Ever since we changed the marketplace performance page from listing old loans as “Defaulted” to calling them “Charge-offs”, and then promising more changes inside lender accounts, we’ve had a lot of questions. Let me try to explain why we’re making this change, how it will look if you’re a lender, and what you can expect going forward.
Performance page changes
In mid-August, we changed the way we displayed seriously delinquent loans on the marketplace performance page, renaming “Defaults” as “Charge-offs”, and moving the “4+ months late” loans into the “Charge-offs” category. Our goal was further transparency in reporting our marketplace’s default rate, and I believe we achieved such transparency.
In our next site update, we’ll be adding even more data to the performance page, separately listing principal payments made before a loan is in Charge-off (4 months late) as “Pre-charge-off payments”, and displaying the total amount collected after a loan is in Charge-off as “Recoveries”.
What does charge-off mean?
In general, a debt or account is considered “charged off” when it is unlikely that further payments will be received. Debts are usually charged off after they remain unpaid for a period of time (e.g., 90 to 180 days). Prosper uses the 120 days as the charge off threshold because loans that become over 120 days past due are eligible for sale to a debt buyer, and we have found that there is a steep drop-off in likelihood of further payments after 120 days of delinquency.
You can think of the new “Charge-off” status as a combination of “4+ months late” and “Defaulted”. A loan is designated as charged-off when it reaches 121 days past due.
The implications of a loan being designated as charged-off are the following:
• The loan’s entire balance (principal, interest and accrued fees) is immediately due and payable in full as of the charge-off date.
• As soon as a loan is charged-off, it remains in collections until final disposition of the loan. Possible dispositions include payment in full, sale to debt buyer, or if the loan is discharged in bankruptcy.
• Although the status of all loans 121+ days past due will be “Charge-off”, you will be able to distinguish the various collection, bankruptcy, and sale “sub-statuses” of charge-offs as they will be visible on the loan detail page.
• Once in charge-off, loans cannot be brought out of charge-off. Payments made by the borrower post-charge-off are considered “recoveries”, and are applied to pay down the loan’s balance, but the loan stays charged-off.
When a loan goes to charge-off, the loan’s balance (principal + accrued interest + accrued fees) will be frozen into a “Charge-off balance” for lenders.
As mentioned above, post-charge-off payments (i.e., recoveries) pay down the lenders’ charge-off balance. From the borrower’s side, however, interest continues to accrue, so there is a possibility (however small) that if a borrower pays off a charged-off loan in full, a lender could receive more than the charge-off balance indicated.
Lender account changes
Inside your lender account you’ll find that loans previously marked as “4+ months late” bucket will now be included in a bucket called “Charge-offs”. You’ll also now be able to see the total number of loans paid in full. A rough approximation of what my lender account will look like once these changes have taken effect is shown at right.
Charge-offs will also be included in the “Net defaults” (now called “Net charge-offs”) total of the lender performance table. If any recoveries are collected, your net charge-off total will go down accordingly.
How are recoveries handled?
A recovery is just a different name for a payment made on a charged-off loan. Post-charge-off recoveries received on accounts that are with a collection agency are subject to collection fees.
In addition to the “Payment history” table, each charged-off loan will have a separate table for the “Recovery history” of the loan. This table will detail the date, amount, and any related fees for any amounts collected after the loan has been charged off.
I look forward to your feedback and further questions.
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