Peer-to-Peer Lender Prosper Concedes to LendingClub

They say that imitation is the sincerest form of flattery...

Well this past week Prosper.com did a sudden and abrupt about-face on their business model.

Without warning they shutdown their auction system for peer-to-peer lending.

The fallout has begun.

SocialLending.net calls this move a "big risk" for Prosper and suggests that the next quarter will be critical.

The comments over at P2P-Banking.com range from "is this just a New Coke" move to test our loyalty to "I think this is the worst thing Prosper could have done."

And the grousing is getting more rancorous over on FaceBook

They claimed it was based on feedback, but as a top 1,500 lender I never received a single survey asking what I thought. Guess I didn't make the cut

I sent an email off to "reflective-rupee" the number one lender on Prosper asking him/her what they thought of the change in model, given that the automated investing system was now placing what appeared to be increasingly higher and higher automatic bids on the paltry number of open loan requests (which incidentally concentrates risk for those lenders). Here's what they had to say:

----- Original message -----
From: BrighterSuns
To: reflective-rupee
Received: Dec-26-2010 6:35 AM
Subject: Concentrating risk: What do you think of the change prosper made?

Hey #1 - #1454 here with a question...

Are you aware of the change that prosper made last week, eliminating the auction system for new notes?

Just curious since it looks like you might be auto-investing and your account has made some pretty dramatic multiple bids in the last few days, investing over $1000 per note in some cases

-BrighterSuns

----- Original message -----
From: reflective-rupee
To: BrighterSuns
Received: Dec-26-2010 6:17 PM
Subject: Re: Concentrating risk: What do you think of the change prosper made?

I think that the end of the auction is a positive, as you cannot be outbid, and rates do not get bid down.

I have bid $1000 on listing many, many times over the past year or so.

In terms of concentration, given that I have a portfolio on Prosper of nearly $1 million in loans, a $3000 concentration is not too much, as it is only about 0.3% of my portfolio.

WOW! Anyone foolish enough, not to mention so casual about losing $3000 in my opinion deserves to lose every penny of it.

Note also that the auction must have been a big burden what with all those rates getting bid down

My own take on it is this:

First of all, the pre-set interest rate removes all sense of hope and optimism for borrowers who have generally fared well in attracting lenders and then getting better rates through bidding down. It created a natural market for measuring and mediating risk. Now we're supposed to outsource that Prosper?

It strips out any emotion from the lenders standpoint in terms of "helping another person out".

With the high-speed auto-funding and the lack of requirement to have borrowers provide a descriptive narrative of their use of funds eliminates the advantage of having the notes get naturally vetted through crowd-sourcing. If dozens of other people aren't voting with their dollars, maybe I shouldn't either. On the flip side, if a loan request is or nearly funded, maybe enough other people have vetted it and have confidence in the borrower -- maybe I should take a second look.

They have halted taking on any new borrowers they deemed to be HR - High Risk -- but since THAT designation was based on their own model, how do we know that the E grade borrowers aren't actually HR's? It's like that goofey color coding system the TSA uses, you know how "Threat Level Orange is the new Green".

From my own portfolio, almost all of my delinquent and likely defaults will occur from borrowers ranked at a grade C and above! Take a look, you'll see the defaults are happening in borrowers rated "AA, B, C" - ridiculous.

In my own investing over the past year, prosper has had countless glitches where they can't seem to calculate their fee's correctly (I recently got charged a $42.52 "service fee" on a $0.42 Note payment against a $25 note!

Dec-29-2010 12:37 AM Dec-29-2010 Withdrawal Service fee 45935-14 051055937 Completed -$42.52 $66.69
Dec-29-2010 12:37 AM Dec-29-2010 Deposit Note payment 45935-14 051055937 Completed $0.42 $109.21

And I've had cases where newly issued notes have mysteriously ended up in my "paid-in-full" status causing the invested money to evaporate. To be fair they have fixed all of these issues when I brought them to their attention...but would they themselves have noticed? Do they have any kind of auditing going on?

It really begs the question: If they have these kind of "block-and-tackle" kinds of problems, what kind of confidence should we have that they can actually execute any kind of big changes in their system successfully?

I invested in the people, not their numbers. Statistics have a place, but when you let the robots run the shop, it dehumanizes the whole affair.

Prosper is no longer a community of peers -- its a soul-less machine.

The high-speed funding, and lack of required narrative sets up the perfect storm for fraud.

Today's Big Idea: "Sudden drastic changes to a company's underlying business model usually signal deep distress."

In piloting almost all accidents are caused by a "chain of events" -- it's usually never one single thing, but a couple of conditions that cause the system failure. "Its foggy, the oil hasn't been changed in a while, AND you're in a rush to get home" -- boom! Or "its the maiden voyage, you're racing along a full steam, AND you're in the north atlantic" -- ice berg!

Or how about "You dramatically change your business model, you irritate your lenders, AND you scare off your borrowers" -- BK!

Who are you guys and what are you doing here distracting me? The Big Idea Blog is written by David Duccini & David Walbridge