Prosper Marketplace

Last updated
Prosper Marketplace, Inc.
Type Private
Industry Financial technology, Peer-to-peer lending
FoundedCalifornia, USA (2005)
Headquarters
San Francisco, CA
Area served
United States
Key people
David Kimball, CEO; Ron Suber, President Emeritus
Products
RevenueIncrease2.svg US$ 144.63 million (2021)
Decrease2.svg US$ -138.27 million (2021)
Total assets Decrease2.svg US$ 828.88 million (2021)
Number of employees
384
Website www.prosper.com

Prosper Marketplace, Inc. is a San Francisco, California-based financial services company. Prosper Funding LLC, one of its subsidiaries, operates Prosper.com, a website where individuals can request to borrow money, open a credit card, or invest in personal loans.

Contents

Overview

Prosper Marketplace is America's first peer-to-peer lending marketplace, with over $23 billion in funded loans. [1] Borrowers request personal loans on Prosper and investors (individual or institutional) can fund anywhere from $2,000 to $50,000 per loan request. Investors can consider borrowers’ credit scores, ratings, and histories and the category of the loan. Prosper handles the servicing of the loan and collects and distributes borrower payments and interest back to the loan investors.

Prosper verifies borrowers' identities and select personal data before funding loans [2] and manages all stages of loan servicing. Prosper's unsecured personal loans are fully amortized over a period of three or five years, with no pre-payment penalties. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers and assessing an annual loan servicing fee to investors.

From 2006 to 2009 Prosper operated a variable rate model. Prosper acted as an eBay-style online auction marketplace, with lenders and borrowers ultimately determining loan rates using a Dutch auction-like system. [3] Effective December 19, 2010, Prosper filed a new prospectus with the SEC, changing its business model to use pre-set rates determined solely by Prosper based on a formula evaluating each prospective borrower's credit risk. [4] [5] Under the new approach, lenders no longer determine the loan rate via price discovery in an auction. Instead, they simply choose whether or not to invest at the rate which Prosper's loan pricing algorithm assigns to the loan after it analyzes the borrower's credit report and financial information.

The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concepts of microlending and microfinance.

Prosper publishes performance statistics on its website and all market data is available to the public for analysis. [6] All transactions are in US dollars; lenders and borrowers must be US residents. Prosper's 10.69% annualized seasoned rate of return, net of fees, for the period of July 1, 2009 through September 30, 2011 was independently audited [7] by Ashland Partners & Company LLP in December 2011. [8]

In 2016 Prosper Marketplace unveiled Prosper Daily, a mobile app. The app is designed to give consumers tools to make financial decisions, including viewing all their financial accounts in one place, budgeting and tracking spending by category, identifying questionable charges, and monitoring their free credit score, which is updated monthly. [9]

Prosper opened to the public on February 5, 2006 and was founded by Chris Larsen (the founder of E-loan) and John Witchel. Prosper is backed by BlackRock, Sequoia Capital, Accel Partners, Agilus Ventures, Benchmark Capital, CrossLink Capital, DAG Ventures, Draper Fisher Jurvetson, Fidelity Ventures, Omidyar Network (an investment vehicle of eBay founder Pierre Omidyar), Meritech Capital Partners, TomorrowVentures (an investment vehicle of Google Executive Chairman Eric Schmidt), and QED Investors (an investment vehicle of Capital One co-founder Nigel Morris).

Evaluation of credit risk

Prosper has provided an increasing amount of information about prospective borrowers over time, while also making various changes to its credit policy. Prior to its 2008 'quiet period' and 2009 SEC registration, the company provided "Credit Grades" and other credit information about its prospective lenders. Following the SEC registration, the company created a new model that determined "Prosper Ratings" instead. Additionally, new prospective borrowers were required to have an FICO 8 credit score of at least 640, while returning borrowers only need a score of 600 to request a loan. [10]

Prosper Ratings

Since its SEC registration in 2009, Prosper has provided a proprietary "Prosper Rating" for prospective borrowers based on the company's estimation of that borrower's "estimated loss rate." According to the company, that figure is "determined by two scores: (1) the credit score, obtained from an official credit reporting agency, and (2) the Prosper Score, figured in-house based on the Prosper population." Prosper Ratings, from lowest-risk to highest-risk, are labeled AA, A, B, C, D, E, and HR ("High Risk"). [11]

Business model

Prosper has a transaction-based business model, in which the company collects revenue by taking a fee on its customers' transactions. Borrowers who receive a loan, pay an origination fee of 1.00% to 5.00%, [12] depending on the borrower's Prosper Rating, and investors pay a 1% annual servicing fee.

Secondary market / Trading platform - Development and Termination

As borrowers repay over the three, or five-year fixed term of their Prosper loan, payments are distributed to investors' accounts. This money may then be re-invested into new Prosper loans or withdrawn from Prosper by transfer into the bank accounts of the Prosper investors.

Prosper had developed a secondary market for note trading, in cooperation with Folio Investing. Through the secondary market platform, investors were able to buy and sell Prosper loans ("notes") at any time. However, Prosper declared in its prospective dated December 21, 2016, that its relationship with Folio Investing had terminated on October 31, 2016. [13] Consequently, note purchasers were informed that they would have to hold their notes to maturity unless Prosper were to establish a new secondary market platform, for which it made no assurance.

Wells Fargo appears as a trustee in Prospers note indenture. [14]

IRA investor accounts

As of March 1, 2012, Prosper allows tax-free or tax-deferred investment via self-directed IRA accounts. Traditional IRAs, Roth IRAs, SEP IRAs, and 401(k) Rollovers are supported through Prosper's IRA custodian partners Equity Institutional and Millennium Trust. The minimum investment required to open a self-directed Prosper IRA account is $5,000. [15]

Cease and desist order

On November 24, 2008, the SEC found Prosper to be in violation of the Securities Act of 1933. As a result of these findings, the SEC imposed a cease and desist order on Prosper. Due primarily to the novel nature of the peer-to-peer lending models, the SEC, after review, now treats all peer-to-peer lending transactions as sales of securities and requires that all platforms register with the SEC.

Litigation

On November 26, 2008, a class action lawsuit was filed against Prosper in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all loan note purchasers in Prosper's online lending platform from January 1, 2006 through October 14, 2008 and alleges that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit seeks class certification, damages, the right of rescission and the award of attorneys’ fees.

Prosper's insurer, Greenwich Insurance Company, refused to pay for defense expenses, claiming the matters involved were not covered by the insurance policy. On December 14, 2010, Judge Richard A. Kramer of California Superior Court issued a tentative decision ruling for Prosper on this limited issue and holding that Greenwich is obligated to defend Prosper in the class-action suit and to reimburse Prosper's litigation expenses so far. Although the decision did not rule on the lawsuit itself or address whether Prosper might be entitled to insurance coverage in the event any of the lawsuit's claims proved meritorious, it relieved Prosper of significant legal expenses in the interim. [16]

The lawsuit was settled July 19, 2013 for 10 million dollars paid in installments over three years. [17]

2009 post SEC relaunch

In July 2009, Prosper reopened their website for lending ("investing") and borrowing after having obtained SEC registration for its loans ("notes"). [18] After the relaunch, bidding on loans was restricted to residents of 28 U.S. states and the District of Columbia. Borrowers may reside in any of 47 states, with residents of three states (Iowa, Maine, and North Dakota) not permitted to borrow through Prosper.

Financial structure of Prosper loans

According to the prospectus issued to investors on July 13, 2009, Prosper notes since relaunch are obligations of Prosper Marketplace and not of the original borrower. Prosper promises to pay the noteholder ("investor") the funds it receives from the underlying borrower. Noteholders of Prosper's "member payment dependent" notes are considered unsecured creditors of Prosper Marketplace with limited recourse against it. The Prospectus states that in the event Prosper becomes insolvent or declares bankruptcy, investors in Prosper notes may lose all or part of their investment even if the underlying borrower continues to pay. Investors' recourse in the event borrower-supplied information proves incorrect for any reason is also "extremely" limited. [19] This structure is identical to that adopted by LendingClub after SEC registration.

Prosper credit card

In 2022, Forbes gave a negative review of the Prosper credit card. According to Forbes, "Prospering with the Prosper® Card* seems unlikely... We hope you live long and… well, apply for a different credit card." [20]

Market performance

Loan performance

Prosper maintains a full public database of all loans issued through its marketplace on its website. This database and all market statistics can be accessed and queried for analysis of loan performance over time. An interface to run complex performance queries is supported and allows investors (and the public) to look into the performance of any subset of loans over whatever time period they choose. [6]

Prosper reports a 10.69% annualized seasoned rate of return, net of fees, for all loans issued from its re-opening after SEC registration (July 1, 2009) to the 30th of September, 2011. Prosper's returns for this period have been independently audited [7] by Ashland Partners & Company LLP. [8] A number of factors, including Prosper's decision to set the interest rates on all loans (rather than let investors choose the rates they would accept), occurred after Prosper registered with the SEC and began issuing new loan notes in July, 2009. Additionally, after Prosper began setting the rates on all loans itself, Prosper significantly tightened the minimum credit quality necessary for a borrower to receive a Prosper loan. Many borrowers who received loans prior to 2009 (which were priced by investors) would no longer qualify for a loan, at any rate, under Prosper's new underwriting policies.

Loan performance prior to July 2009

As of August 2008, approximately 18.5% of all money loaned through Prosper from inception (February 2006) through June 2008 were in some form of delinquency. Also, more than 35% of all loans that originated in February 2007 were in some form of delinquency.

As of January 24, 2010, Prosper reported that 22.45% of all money lent since inception had been charged off and an additional 2.51% was delinquent but not yet charged off. Charge-off rates by credit score category ranged from 11.57% of money lent to borrowers with a credit score of 760 or higher to 44.30% of money lent to borrowers with a credit score below 600. Eric's Credit Community reported generally consistent delinquency results, with a 24-month delinquency rate by credit grade for loans originated after January 1, 2006 ranging from 11.8% for 'AA' loans to 61.6% for 'HR' loans. The charge-off rates in many cases exceeded the interest received on the loan categories, resulting in a negative return. Eric's reported that the median return to Prosper investors was negative 2.00% and the mean return negative 2.28.

After Prosper's relaunch in July 2009, and implementing stricter credit guidelines for borrowers [21] Prosper's loan default rate has been significantly reduced. The percentage of all loans that are 6+ months old, and are 1+ month late, dropped to less than 4%. [22] As of Aug 11, 2010, the 4 months that match these criteria are the lowest percentage of late payments Prosper has seen since inception. [22]

Financial history

Since its 2009 relaunch, Prosper received a Series D funding round of $14.7M in April 2010 with participation from all previous investors as well as new investors CompuCredit and TomorrowVentures. [23] TomorrowVentures is an investment vehicle funded by Google Executive Chairman Eric Schmidt. [24]

Bloomberg BusinessWeek reported on November 11, 2010 that Prosper was seeking additional funding [25] and Prosper received an additional funding infusion in a Series E round on June 3, 2011. According to Prosper's SEC filing, the company raised $17.15 million by selling additional shares at an average of approximately $0.738/share. Series E investors included Draper Fisher Jurvetson, Crosslink Capital, Accel Partners, Agilus Ventures and TomorrowVentures. [26]

In January 2013, Prosper received $20 million in funding led by Sequoia Capital, [27] followed by $25 million in September 2013 led by Sequoia Capital and BlackRock. [28] In May 2014, Prosper announced a $70 million funding round led by Francisco Partners. [29] Credit Suisse's NEXT fund led an investment of $165 million in Prosper in April 2015. [30] In 2017, Prosper raised US$50 million in a Series G round, led by FinEX Asia's private equity division. [31]

Loan to terrorist

In December 2015, the FBI reported that Syed Rizwan Farook, one of the shooters in the 2015 San Bernardino attack, had borrowed $28,000 from Prosper to finance the purchase of weapons and explosives. This is now being investigated by the FBI, the House Financial Services Committee, and the California Department of Business Oversight. [32]

See also

Related Research Articles

<span class="mw-page-title-main">Peer-to-peer lending</span> Practice of lending money

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower. There is the risk of the borrower defaulting on the loans taken out from peer-lending websites.

<span class="mw-page-title-main">Kiva (organization)</span> Micro-loan platform

Kiva is a 501(c)(3) non-profit organization headquartered in San Francisco, California, that claims to allow people to lend money via the Internet to low-income entrepreneurs and students in 80 countries. Kiva's mission is "to expand financial access to help underserved communities thrive." They have been accused of deceptive business practices, misleading donors into believing their funds would be used for specific individuals and misrepresenting other aspects of their operations.

LendingClub is a financial services company headquartered in San Francisco, California. It was the first peer-to-peer lender to register its offerings as securities with the Securities and Exchange Commission (SEC), and to offer loan trading on a secondary market. At its height, LendingClub was the world's largest peer-to-peer lending platform. The company reported that $15.98 billion in loans had been originated through its platform up to December 31, 2015.

Zidisha allows people to lend small amounts of money directly to entrepreneurs in developing countries. It is the first peer-to-peer microlending service to link borrowers and lenders across international borders without a local microfinance institution intermediary. The organization is named after the Swahili word zidisha, which means "grow" or "expand".

<span class="mw-page-title-main">Funding Circle</span> Multinational peer-to-peer lending marketplace

Funding Circle is a commercial lender. Originally it was peer-to-peer lending marketplace that allows the public to lend money directly to small and medium-sized businesses. Through this exchange businesses access lower costs of financing than they would get at a bank and the public are able to become lenders and in doing so make a return on their capital. It closed its lending option to "retail investors" between 2020 and 2022, and then announced, in March 2022, that it had made the closure permanent.

Crowdfunding is a process in which individuals or groups pool money and other resources to fund projects initiated by other people or organizations "without standard financial intermediaries." Crowdfunded projects may include creative works, products, nonprofit organizations, supporting entrepreneurship, businesses, or donations for a specific purpose. Crowdfunding usually takes place via an online portal that handles the financial transactions involved and may also provide services such as media hosting, social networking, and facilitating contact with contributors. It has increased since the passage of the Jumpstart Our Business Startups (JOBS) Act.

<span class="mw-page-title-main">Assetz Capital</span>

Assetz Capital is a British peer-to-peer or "marketplace" lender which allows private and institutional investors to lend money directly to small businesses (SMEs) and property developers.

SoFi Technologies, Inc. is an American online personal finance company and online bank. Based in San Francisco, SoFi provides financial products including student and auto loan refinancing, mortgages, personal loans, credit card, investing, and banking through both mobile app and desktop interfaces.

Achieve is a lender that mainly focuses on underwriting loans to prime consumers. Achieve is the consumer brand of Freedom Financial Network, LLC, which is headquartered in San Mateo, California. Achieve developed a proprietary underwriting process that delivers low-cost loans to borrowers and low-risk access to consumer loan portfolios for accredited investors.

Lendico was a multinational company, operating a peer-to-peer lending platform. It was taken over by Dutch bank ING Groep in early 2018 and now operates as a subsidiary. The international online marketplace for business and consumer lending was founded in December 2013 by the incubator and venture capitalist, Rocket Internet. After launching in Germany, the company expanded into Spain, Poland, Austria, South Africa, the Netherlands and Brazil. Using the crowdfunding model, the company based in Berlin, Germany, directly connects investors and private and business borrowers. Lendico is led by Friedrich Hubel and co-founder Clemens Paschke. Currently, Lendico Brazil still exists but is an independent company from Lendico Global Services.

<span class="mw-page-title-main">Peer to peer investing</span>

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LendingRobot is an automated investment service for Peer-to-peer lending for retail investors. It is based in Seattle, Washington, and was the first SEC-registered Investment Advisor in the Peer to Peer Lending industry.

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References

  1. ↑ "About Prosper".
  2. ↑ Prosper Marketplace, Inc. "Listing Review". Archived from the original on 2009-04-02.
  3. ↑ Kim, Jane (12 March 2008). "Where Either a Borrower Or a Lender Can Be". No. Financing. United States: Wall Street Journal. Dow Jones & Company Inc. Retrieved 25 September 2009.
  4. ↑ Prosper Marketplace Inc., Post Effective Amendment to Form S-1 SEC Edgar Archive (Retrieved 2 January 2011)
  5. ↑ Securities and Exchange Commission, Notice of Effectiveness. (Retrieved (2 January 2011)
  6. 1 2 Prosper Marketplace, Inc. "Prosper: Marketplace Performance". Archived from the original on 2015-09-06. Retrieved 2010-01-24.
  7. 1 2 (Press Release) "Independent Audit Confirms Industry-Best Returns of P2P Lender Prosper.com" . Retrieved 4 July 2015.
  8. 1 2 (Press Release) Ashland Partners LLP Independent Audit of Prosper.com Annual Returns (July 2009–Sept 2011) Archived 2012-04-25 at the Wayback Machine
  9. ↑ "Prosper Marketplace and HomeAdvisor Partner to Bring Home Improvement Financing to Millions". 10 March 2016.
  10. ↑ "Prosper Risk Performance Presentation" (PDF). Archived from the original (PDF) on 30 September 2011. Retrieved 16 April 2011.
  11. ↑ "Prosper Ratings" . Retrieved 16 April 2011.
  12. ↑ "Personal Loans: Rates & Fees for Borrowers - Prosper". www.prosper.com. Archived from the original on 2 July 2015. Retrieved 1 July 2015.
  13. ↑ "Prosper Prospectus - December 21, 2016" (PDF).
  14. ↑ "Prosper Official" (PDF).
  15. ↑ "(Press Release) Prosper.com Brings Consistent, High-Yield 10.46% Returns to IRAs" . Retrieved 4 July 2015.
  16. ↑ Superior Court of California, County of San Francisco, Docket: Case Number: CGC-09-491736 (retrieved 23 January 2020)
  17. ↑ p8k7d19d2013.htm. Sec.gov. Retrieved on 21 September 2013.
  18. ↑ Kim, Jane (28 April 2009). "Peer-To-Peer Lender Relaunched". No. Money. United States: Wall Street Journal. Dow Jones & Company Inc. Retrieved 28 April 2009.
  19. ↑ Prosper Prospectus of July 13, 2009 (Retrieved 24 January 2010)
  20. ↑ Prosper Credit Card 2022 Review by Chauncey Crail (contributor), Robin Saks Frankel (Editor), Updated: Sep 19, 2022, 9:00am
  21. ↑ Lender is Back and Better Than Ever (Retrieved 11 August 2010)
  22. 1 2 "Eric's Credit Community - Prosper.com Data & Statistics". Archived from the original on 2010-07-21. Retrieved 2010-08-13. (Retrieved 11 August 2010)
  23. ↑ Prosper Marketplace Inc. SEC Form Form 8-K, April 20, 2010
  24. ↑ Prosper.com Raises 14.7 Million; Eric Schmidt Invests
  25. ↑ Bloomberg BusinessWeek, Prosper Marketplace Inc.: Key Developments: Prosper Seeks Additional Funding (retrieved 2 January 2011)
  26. ↑ Prosper Marketplace Inc. SEC Form 8-K, Jun 7, 2011
  27. ↑ "Prosper Reboots With a New CEO and New Funding - Lend Academy" . Retrieved 1 July 2015.
  28. ↑ Merced, Michael. "Prosper Raises $25 Million in New Round, Adding BlackRock as a Backer" . Retrieved 1 July 2015.
  29. ↑ Levy, Ari. "Prosper Said to Get $650 Million Valuation After Funding". Bloomberg.com. Retrieved 1 July 2015.
  30. ↑ Merced, Michael J. De La (8 April 2015). "Prosper Marketplace Raises $165 Million in Latest Funding Round". The New York Times. ISSN   0362-4331 . Retrieved 1 July 2015.
  31. ↑ "FinEX Asia's Private Equity Fund Manager Announces US$50 Million Investment in Prosper Marketplace". finexasia.com. 11 May 2018. Retrieved 2018-05-11.
  32. ↑ Koren, Janes & Puzzanghera, Jim (11 December 2015). "Loan to San Bernardino shooter draws scrutiny to online lending industry". Los Angeles Times.
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