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Debt Sale Update

by Doug Fuller on 05/30/08

I know that many people have been anxiously waiting for an update on the debt sale.  We’ve been working very hard toward finding a more favorable bid, as well as considering alternatives, but we’ve met with some severe obstacles.

Once bids with unacceptable contract conditions were eliminated the highest bid we received was only 1.5 cents on the dollar.  To put this in context, “Out of Statute” paper – consumer debt that is time-barred by the statute of limitations, where the debt holder has not received a payment in 3 to 15 years – gets prices in the range of 0.5 to 0.75 cents. 

The problem is that there is so much credit card paper available in the market, that no one is interested in a “novel” asset such as Prosper loans.  More than one bidder had told me that in this market, they’re only spending their money on consumer debt paper they’ve had experience with.

We believe the prudent course of business is to not sell at this time.  Instead, we are going to consider the loans as charged off, and keep them and continue to try to collect them as charged off debts.  You will continue to own the loans as we apply post charge off collection techniques to these accounts.  We recognize that this is different than our normal process, but firmly believe that it will result in a higher return for our lenders.

One of the key arguments for selling bad debt quickly and without applying “post charge off” collection techniques, is that it reduces the value of accounts that don’t respond.  However, given the very low price we’re currently faced with, that’s not really a concern.

Several people have expressed concern regarding how 121+ dpd loans are reported.   We are working to create a new loan status of “charged off”.  Loans in this status will not have their balance “zeroed” out (so that they can still accrue interest), but they will not be eligible to revert to a “current” or “delinquent” status even if a payment is received.

Doug Fuller is the Vice President of Operations at Prosper.


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23 Responses


Yankeefan | May 30th, 2008 at 8:30 pm

Thank you for the update, Doug, even if it is not good news.
Could you explain what the “post charge off” collection techniques are for those of us who aren’t familiar with the market? I’m assuming that, unlike the movies, baseball bats are not involved.


Xenon481 | May 30th, 2008 at 9:17 pm

What are the tax implications of a “Charged Off” loan? Can I deduct it on my taxes just like a sold/defaulted loan? If I can, how do I have to then later account for payments received in the next tax year? What about if it ever actually sells in a different tax year from the charge off date?


HollowOak | May 30th, 2008 at 10:16 pm

Mr. Fuller, Please clarify something for me.

On May 2nd you blogged that the then-offered prices were unacceptable. In response to a query on how much lenders were offered, you mentioned roughly 1/3rd of the debt sale prices in December 2007.

According to my calculations, that would have meant that in April lenders were offered somewhere between 1.7 cents on the dollar for the worst class of loans (loans in Texas) and 4.9 cents on the dollar for loans in the homeowner category.

For some reason, Prosper decided that that was not enough and did not sell the debt. Now we’re told the best follow-up offer was 1.5 cents on the dollar and Prosper will not sell the debt at all.

Do I have my facts straight?

Can you please refer me to the clause in my lender agreement that provides Prosper with discretionary powers to make these decisions?


112233 | May 31st, 2008 at 1:44 am

How will the “charged off” status affect the value of my loans? How it will affect my net gain/loss?


Chrisfs | May 31st, 2008 at 2:44 am

Thanks for the update Doug, I appreciate you giving us some insight into the decision. Also it’s fascinating to see how much debt beyond SOL goes for. I know someone who has some and he still gets contacted by collection agencies every now and then. They generously offer to settle for 30-50 cents on the dollar, since they bought it for less than 1 cent of the dollar, it’s not clear why they do that.


RateLadder | May 31st, 2008 at 9:44 am

@HollowOak

Quoting from original… “Once bids with unacceptable contract conditions were eliminated the highest bid we received was only 1.5 cents on the dollar.”


pioneer11 | May 31st, 2008 at 10:45 am

Would Prosper please provide information on what contract conditions were deemed “unacceptable”?


Chrisfs | May 31st, 2008 at 11:00 am

@Xenon481
I would treat it as a bad debt or a worthless security, (not sure which just yet)
http://www.irs.gov/publications/p550/ch04.html#d0e8759
The link above explains both and how to deal with income after the charge-off. I suspect it’s treated as ordinary income in the year received.

@HollowOak
The Lending Statement says:
“Prosper shall use the same care, skill, prudence and diligence with which prudent lending institutions service similar assets, and Prosper shall seek to maximize the timely recovery of principal and interest on the Loans. Prosper shall have full power and authority to do or cause to be done any and all things that it may reasonably deem necessary or desirable in connection with such servicing and administration of the Loans on your behalf, and you agree to cooperate with Prosper in the performance of its servicing and other obligations under this Agreement.”

“Loans that become over 120 days past due are written off as uncollectible, and sold to a debt buyer authorized and willing to purchase consumer loans. Proceeds, if any, from the sale, less expenses of sale, will be paid to you.”

Right now they are moving the loan to a charge-off status, which in effect values them as worthless and allows a write-off while at the same time allows them to continue to make collection attempts.

Which is basically what a bunch of people have been asking for.


RateLadder | May 31st, 2008 at 10:47 pm

For reference here is the lender agreement Chrisfs is referring too: http://www.prosper.com/account/common/agreement_view.aspx?agreement_type_id=8


WasatchLife | June 2nd, 2008 at 11:28 am

Are “RateLadder” and “Chrisfs” Prosper employees? I sure would to hear answers to all these questions from someone official.

Thanks and good luck,
-WL


RateLadder | June 2nd, 2008 at 1:27 pm

@WasatchLife

I am under contract as the Editor-in-Chief of the Prosper Blog and not technically an employee… On this post, I did not say anything not already in the original post. I was just trying to point out a sentence that I felt answered one of the questions HollowOak asked.


Chrisfs | June 3rd, 2008 at 1:54 am

I am not a Prosper employee. My thoughts are just that, my thoughts, but I usually try to find backing before I say something.


NewHorizon | June 13th, 2008 at 1:23 pm

@WasatchLife who wrote:
“I sure would to hear answers to all these questions from someone official.”

My thought – tho’ with some “backing” – is that many feel yours is a reasonable and shared expectation.


sophomore | June 27th, 2008 at 3:27 pm

The original post indicated that a new loan status (“charged off”) was being created. Does anyone know when the new status is expected to be visible on the Prosper website?


Matt | August 28th, 2008 at 2:28 pm

Any updates on this. I have a loan that hasn’t made a payment in more than a year. Was a AA homeowner. Still not showing as charged off, doesn’t show any status at all.

I think what Prosper needed was to implement the Peer to Peer secondary market for these loans. Surely at 4 month late status there is someone who is willing to pay more than 1.5 cents on the dollar for someone with a AA credit rating who incidentally is also a thriving business owner.


ChaZ5AZ | August 31st, 2008 at 4:11 pm

Unless Prosper is able to provide clearer explanations on how aged (in collections) loans will be written off, the average lender will become frustrated with the process. I am willing to take my own chances on lending to someone who might not pay me back, but I find it quite difficult to know what to do without some more insightful guidance (or education, or explanation) from Prosper itself. Is Prosper ducking these issues?


Adam | February 12th, 2010 at 12:24 am

It’d mean much more to me financially to be able to write these loans off of my taxes, WHICH I CAN’T DO UNTIL YOU SELL THE DEBT. Sitting on it doesn’t help us lenders at all, it just delays the credit we get on our taxes and time is money. Get it sold.


deal giam gia | April 17th, 2012 at 6:51 pm

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