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 -----
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
----- Original message -----
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!
This is the kind of test case that shows the risks of auto-funding and the increased risk of fraud that the former "crowd-sourcing" oversight would help prevent:
John Plyter I created a listing friday night and yesterday it went live. listingID=490232
$15,000.00 Personal loan
Purpose of loan: do not lend me any money
My financial situation: I am a lender and want to see the borrowing side of prosper.
Well nobody read my info and within 25 minutes it was 68% funded before I withdrew it.
Received an email offer yesterday -- upto 4% cash back on "new money" invested...
The only problem is that to earn that requires 250K in (good luck actually getting that much money invested based on the low volume of loans present)
And here's a tell-tale sign: They are offering warrants to large investors.
A warrant is the right to buy the stock at a certain price (they usually expire) -- its a gimmick used to attract capital -- which tells me they need cash to fund operations since I can't imagine they have any solid expansion plans (advertising? acquisition? retail locations?