Microfinance: By Children, For Children

My only travels in the developing world thus far are limited to the month I spent in Ethiopia last year. I marveled at the ingenuity of the children—many of whom fended for themselves. When I visited orphanages, I carried with me more than 5,000 “twisting balloons” to make balloon hats and animals for the kids. The rough terrain, rowdy behavior and stray voltage common there was hard on the balloons, and they popped almost instantly.

What surprised me was that the children collected up every last scrap of broken balloon and put them to use. Some made jewelry, some built sling-shots, others took the ends and made hair elastics from them for braids. A balloon micro currency erupted in each building that I visited over the two weeks that my balloon supply held out.

Another thing that I’ve learned from families who have since visited is that the balloon currency still exists in some of the buildings—months later! Children have stashed and preserved balloons (some still intact and un-inflated) for another day.

My mind came back to this scenario when I saw a story today on the Children’s Development Bank (CDB). CDB is a bank run by and for children in India, Afghanistan, Bangladesh and Nepal.

CDB serves the street children of these countries. These kids use their entrepreneurial skills as workers for hire. Because street children are so vulnerable to theft, they rarely amass enough money to make an entrepreneurial move in building their business or education. Instead, they spend what they need to meet their day-to-day needs and spend the rest of their money on small luxuries (Pepsi and chewing gum were the favorites among the street children in Ethiopia).

CDB is solving this problem by providing interest-bearing deposit accounts to children as well as low interest microloans. The novelty of this plan is that the entire business is operated by children. A board of children determine who will receive loans—and they evaluate the credibility and creditworthiness of the child who wants the loan, as well as their intentions. The children on the advisory board also determine membership, eligibility and the size of the loan available as well as interest paid on savings for members of the bank.

Children are encouraged (and do) invest in the bank their daily earnings. They also take loans to improve their education or business services. They can borrow for items such as inventory (many children in Ethiopia had toilet-paper sales businesses) or shoe-shine supplies or any number of other tools to provide their services.

While the process is facilitated by adults with knowledge of finance, recordkeeping and banking, children are the decision-makers.

You can read more about the Children’s Development Bank by visiting their Web site at http://www.childrensdevelopmentbank.org/new.htm.

IMAGE CREDIT: CDB Web Site www.childrensdevelopmentbank.org

Jessica Ward is a freelance writer, blogger and mother of two children. She blogs at www.pennywisefamily.blogspot.com.

'Snarky' blogger critiques Prosper borrowers

Before Prosper deleted their forums (archive available at prosperreport.com) lenders would often critique borrowers and share information in an effort to avoid borrowers who were likely to default. Sometimes those discussions would turn up quite a bit of scandal - the most notorious was Jessica Wolcott. Now these discussions have moved to other web properties, mostly propsers.org and various blogs.

One of these blogs belongs to Kyle M. Stevens. He says he started the blog to "poke fun at some of the Prosper listings." His blog is less than two weeks old but it has already captured the attention of MSN's money blog. Donna Freedman writes, "It was just a matter of time before some snarky blogger began commenting on the applications for loans at Prosper.com, the peer-to-peer lending site. If you apply for a loan at Prosper and your credit history isn't great, you might show up on Prosper lender Kyle M. Stephens' radar screen. You'd better have a thick skin or a generous sense of humor."

Prosper raises borrowers fees, improves collections

Three months ago Prosper hired Doug Fuller as the new Vice President of Operations in order to improve collections. He has started a letter series that he says has greatly increased payments. This is his first report to the Prosper community:

"One of the many activities aimed at improving collections undertaken in the last couple of months was the testing and implementation of an 'Early Delinquency' letter series. Although borrowers were already receiving reminder emails and phone calls during the early delinquency period (1 -30 days past due), we thought it worth seeing if an actual letter might drive additional payments. We conducted an initial test in mid-October where half of the early delinquency population was sent a letter and half was not. Measured by the number of manual payments initiated, the results were good. In the three weeks after the letter was mailed 57% more recipients initiated a manual payment (41% vs 26%).

Given this success, a two letter series was produced and a process created to automatically generate and send the letters. The first letter goes out at 15 days past due and reminds the borrower of the “community aspect” of their prosper loan – the money comes not from a bank, but was made possible by a group of individuals. The second letter is generated at 30 days past due and details the various consequences of becoming 'delinquent' including collection activities, credit reporting and the possibility of a lawsuit.

Additionally, we have contracted with Accurint (a division of Lexis-Nexis) to provide skip tracing information and are developing an internal process around that data."

In addition to improving collections, Prosper has also increased origination fees for borrowers effective today. Here is the new rate structure:

AA - 1.00% (no change)
A/B - 2.00%
C/D/E/HR - 3.00%

I'm pleased to see Prosper announce these changes on their new blog. This is a greatly improved method of communicating with members.

Loan money to family and friends through Prosper

In my opinion, Get Rich Slowly is the best finance blog on the net. Today JD Roth, the author, posted a question from a reader. Tim's brother-in-law is in college and is having trouble making ends meet. Tim wants to help him out but is "not keen on the idea of just loaning him money directly." The brother-in-law just lost his job and is asking for about $10,000 to pay for his car, rent, and food. In my opinion, Prosper is a great solution. Here are some of the advantages:

• Tim does not need to loan the full amount. He could potentially lend as little as $50.
• Tim could endorse his brother-in-law which could help the loan get funded.
• Tim's brother-in-law would get the help he needs but would be forced to be financially responsible and pay the loan back.
• Tim has reduced his overall financial liability on the loan but is still fully supporting his brother-in-law.
• If the loan listing attracts enough attention, Tim could eventually get bid out of the loan reducing his financial liability to zero.
• Tim can earn a modest return on the money he lends to his brother-in-law, while the brother-in-law can get an interest rate as low as 6% depending on his credit.
• The loan listing preparation would force Tim's brother-in-law to think through how he currently spends his money, how he plans to use the loan, and how he plans to pay it back.
• The brother-in-law would learn the importance of maintaining a good credit score.
• This is better than co-signing for a loan which could have a significant negative to Tim's credit score if his brother-in-law missed payments.

Are there other advantages I've missed? What are the disadvantages? I know that many Prosper lenders read this blog - has anyone loaned money to family through Prosper or funded part of a loan where this was the situation? What would you do if you were in Tim's situation?

If you are new to Prosper, start borrowing here.

Prosper lenders avoid high risk loans

Earlier this week I put together a list of all the top Prosper blogs. As I was reading, I came across an interesting post from January on Money Walks. The article, Blame the Lenders? Or the Borrowers?, showed that high risk and E-grade loans made up a full 80% of the listings at the time. Money Walks also discovered that lenders were allocating nearly 50% of funds to those risky credit grades. This surprised me and I decided to take a quick look at current open loans.

At the time of this writing there are 2554 open loans. 48% are high risk and 19% are E-grade. A full 67% of loan requests are from these risky credit grades - not quite as high as earlier this year but still very high.

So, are lenders funding these loans? Of the open loans I ran a quick search to see which ones have already been funded at least 75%. Only 8 of 1221 open high risk loans (<1%) are on their way to funding. Not much better for E-grade - 6 of 476 (also 1%). How about AA and A credit grades? 18 of 67 (27%) of open AA loans are at least 75% funded while 13 of 67 (19%) A loans meet the criteria. It appears that lenders have learned their lessons over the past months and are now avoiding high risk borrowers. The money is now flowing to those with good credit. Of course, many of these loans I looked at have just opened so the percentage is not representative of how many will be funded by the time the bidding closes. It does, however, allow us to compare the different credit grades.


The graph above shows the number of loans that are at least 75% funded compared to the number of open loans for that credit grade. Last week Matt explained why it makes good financial sense for some people to borrow from Prosper. Those with good credit and no home to borrow against can usually get a better rate through Prosper on an unsecure personal loan than they can through a traditional bank. It appears, however, that this demographic may be a very small minority on Prosper. Many of those seeking Prosper loans may be borrowers that can not obtain financing through other means. Many months ago, lenders on Prosper may have funded these loans but high default rates have caused changes to investing/lending habits.

It's also interesting to note the size of loans being funded to high risk borrowers. Of the 87 open listings that are at least 75% funded only 4 of them are over $20,000 - all to AA and A borrowers. The largest funded loan to a HR borrower is $10,000 (which one lender put up the full amount despite never bidding on anything but B or better in 58 previous loans - very odd.) Bottom line, if you want to be funded on Prosper today and especially if you want to borrow more than a couple thousand dollars, your chances are pretty slim if you are a high credit risk. It appears lenders have changed their investment patterns in accordance with good risk management tactics.

I realize that more complete statistical analysis can be done on closed loans and perhaps I will do that in a future post. It will be interesting to look at which credit grades have been favored by lenders over time.

Do Prosper lenders discriminate?

When you sign up as a lender you are required to agree to a Lender Registration Agreement. Among other things, you agree to not discriminate against borrowers based on race, color, religion, national origin, sex, marital status, age, sexual orientation, military status, or the borrower's source of income. Each lender agrees to follow these non-discrimination guidelines.

The publicly available data from Prosper does not include these identifying items, so it is difficult to do any kind of analysis to determine whether discrimination exists in any overall statistical sense. After reading this list, however, it seems to me that unless you set up a standing order to auto-fund loans, it is difficult to avoid discriminating based on some of these items.

Here are some examples:

Two of the items listed are military service and source of income. I have bid on several military loans specifically because I consider them a lower risk. My reasoning was that the military can take disciplinary actions against service members that default or are late in paying their obligations including revoking their security clearances. Also the military is a very stable employer - I don't expect the military to be doing any layoffs any time soon. For a similar reason I recently bid on a loan from a Microsoft employee. Like the military, Microsoft is a large stable employer with low employee turnover. So, the question is, by taking employer or military status into consideration are you in fact discriminating in violation of the lender agreement and federal law?

My pro-military and pro-stable employer bias is not based on hard statistics, but is instead more of a personal bias since my brother is in the military and I work for a large stable employer. According to this Prosper forum posting more than 6,300 troops have had security clearances revoked for financial reasons during a four year period. This indicates that although the military does have additional penalties for not paying debt that doesn't stop everyone in the military from going late on loans. It would be interesting to see actual stats of how these groups compared to the general population.

Age is also mentioned as something that is protected from discrimination. Perhaps Prosper took care of the biggest instances of this when they eliminated the NC category, and prohibited people without credit from applying for loans. Most of the people in the no credit category were there because they were too young to have an established credit history. In eliminating this category, was Prosper discriminating or is it okay to discriminate against a group as long as they fall into a nice credit category so the basis can become the credit grade rather than the age?

Marital status is also listed as an item that should be excluded from discrimination. Personally the only time this is an issue for me is if they mention in the listing that they are going through a divorce or have recently gone through a divorce. When someone goes through a divorce it usually has a measurable impact on their finances. There are two households to support instead of one, attorney fees related to the divorce, and potentially ongoing custody disputes that can cost tens of thousands of dollars and drag on for years. According to the National Association of Bankruptcy Attorneys, divorce is among the top three causes for unmanageable debt along with loss of job and medical expenses. So, I try to avoid these categories because I want to have as few defaults or late payments as possible. Is avoiding loans that mention divorce an instance of discrimination based on marital status?

As far as the remaining items go, race, gender and national origin are not usually listed in the details of the loan. However, many borrowers include photos of themselves as part of the listing. On the Prosper forum there is a series of over 1500 posts titled "Photos that make you want to bid..." The posts contain many humorous photos that include things such as a listing for Paying for Medical Bills that included a photo of a dog with his leg in a cast. However, there are also many posts indicating that some people have a tendency to bid on listings when they find the photo attractive. After several unsuccessful attempts at funding, one member of the military who is serving in Korea changed his profile photo to an attractive Korean woman. Once he did that the bidding activity on his loan significantly increased.

I think the primary concern for lenders is earning a good rate of return on the money they invest in loans. However, all of the lenders at Prosper are human, and I think it is clear that it would be impossible to eliminate all forms of discrimination from lenders who are bidding on the loans.

So, if you are a borrower what should you do to avoid being discriminated against? The answer is that all of the non-credit related information that lenders are using to discriminate between loans is being provided by the borrower. So, if you are worried about a lender discriminating against you based on your recent divorce don't write "I am consolidating credit debt that I acquired as a result of my recent divorce." Instead, just write "I will be using this loan to consolidate my credit card debt." It is not necessary to provide the lender with information about your past or why you got into the situation you are in. If you are worried about someone discriminating against you based on your photo, you can use a photo of your favorite flower, your pet, or a nice sunset. In short if you are a borrower, you are not required to disclose any of the items that could be used to discriminate against you. If you do disclose some of these items, you do so at your own risk. I think it is reasonable for lenders to use any of the voluntarily provided information in making subjective judgments on whether or not to fund the loan.

Why would a borrower use Prosper instead of a traditional bank?

The following question that a reader left on Tom's OmniNerd article inspired me to write this post.

What makes me curious is this: why don't the A or AA folks just borrow from a bank? The rates seem high compared to banks'. My perspective is that of someone who has only ever borrowed with collateral--a car or house--maybe unsecured loans just run higher, but aren't a lot of these people using their home equity as collateral?

The question was a good one and one that many lenders have wondered about. After all, you can get a mortgage loan right now for between 6-7% and, with good credit, you should be able to get a car loan at less than 8%. So, why pay 9-12% on Prosper if your credit is perfect?

Well, interest rates have been rising recently and many people who have not been to a bank for a personal loan might be surprised by the current rates:

• Key bank is at 12.24% with $99 in fees for a $5000 loan at 36 months
• America First CU is at 12.75% for a $1000 loan at 36 months
• Chase is at 13.49% with $75 in fees for a $2500 loan at 36 months
• Bank of the West is at a whopping 16.25% with $50 in fees for a $5000 loan at 36 months

Keep in mind that these rates assume that you have very good credit. Add to this that the average credit card rate is at 18.9% according to American Consumer Credit Counseling, and you can see that Prosper rates are less than or comparable to other rates in the industry for unsecured debt.

So, why would anyone pay these rates when you can run out and get a home equity line of credit for less than this and get an extra tax deduction to go along with it? The answer is that not everyone owns a house, or has equity in their house that they can tap into. Even among people who do own a house it may require several hundred dollars in fees for appraisals, title transfer, and processing fees that are common throughout the mortgage industry. So, if you add those onto a $5000 loan you may be taking a 5-10% hit right from the start.

Same is true for a car loan. Many people, even those with good credit, do not have a car that has been completely paid off that they can use for collateral. If they do, then taking a car loan also comes with processing and title transfer fees. It seems that you can't do anything at a bank without running into fees.

So, there are plenty of good situations where a borrower with good credit can save money by obtaining a loan on Prosper rather than going through a traditional bank. That does not mean that it is the best choice for all borrowers. I mentioned in an earlier post that it doesn't make sense for a borrower to re-finance a student loan on Prosper. This is also true for house purchases and new car purchases. When I come across a listing that doesn't make sense to me, I don't bid. It doesn't make sense to me for someone to borrow at 12% here to help them purchase a house or car. However, it does make sense to me if they are refinancing credit card debt or paying for a wedding. Matt's advice: if the why part of the listing doesn't make sense to you then don't bid on the listing.

If you are new to Prosper, start borrowing here.