Archive for June, 2008

From the beginning of time, humans have been wired to keep succeeding, to amass more goods, and to expand their horizons. For many, this meant getting a loan from a friend to tide them over until the next harvest, or until a shipment of goods came in. Peer-to-peer lending has been in existence for thousands of years, even if it wasn’t always called by this name. Its existence has remained constant and the general concept is still in use today.

The origins of peer-to-peer lending have been greatly debated, but it was the first civilizations in Mesopotamia that were believed to have had the most impact on this type of lending. It was here that the first limits were instituted on the amount of interest that could be charged for a loan.

Clay tablets dating back to Mesopotamian times show an interest rate cap of 33½% was put into place for loans on grain, while silver had a slightly lower cap of 20%. These rules were believed to have been instituted in 1900 BC and many surrounding civilizations picked up on this concept.

Hammurabi, a Babylonian ruler that lived around 1750 BC, was also very instrumental in the development of peer-to-peer lending. Many of the documents that have been attributed to him discuss lending fundamentals, and how the practice should be carried out. In Hammurabi’s Code, a series of tablets on various subjects, he expounded his rules on loans for crops.

These rules dictated the maximum duration of a loan, the delivery method for repayment, as well as what a lender could do if a crop failed and there was no means of exacting payment for the loan. This is some of the first recorded evidence of peer-to-peer lending and would greatly affect the future of this type of loan.

In these ancient times, the concept of collateral was much different than it is today. For example, it was acceptable for a borrower to use their concubine to secure a loan. Other forms of collateral during this time included crops, slaves, or even one’s own children.

Fast forward to our current times and, although peer-to-peer lending has changed with respect to types of collateral, the general concept is still the same. It is much easier to get financing when dealing with a friend or otherwise bypassing a bank. And, in most instances, the interest rates are still capped - similar to what Hammurabi discussed in his famous tablets.

All cultures have their own history when it comes to peer-to-peer lending, but the 21st century developments may prove to be the most fascinating. Suddenly, people from all over the world have the ability to connect online, and vast new opportunities for peer-to-peer lending have opened up as a result.

The fires caused by last week’s unusual dry lightening storm are starting to be brought under control in some areas… The smoke is still noticeable in my part of the Bay…  Our thoughts and prayers to those that have suffered a loss.

The blogosphere had  some interesting posts this week…

Rich Credit Debt Loan is Making Extra Money With P2P Lending

Peer to peer lending with Prosper covers Prosper Introduc[ing] Institutional Lending

The Digerati Life asks rhetorically Doing A Home Improvement Project? Know Your Return On Investment

Money Smart Life says to Stop Whining & Start Making Some Money

brip blap offers 9 Ways to Save Without Breaking a Sweat.

Cash Money Life asks Which Shift to You Prefer to Work?

On LazyMan the question is asked Is Now the Time to Take Advantage of the Housing Crisis?

Blogging Away Debt internalizes Hitting a Low on the Roller Coaster Ride

GenX Finance has A Reminder to Keep Your Beneficiaries Up-to-Date

On other tangents…  I cannot tell if this is a parody site or not… but it had me laughing…  Is Money Millionaire a late night infomercial?  See for yourself at Will Astrology Help You Become a Millionaire?

and just because I was wondering the other day and this website had the answer… Who Invented Baseball?

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Plus blogs that send trackbacks that are approved will be featured in the sidebar while their trackback remains one of the last 5 received. 

While this will not guarantee that you will be included it will certainly get my attention…  The blogs featured here already have my attention.   Will you be next?

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RateLadder is a Prosper lender and has been since July, 2006.  He has a passion for p2p lending.  He owns RateLadder — My Prosper.com Journey and other P2P Lending Adventures, P2P No Bank the P2P Blog Aggregate, and ProProsper — Professional Tools for Prosper Lenders featuring SQL access to Prosper data. 

For as long as there has been a need for loans, peer-to-peer lending has played a strong role in the formation of many societies and cultures. Most of the ancient world was built on the backs of these loans, as farmers and merchants carved out their own swathe of history. We can look back thousands of years to learn how peer-to-peer lending was formed, and how it has changed.

Many believe that the birthplace of peer-to-peer lending can be traced to the earliest civilizations in Mesopotamia. This was an incredibly rich land, nestled between the Tigris and the Euphrates rivers, and home to many innovations. Our very first records of peer-to-peer lending can be found here, thanks to the meticulous records that were kept by its inhabitants.

In this rich land, there were two primary means of making a living: farming and the merchant trade. Both were highly cyclical in nature, and part of the year was spent without a means to earn any income. Farmers were particularly subject the cyclical effects as they tried to survive in between harvests. Loans became quite common during this time and were usually secured with a portion of the farmer’s future harvest.

As these loans became more popular, abuses began cropping up. It wasn’t too long before Mesopotamian officials instituted what many believe were the first interest rate caps on loans. They decided that no more than 33 ½% interest could be charged for crop loans, and silver loans were capped at 20%.

If you fast forward to 1750 BC and beyond, the Babylonian civilization was at its height, as was peer-to-peer lending. Cities were expanding and there was great need for loans to build, as well as subsisting between harvests. It was during this time that the ruler Hammurabi addressed peer-to-peer lending in his tablets which are now known as “Hammurabi’s Code.” (more info from wikipedia)

“The purpose of the Code of Hammurabi was to use political power to create common bonds among the diverse people of the society. It greatly influenced a total dependence on the power of their one ruler, and it was a conscious effort to exalt the king as the source, the only source, of earthly powers. It unified the empire by offering the standards for moral values, class structure, gender relationships, and religion. It was the most important of all Mesopotamian contributions to civilization.” (source — World History Chronology)

Hammurabi stated that there should be specific limits on the amount of time that would be given to repay a loan and also instituted guidelines to help lenders in the event that a harvest did not come in. During this time, peer-to-peer lending continued to evolve throughout the Middle East and Greece.

From 600 BC to 100 BC, an interesting trend took place in Greece. Interest rates for peer-to-peer loans were generally in the 18% range, and continued dropping until they settled in at between 6 and 12%. This is one of the first recorded drops in interest rates during this time period.

This drop was attributed to a greater availability of better collateral and the fact that the markets were much more stable. Peer-to-peer lending would continue to evolve throughout this time to the present, with each society and culture instituting their own rules and regulations governing loans. Without peer-to-peer lending, our past and as such our future, may have looked quite different.

A few people have asked for more detail about our new feature and process change where borrowers will now be signing promissory notes. We’ve been asked whether the change was made to fix a weakness in the process.

There has never been any weakness in the manner in which borrowers have signed Prosper promissory notes. Prosper’s notes are and always have been fully enforceable. We did not have to make this change, as we were not receiving any complaints about the manner in which the notes have been signed.

Until now, at the time a listing is created borrowers have appointed Prosper as their agent to sign the notes on their behalf. This has been done as a convenience to the borrower, so that the borrower didn’t have to sign 20 or more notes. Now we have created a process where borrowers can conveniently, with one click, sign the notes themselves. We elected to make this change primarily for two reasons.

First, there have been occasions where borrowers, after their listing expired but before loan disbursement, changed their mind about wanting a loan. It those instances, Prosper would go to the trouble of funding the loan (and the borrower would rightfully incur a closing fee) but they would end up paying off their loan right away. We thought this arrangement didn’t really benefit anyone – the borrower, lenders or Prosper. By having the borrowers confirm prior to loan disbursement that they indeed want the loan, this problem would be avoided entirely.

Second, the new process makes it easier to see how Prosper’s promissory notes are signed. Now there will be one page that shows how the notes were signed. Before, in order to evidence the signing of the notes, you would have to see not only the note, but also the listing creation web page and Borrower Registration Agreement that contains the language authorizing Prosper to sign the notes on the borrower’s behalf. Prosper undergoes routine regulatory examinations from time to time, and is sometimes asked to explain how notes are signed; this new process will make the task quick and easy. It may also make Prosper’s notes more familiar to prospective debt buyers who consider bidding on a portfolio of defaulted Prosper loans. (As noted earlier, in the current credit crunch environment it is a buyer’s market for defaulted loans, so anything we can do to make our loans more mainstream could help garner more or better bids.)

I hope this clears up any confusion about this feature change.

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Ed Giedgowd is the Chief Compliance Officer and General Counsel of Prosper

Last night we made another update to the Prosper site. The update includes a few nice changes for lenders and some important process changes. 

Adjust the rate on your portfolio plans

When you add a portfolio plan to your lender account, now you can adjust the average bidding rate on your portfolio plan from the “Fund your plan” page:

Just change the average bid rate, and all of the slices that make up your plan will be changed accordingly. This makes customizing your plan even easier. View your portfolio plans now.

Manual bidding guidance

As of this release, a new reminder may appear when you’re bidding on a borrower listing and the bid rate may be too low to account for the risk associated with the listing based on the estimated loss rate for similar listings. For example, if, after taking the default rate into account, you are aiming for a 6% estimated return, in most cases you would need to bid considerably more on a D listing than on a AA listing because D loans normally experience a much higher estimated loss rate and therefore you are taking on more risk. 

Here’s what the new message looks like:

You can read more on this help page.

More bankruptcy data

As foreshadowed in the May site update, we are now providing chapter and filing date information on bankruptcies filed by borrowers. If you have a loan where the borrower has filed bankruptcy, you’ll see something like this on the loan detail page:

Keep in mind that in some cases we don’t have the chapter and filing date for the borrower. In those cases, that information will not be provided in the message box.

Borrowers will now sign promissory notes for their loan

As of today, borrowers will be required to return to the Prosper site and sign the promissory notes which evidence their loan, before loan proceeds are disbursed. Until now, borrowers have not had to sign all of the notes themselves because they authorized Prosper to do so on their behalf.

Borrowers will receive an email notifying them that their loan is ready to sign, and will have 7 days to return to the site and sign the promissory notes. We will remind the borrower via email and phone calls every day until the 7 days is up, at which point, if the borrower has not responded, the loan will be cancelled.

Although this new process may add some additional time before loan funding, we expect that this change will reduce immediate loan payoffs and enhance the legal enforceability of Prosper promissory notes.

Self-employed borrower changes

Borrowers who are self-employed will now have their DTI displayed as “Not calculated”.

This is due primarily to the wide variety of business activities engaged in by self-employed borrowers, which present equally wide variations in the forms of income and tax statements often provided to verify income. As a result, income verification for self-employed borrowers is extremely difficult and time-consuming.

Additionally, the DTI of full-time, part-time, and retired borrowers who cannot verify their income will be displayed as “Not calculated”. Previously, it was displayed as “Not available”.

Stated income changes

The “Income range” field on the listing page has been renamed “Stated income”, and the stated income of every borrower will always be displayed. This includes self-employed borrowers and wage earners who indicate that they cannot document their income.

The employment section of the listing page will now look like this for self-employed borrowers:

We hope you find these changes helpful, and look forward to your feedback. If you have any requests for the next release, please leave a comment.

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Andrew is a Product Manager at Prosper.