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