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The Facts of the Matter

by Prosper on 09/2/08

A highly unusual Prosper borrower bankruptcy case, which is of course a matter of public record, has raised questions among some members of the Prosper lender community. Therefore, we believe it is appropriate and necessary to provide factual clarity to set the record straight.

Specifically, the discussion centers on three main questions:
1) Is this a case of identity theft subject to Prosper’s Identity Theft Guarantee?
2) What is the status of debt sales and collection activities on Prosper?
3) What are the net returns on Prosper?

In the relatively small number of identity theft cases that have occurred on Prosper, the cases typically involve a perpetrator stealing a borrower’s identity and then using it to transfer money into a bank account solely controlled by the perpetrator of which the victim is wholly unaware. In these cases, it’s fairly straightforward for the borrower to show that money was not transferred into an account they own and therefore they did not benefit from or receive the proceeds of the loan. In these cases, Prosper repurchases the loans and works with law enforcement and the courts to find and prosecute the perpetrators. It’s important to underscore that since inception Prosper’s position has always been that in legitimate cases of verifiable identity theft, we will repurchase the loan and return the unpaid principal balance to impacted Prosper lenders.

However, in more rare cases of identity theft claims, someone who knows the borrower has access to both the borrower’s Prosper ID information and bank accounts. These “friends and family” cases are more complex because it is often difficult to show that the borrower did not benefit from the money if it went into their account. Thus, Prosper follows the guidelines of the Federal Trade Commission in their “Fighting Back Against Identity Theft” program, and industry practice, by requiring borrowers to file a police report and name anyone they know of that may have been the perpetrator of the crime. This is a critical step because it prevents the clear moral hazard of someone taking out a loan, having the money sent to an account they have access to, and then immediately claiming the loan does not belong to them.

If Prosper or any financial institution were to allow borrowers who take out loans that are sent to their bank accounts to simply claim that they are not responsible, a large number of unscrupulous individuals would surely take advantage of such a loophole. Therefore, requiring a police report where any known perpetrators are named is a very important requirement to distinguish between those using identity theft as an excuse not to pay and those real victims of identity theft who need to be protected.

Turning to the particular facts at issue, the borrower in this case took out a $25,000 loan in August 2007. After making two payments, the loan became delinquent and went to collections. In January 2008, the borrower filed for bankruptcy protection under Chapter 13, and further claimed that the loan should be excluded from the bankruptcy (i.e. the debtor’s Chapter 13 repayment plan) because it was allegedly made by the borrower’s wife using his identity. The borrower has also claimed identity theft on a number of other debts included in his filing. Two additional payments on the Prosper loan have been made recently.

The assertion of identity theft has been made despite the fact that the loan was funded into a joint bank account belonging to both the husband (debtor) and the wife, meaning the borrower had full access to the funds. Also, the borrower has claimed that his wife stole his identity, but he did not name her in a police report claiming identity theft. Also noteworthy is that fact that prior to loan funding, Prosper reviewed copies of the borrower’s driver’s license, pay stub and W-2, and a male at the phone number provided on this loan successfully answered all of the screening questions in Prosper’s phone verification process. These facts distinguish this case from the true identity theft scenario.  

Based on these principles and the evidence developed in this case at this point in time, Prosper believes that the case is not one of verifiable identity theft and intends to treat the case and defend the matter on that basis. However, in the event that new substantiated evidence was to come to light proving that this was a legitimate case of identity theft, Prosper would naturally change its position with respect to the litigation, while also honoring its Identity Theft Guarantee. 

We would also like to address questions raised about statements made in Prosper’s pleadings as to who made the loan to the borrower in this case. Specifically, there was understandable confusion about a statement in one of Prosper’s court documents that incorrectly described the legal relationship among Prosper, the borrower and the lenders. Although the incorrect statement is not germane to the central issue in the case, we are currently in the process of correcting this in an amended filing with the court. We want to apologize for any confusion this mistake on our part may have caused for Prosper lenders. 

Regarding the second question about debt sales and collections, Doug Fuller has communicated that the current economic environment has significantly lowered the value of bids from debt buyers, meaning bids have been insufficient from a net return perspective in comparison to continuing to work to collect on 4+ months late loans. 

Finally, it is important to reiterate that the best estimate of net returns from the entire portfolio of Prosper loans are roughly 6% as demonstrated by an independent University of Maryland study conducted using Prosper’s data, which is fully transparent and publicly available via Prosper’s API and data downloads. 

We hope this discussion helps clarify the facts of the case in question and related matters to interested members of Prosper’s lender community.

Updated: Prosper has filed the motion with the court to correct the error we referenced in the post above. 


  • Nora_Lenderbee

    Thank you for the detailed explanation of the situation with this case.

  • mothandrust

    Regarding debt sales and collections–one of my 4+ month lates which had been part of the cancelled debt sale filed for bankruptcy and now I will receive nothing. Had Prosper accepted highest “insufficient” bid I would have received something instead of nothing.

    I would very much like it if Prosper would conduct debt sales that are regular, transparent, and competitive instead of trying to time the credit markets.

  • http://www.prospers.org/blogs/zcommodore zcommodore

    I find it amazing that this “oversight” regarding the lending agreement discrepancy is just now being corrected. It’s been discussed for months on the discussion forum that must not be named and I’m certain a number of people have brought it to the attention of Prosper’s customer support and various other avenues. Why is it that Prosper only decides to correct this when it is mentioned in an article in the public media? It would have been a lot simpler and better to correct the “mistake” immediately rather than wait for it to become blown way out of proportion would it not?

  • cardinalflyer

    It appears a lot of bidders stop bidding when their loans go into past due status. I have a hard time figuring out what happens with collections and what recourse Prosper has to make these people pay, some seem to have the resources but just don’t want to pay. I’ve also asked about Chapter 13 filings and if we will continue to be paid, but no answer to that question.
    Lately a bunch of carrots appeared along side of some of my 4 month late loans, like payments were coming in, then later on the same day they disappeared???
    Until collections improve, I will not be bidding much more. Letting borrowers get by with not paying their loans doesn’t seem to be a good way to run a business.

    JR

  • http://blog.prosper.com Prosper Blog

    In response to zcommodore’s comment:

    First, we want to thank those who took the time find and point out that one of Prosper’s court documents related to the above referenced case incorrectly described the legal relationship among Prosper, the borrower and the lenders. The amended filing (correction) with the court will take place within the week, and we will post a follow-up comment once this has been completed. However, to be clear, this incorrect statement was not germane to the central issue of this case nor did it result in any changes to or have any bearing on Prosper’s legal agreements with lenders or borrowers. Regardless, we agree that we should have corrected this mistake and cleared up the confusion in a much more timely fashion. We sincerely apologize.

  • http://blog.prosper.com Prosper Blog

    In response to mothandrust and cardinalflyer’s comments:

    There is a “rule of thumb” in debt buying that you know you didn’t pay too much for a portfolio if you receive back you purchase price in the first year. In the case of the accounts that comprised the “cancelled” debt sale bid file, they have already collected more than 2/3 of the total amount of the best bid. We remain confident that NOT selling the file was/is in the best interests of the lenders.

    Having said that, one of the challenges in working with Prosper collections is the fact that while there is interest in how the whole portfolio is performing, lenders quite rightfully only really care about what is happening on their loans. A lender that is on one of the loans that came current is probably very happy with the decision — a lender on a loan that declared bankruptcy or does not pay anything, would obviously rather had the debt sale price.

    This is one of the key reasons for diversification in the loans you own.

  • I8Well

    Fred93 stated” As part of Mr. Gaerke’s claim that the Prosper loan was identity theft, he says that Prosper never contacted him, and never verified his identity prior to originating the loan. I would have expected Prosper to defend itself against this charge, producing or at least offering to produce records showing how and when the fellow was contacted and his identity verified prior to loan origination. This verification is Prosper’s duty, so I figured maybe they kept records, and could produce them. Maybe sworn statements from the verifier person, or recordings of phone calls. They didn’t produce any of these things.”

    Please respond.

  • cardinalflyer

    How about the chapter 13 bankruptcy filings, when will those people resume payments?

    JR

  • BT

    In response to the “Charge-Off” status. I have a business proposal for Prosper to force the borrower to sign an agreement if he or she could no longer pay the current outstanding loan within 30 days of a 4+ months status, then they will be “Charged-Off” permanently. It may help also to include this information in the initial Loan Agreement after the bidding is over. As a borrower, he or she should not be able to borrow anymore from Prosperm, and as a Lender, I would prefer to claim this delinquant loan and its remaining principal balance as a loss investment in my tax return permanently.

  • http://blog.prosper.com Prosper Blog

    While Prosper cannot give you tax advice and you need to discuss the particulars of your situation with your tax advisor, what you are suggesting is exactly the procedure that is being implemented.

  • http://www.codesweep.com tekiegreg

    I’m inclined to agree with Prosper’s decision, even if it means I’d be out money as a result. Identity theft between husband and wife? I sign for stuff for my wife all the time. Generally I call her first at least if she’s gone, but once or twice I couldn’t even do that much…so far no issues have resulted.

    On the other hand if we’re talking a family member grabbing prosper $ to feed his drug habit so he bums his Father’s ID…gets dicier…

    I think the following criteria need to be established for a transaction to be considered Identity theft:

    1) An ID must have been used that was not the actual ID of the person who signed up for on Prosper (well duh)

    2) The Person whose ID was used in the signup cannot have given consent in any way for that person to sign up for a Prosper account.

    If consent was given, must have been given of sound mind (not drunk or under influence), free of coercion or intimidation.

    3) The person whose ID was used in the signup cannot be a legal spouse/authorized domestic partner of the person who actually signed up for the Prosper account (we’ll just exempt spouses outright from identity theft on each other, that’s just too dicey going there…)

    Exception to 3: Documented divorce or separation in progress at or near the time of signup/loan posting, a disgruntled spouse is identity theft.

    Does Prosper need to enforce all this at every loan posting? No, but to make a determination of identity theft, these criteria need to be laid out, if established the guarantee is held and we’re refunded.

    Thoughts from the crowd?


posted in Borrowers,Lenders,Prosper News 11 comments »

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