums with more than 500 posts, and has been the main point of contact to Prosper for many lenders. On one of his posts he posted the results of a visualization tool run on the Prosper database. That turned out to be a pretty cool image:

GlobeFunder to launch October 2nd

GlobeFunder has announced on their blog that they will launch in "less than 1 month" and in an email have set the date as October 2nd. GlobeFunder describes themselves as the "first true global small loan marketplace dedicated to offering investors new alternative investment vehicles in an online brokerage like marketplace while simultaneously offering borrowers the opportunity to consolidate their debt and enjoy a decrease in their monthly debt payments by offering lower interest rates." In June GlobeFunder raised $1.5 million in seed capital. Wiseclerk recently interviewed Brian Mullally, GlobeFunder's Co-Founder and CEO. GlobeFunder has also been featured in MicroCapital and Michigan Live. Here is some information about GlobeFunder from their website:

About GlobeFunder

GlobeFunder is committed to being the leader in providing loan funding where it is needed most, at market-driven interest rates, with the highest levels of service and integrity. GlobeFunder's lending marketplace scales by lowering capital costs for borrowers and providing market-driven investment returns for lenders. GlobeFunder's mission is to change the lending industry for positive impact to borrowers and lenders around the world.

GlobeFunder Investors

GlobeFunder members decide where to direct their funds in an automatic and aggregated loan selection search process, making loans to borrowers. Loans are auctioned to ensure market-driven interest rates, and payments will facilitate transactions from lenders to fund loans in GlobeFunder. Loan funding and borrower repayments will be processed and serviced by GlobeFunder.

GlobeFunder Borrowers

Borrowers are US individuals and participating institutions in the microfinance industry from around the world that need capital. The October 2007 launch of GlobeFunder will provide a marketplace to US borrowers seeking loan funding. Prospective borrowers may join GlobeFunder online, and several important verification checks are conducted before borrowers are able to post a loan request including identity checks, credit scoring, residency, debt and income, qualifying their loan and then ultimately originating the loan if approved. US borrower loan request are then published on GlobeFunder and auctioned to US lenders.

Prosper referral program extended

Prosper announced that it is extending its referral program through December 31, 2007. It was originally supposed to end today. To date 13,000 new Prosper members have signed up through the referral program.

Full details on the referral program can be found at Prosper's Referral Program website. When referring a borrower members receive 0.5% of the loan amount. When referring a Lender members receive $25. The new lender also receives $25 once their first loan is funded.

See our previous coverage of the referral program here.

P2P lending in a credit storm

Techdirt is one of my favorite sites. I subscribe to their daily emails, am a member of their Insight Community and love their news analysis. Mike Masnick in particular provides some great economic analysis of niche topics like the RIAA, DRM, piracy, copyright, laws, and the entertainment industry. Today they tackled peer to peer lending sites in an article called Peer-To-Peer Lending Sites Weather Credit Market Storms and got it all wrong. Here's what Techdirt's Joe Weisenthal had to say. It's short so I'll quote the whole thing:

"Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."

Let's take a closer look at each of his points.

"From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. "

First, what are the peer to peer lending sites we are talking about? Right now there are only two peer to peer lending sites available to lenders or investors in the U.S. - Prosper and Lending Club. The article mentions Zopa but Zopa has yet to launch in the U.S.

I'm not sure of any way that Prosper has emphasized diversification. In fact, Matt wrote an article last month about this - Most Prosper lenders do not diversify their portfolio. Clearly diversification is one of the keys to successful lending but since the minimum amount that can be committed to an individual loan is $50 most lenders never reach an appropriate level of diversification. 70% of lenders on Prosper have less than 20 loans. If one loan defaults they lose 5% or more of their total investment. (Of course, the amount lost is reduced as the loan matures.)

Lending Club, on the other had, has emphasized diversification since their launch three months ago. The minimum loan amount is $25 instead of $50. They have a program called LendingMatch which is supposed to help borrowers diversify based on their risk preferences. If you use LendingMatch you are required to start lending with $500 and pick your level of risk tolerance on a scale of 1 (less risk) to 5 (more risk). As you move to a 5 the average interest rate on your loans move up and the credit grade of your borrowers goes down.

As far as emphasizing direct relationships, Prosper and Lending Club try. Prosper has a group program that is supposed to bring a community feel to lending. Angry lenders on the Prosper forums don't think it's working. Lending Club uses the Facebook platform to build connections between lenders and borrowers. The potential benefit of the connections is greatly mitigated by the desire and requirement for anonymity for lenders and borrowers as I discussed in this article.

"Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business."

Is this true? There are different ways to define brisk business, of course. On the surface, it appears business is booming. Over $84 million has changed hands on Prosper. Prosper just received $20 million in venture capital and Lending Club got $10 million. Lending Club has hit several quick milestones since their launch in May - $100,000 then $250,000 and they are now at $881,600. Loanio and GlobeFunder are preparing to launch this fall. Zopa is expanding to the U.S. However, a look at loan growth on Prosper shows a different story. This graph, from Eric's Credit Community, shows loan growth is slowing. Lending Stats also has a nice graph showing the same trend.

From a peak of over $8.5 million in April, loans on Prosper have dropped month by month. From roughly $8.5 million to 7.5 million to 7 million to 6.5 million with each passing month. This is despite a new aggressive referral program which has created more than 5,000 new borrowers and lenders.

Although the drop started in May, it cannot be explained away by competition from Lending Club since Lending Club is still under $1 million in loans. The trend is most likely due to a realization among lenders on Prosper that high risk loans have a high default rate and are not a wise investment. To be fair, the August numbers may still improve. It's the last day of the month right now and loans can take a week or two from the time they close to the time they actually originate. The trend does show, however, that lending on P2P networks may not be as brisk as news reports indicate.

"Lenders aren't seeing mass defaults, because the standards have been high since the beginning."

Unfortunately, standards haven't been high since the beginning. At one time Prosper allowed people with no credit to borrow. This was a disaster and they stopped that experiment. Default rates for high risk borrowers, as Matt pointed out in his article about risk and diversification, are very high. According to his article, 45% of HR borrowers are late or in default and 28% of E borrowers are late or in default. This translates into a negative expected rate of return for borrowers. Prosper now warns lenders of the risk when lending to HR or E borrowers.

"Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine."

Very true, P2P lending sites are better suited for other needs such as consolidating credit card loans or funding a start-up.

There is, however, potential for peer to peer mortgage lending. Circle Lending is a peer to peer lending site that facilitates mortgage loans among family and friends. The big difference between Circle Lending and other peer to peer lending sites is that it's not a good option for investors, just family and friends who want to help out someone they actually know. There has been some media attention into the possibility for Prosper to facilitate small mortgages - those under $50,000 where other mortgage lenders can't help. In addition, there is a new start-up which we wrote about, Equity sharing - Prosper for real estate, which uses a P2P lending model for mortgages.

"Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."

There is a lot of truth in this statement. Lack of available credit will push borrowers to other places such as peer to peer lending sites. However, their luck might not be much better. Due to recent defaults, lenders on Prosper and other sites are getting wiser. Sub prime borrowers are not getting funded at the same rate they were months ago. Lending Club does not permit borrowers with a score below 640 to request a loan. Except for very small loans (under $5,000), sub prime borrowers are already very nearly shut out of the peer to peer lending market. Despite all this, Prosper still makes a lot of sense for many borrowers with good credit who are looking for an unsecured loan.

As for lenders, Prosper does give the ability to diversity to a new asset class. It is different than other investments in significant ways. This could be valuable as lenders try to weather the sub-prime storm. It's unlikely, however, that peer to peer lending sites will fare much better than the sub-prime market at large. Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."

Techdirt raises some good points. I think we will see new activity in the peer to peer lending markets in this 'credit market storm' from borrowers and lenders. This activity, however, cannot solve many of the underlying problems that are driving this storm. Borrowers who are going to default with a bank are still going to default on peer to peer sites. Lenders who invest in these borrowers are going to lose money and will tend to favor borrowers with better credit. The same borrowers would be eligible for credit from banks.

309 late loans sold in Prosper debt sale

Over the past week Prosper conducted their third debt sale. Prosper's policy is to default loans and sell them once they are more than 3 months late. However, in order to conduct a debt sale they need to pool a significant number of loans together to attract the needed buyers. This results in infrequent consolidated debt sales of loans that are anywhere from four to ten months late on payments.

The first debt sale was in Dec 2006 with 51 loans sold.

• 27 - 30%: Homeowners with any credit grade
• 15 - 18%: Non-homeowners with a credit grade of D and above
• 3.0 - 3.7%: Non-homeowners with a credit grade of E and HR

The second debt sale was in May 2007 with 294 loans sold.

• 16 - 19%: Homeowners
• 2.4 - 3.3%: Non-homeowner

This debt sale was the largest yet with 309 loans sold. Possibly due to the recent downturn in the housing market, homeownership was not a factor that was considered in the latest debt sale.
Here are the details from this third sale:

• Eligible loans were 122 days past due as of July 26, 2007, provided the loan was not part of any bankruptcy filing
• 309 loans were sold
• Price range: 1.8% - 26% as a percent of principal balance

Pricing on the loans is determined solely by the debt buyer and can vary from sale to sale. Several factors were used to determine pricing in this sale, with credit grade being a primary reason instead of homeownership. Here's the weighted average prices by credit grade for this debt sale:

• AA-A = 23%
• B-D = 13.3%
• E, HR, NC = 8.1%

Prosper anticipates the next debt sale will occur in December of 2007.

In the second Loan sale it seems the primary determining factor was homeownership, and some lenders had changed their bidding strategy to factor that in. One lender who goes by the name of PrintAns commented in the Prosper forums, "I hadn't viewed homeownership as good or bad when picking the listings until the last bad loan sale. When they sold bad loans more was given for loans where the borrower was a home owner. I now use home ownership part of my criteria."

In a way it seems unfair for Prosper to be changing the rules of the game, but in reality it is the debt buyers that change their criteria and the amount they are willing to pay for different types of loans based on the changing economic conditions in the marketplace. It probably doesn't help that liquidity for all types of debt purchasing has been drying up throughout the economy.

John Witchel, Prosper's CTO, commented about the debt sale process on his blog several months ago. He specifically mentions two challenges they face in these debt sales. The first is that Prosper is a new and different asset class, and the debt sales are typically geared more toward established asset classes like credit card debt. The second challenge is volume. It takes a certain volume to attract debt buyers, which is the primary reason for the infrequent timing of the debt sales.

WSJ: Become a loan shark

Jonathan Last wrote a humorous article about Prosper, Need a Loan? Usury for Beginners, for the Wall Street Journal which details his own experience becoming a Prosper lender. Not only does he become a lender, he becomes a loan shark. Here's an excerpt:

"Yes, we all have lofty goals, like helping the infirm, reaching out to shut-ins or starting a catering service. But what we've always wanted to be may seem, to some, a bit less commendable. For instance, I've always wanted to be a loan shark. There's something luridly poetic about outlaw lending: Getting the juice ticking at 30% on some hard-luck mope; making profits off of the backs of the union guy who lost it all at the race track or the stock broker with the expensive drug habit; sending minions like "Bobby Bats" out to do collections. It's like being a banker, only cooler.

Thanks to Prosper.com, my dream has come true, sort of."

So how does he do?

"In the end, I purchased three loans, all of which went to the type of high-risk borrowers that normally resort to getting in hock to degenerates like me. The first was to someone named "Shannon" who said he (or she) was starting a small-town newspaper. The second was to a Yahoo! employee who runs a side business selling refurbished electronics equipment.
The third was to a down-on-her-luck single mom who had no assets and needed cash to get out of credit card debt. She has an ex-husband who did her wrong, and the picture of her 5-year-old son was awfully cute. This cold-blooded loan-sharking racket is harder than it looks. I could imagine myself being tough on the first two borrowers because, deep down, I thought that there was a chance that they could make good. But the single mom seemed hopeless. I gave her the loan anyway. All told, the average interest rate I was getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make me feel pleasantly evil.

...My career as a bad-boy money-lender was deflated even further when I received my first payments, which totaled $4.60 ($4.55, once Prosper took their cut). All three borrowers made their first collection. I didn't even get to have anyone roughed up. Not that I could have afforded it -- even Bobby Bats must make more than $5 an hour."

Oddly, the WSJ article does not have a date but it appears to have been published almost a year ago. Google News shows it was published six hours ago (so maybe it is republished) and it's new to me so I thought I would share it. The author, Jonathan Last, who goes by the username LoanBruce still doesn't have an excuse to rough up any borrowers - his three loans are still current.

What is a loan shark really? According to the very authoritative Wikipedia a loan shark "is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are not willing or are unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal." Well, these loans certainly aren't illegal, so I guess LoanBruce isn't quite a loan shark.

Luckily for LoanBruce, all his high risk loans are still current. I thought it might be fun to take a look at the three loans that are making LoanBruce nearly 20%.


$4,999 at 19.75% for "A Well Respected Publisher"

"My name is Shannon and this is a relist for a personal/working capital loan for my new publishing business. For over 10 years, I've been the creative mind at a newspaper business in Dallas/Ft. Worth, Texas and have now moved on to become a publisher myself. I'll be continuing a very successful classified advertising/newspaper business under a new name which has been respected by the community and is also very charitable to numerous national organizations. I have a great working crew (commissioned), equipment (PCs, phones, Macs, office furniture), and retained many advertising clients who are ready to do business in 2007."





$15,000 at 16.86% to "Consolidate Profitable Business Running on Credit Cards"

"My name is Christopher...I own a small business selling refurbished electronics & cell phones...We have recently experienced an enormous growth spurt in quarter over quarter sales and expect the trend to continue in 2007."

"You can see more about this business by visiting www.auctioncleveland.com. If you research my sales for December 2006 we had over $60k in eBay sales and $10k in outside eBay sales. We expect January to be approximately $85-$90k gross revenue @ 35% margin. I carry a 100% feedback rating on eBay which should help show I am a serious and trust worthy business. Show me ANY other company that can transact over 5000 transactions and receive NO negative responses to their service and I will show you an AA credit rating. I turn over inventory very quick and need keep larger inventories. We have the infrastructure to scale but not enough cash to float the inventory costs. I currently have $40k in cash and would like to borrow another $15k to expand inventory for three to six months."



$1,500 at 26% for "A New Year"

"I am a 45 year old single mother with a 5 year old son. I have worked in administrative services for the last ten years at the same company."

"I got married in 2001. My husband had terrible credit history, so when he wanted to start his own limo business, we put the loan for his Cadillac under my name. I got pregnant; we moved to a new apartment with more space. I foolishly picked a place that was way out of our price range. My husband's limo business was doing well, so although things were tight, we were still managing to stay on top. After 9/11, the travel business came to a halt and we started falling behind on car payments. My son was born in September, and when I had to go back to work, we had to put my son in daycare ($1000+ a month). In 2003, I filed for bankruptcy. I still had the Cadillac loan in my name, I had tried to consolidate my credit card bills, which was a huge mistake, and my ex wasn't paying child support...I am still having a hard time paying my bills...The reason I am looking for this loan is because I want to try to get ahead a bit, or at least break-even."

Prosper beats the S&P 500 (on AA loans with no delinquencies)

Prosper sent out an email campaign to all Prosper members with the following news:

"Did you know that the average loan on Prosper is outperforming the 2-year return on the S&P 500? Smart lenders like you have already discovered that lending on Prosper is a great way to earn a market-beating return!"

Some people on the Prosper forums claim the ad is misleading. You have to read the fine print of the email to realize that what Prosper is calling average performance is computed using just the performance of AA loans with no delinquencies which is a very small part of the overall marketplace. They also selectively picked date ranges that ensured the best performance relative to the S&P 500.

Here is what their fine print says:

[1] Rate of return shown is the average net annual return on Prosper loans originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07. For more information, go to http://www.prosper.com/lend/performance.aspx.
[2] Avg. annual return of the Standard & Poors 500 Stock Index from 8/16/05 to 8/16/07.
[3] APY on FDIC-insured Citibank, N.A. 1-year Certificates of Deposit as of 7/23/07.
[4] Annual Percentage Yield (APY) on FDIC-insured E*TRADE Money Market accounts as of 7/23/07.

Overall, I think it is encouraging to see that sector of Prosper doing so well. In our posts on this blog we have tried to steer lenders toward A and AA loans to earn the best performance. However, Prosper does need to get better about creating straightforward marketing. Earlier marketing campaigns claimed that you could make up to 29% returns on Prosper which was also misleading since no one is earning those kinds of returns after fees and defaults.