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A little cheerleading for Prosper Ratings

by Prosper April on 08/31/09

I’m excited, thrilled even, by the switch to Prosper Ratings. Although the Prosper Ratings are still letter grades ranging from AA – HR they are radically different from the credit grades we used in prior years.

Before Prosper Ratings, there were Credit Grades, which were based solely on the Experian credit score.

Two listings with the same Credit Grade could have very different loss rates. As you’ve probably read on the site, new Prosper Ratings are based on an estimated loss rate, which in turn is based on a combination of Prosper Score and Experian credit score referenced against historical data. I guess when I put it that way, it doesn’t seem that exciting… so let me boil it down to the truly exciting part: Prosper Ratings aren’t just about a borrower’s Experian credit score.

Don’t get me wrong—Experian’s credit scores are very important when assessing a listing. They remain an easy one-glance way to start getting an idea of a borrower’s past performance when repaying their obligations. I’ve seen lenders run into problems when they tried to put too much faith in a Credit Grade, though. First, we don’t know exactly how Experian calculates that credit score. Do they put the same weight on the credit history details we’ve found have a big influence on loan performance amongst actual Prosper borrowers? Probably not.

Furthermore, there’s more to a loan request than just the borrower’s credit history. A 760 credit score borrower sounds great, after all, until you go on to see they make $1-$24,999 per year and are asking for a $25,000 loan. A Prosper Rating that considers the historical performance of actual Prosper borrowers is a huge step forward in accounting for these listing-specific details.

Some highlights of what affects a Prosper Rating:

1. Experian Credit Score
The credit score is still very important, and a major factor affecting a listing’s Prosper Rating.

2. Inquiries and delinquent accounts
Many inquiries are an indication that the borrower is seeking credit from multiple sources, while delinquent accounts indicates the borrower is already having trouble meeting existing financial obligations.

3. Loan Amount
The monthly payment amount for a loan has an effect on its loss rate, and that makes sense. The level of financial distress necessary to force you to default on a loan with a $35/month payment is a lot higher than on a loan with a $900/month payment.

4. Available credit on bankcards
Someone with a 99% bankcard utilization might have fewer options in a temporary financial emergency, driving them to default on a loan that another borrower might not have to.

Do you see why I’m excited yet? By basing the Prosper Rating off estimated loss rate, it should give lenders a better idea of how risky a listing is at first glance than Credit Grade alone ever could. Also, because Prosper Rating is affected by so many factors, it has simplified the criteria in my saved searches, portfolio plans and bidding decisions by quite a bit.

I’m happy to sing praise for anything in my life that improves both simplicity and accuracy at the same time.

Learn more about Prosper Ratings.  Notes offered by prospectus.


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11 Responses


Rick Campbell | September 1st, 2009 at 2:12 pm

What do the ratings really mean? I have had 3 “A” rated loans be charged off, it now apears one “AA” will be charged off and another “AA” is late. I did not do any loans below C and the large majority were A or B rated, but 10% have been charged off so far and it appears likely before the end of the year another 10% of my loans will be charged off. How does one recover from that regardless of a new ratings schedule or the “good” interest rates?


NewHorizon | September 2nd, 2009 at 2:36 pm

@Rick “What do the ratings really mean?”

From the prospectus, we read:
“The Prosper Rating may not accurately set forth the risks of investing in the Notes and no assurances can be provided that
actual loss rates for the Notes will come within the expected loss rates indicated by the Prosper Rating.”

HTH.

And also, I thought I read (but can’t find it) that as Prosper loans continue to accumulate and age, the Prosper Rating can change. For example, if we take an “A” rated listing and post its identical twin two years from now, it might be rated “B” at that time because similar loans ended up performing worse (in my theoretical example) than was calculated 2 years prior.

Me – I think I’ll pretty much sit on the sidelines until I can see how well the new rating system tracks with real Prosper loan performances. Hopefully, in, say, 2 years, the new ratings won’t be abandoned in favor of some new rating/scoring system – starting my waiting process all over again. But for now, I find myself unable to share in Prosper April’s exuberance.


Susan | September 3rd, 2009 at 12:42 am

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Susan

http://pay-dayadvance.net


John Roberts | September 3rd, 2009 at 1:52 pm

We will have to wait and see if the new system works any better, but based on past performance, even those that bid only on AA and A rated loans lost money. Hardly anyone has made money, some lost a lot!!!

JR


Sandi | September 5th, 2009 at 7:17 pm

There are no guarantees. An AA+++ could leave you holding the bag while an HR, like me, could keep their word and pay you back. Someone in hard time who’s a good person remains a good person. I had a loan of $1000 last time. I had 3 years to pay it pay. I promised to pay it back in 6 months and I did. My rating was an E. My credit score is better now than it was two years ago. Statistics prove you may lose your money regardless of the rating. It’s the honesty of the person you do business with that makes or breaks your contract.


Steve | September 7th, 2009 at 8:00 pm

I cannot wait for Prosper to start allowing lending from Ohio again. I have an account with half the funds in cash waiting for the approval.


Marilyn | September 16th, 2009 at 8:17 am

After reading comments on this blog I understand why with only 8 days left my “C” rated loan is only 3% funded. And I am disappointed. My information states I have no delinquencies, no defaults, no lates, just high balances on credit cards. That little bit of information does not tell you I only us one of those cards now. and am paying the others off as quickly as I can. I pay the required minimum, the interest and any insurance every month. This increases the amount I voluntarily pay out.

Because of this when I decided to increase my professional standing by earning the right to place CPP and PHR after my name, I had to make the decision to reduce the amount I paid out, or borrow the money short term. I have the money each pay day to repay it, I just didn’t plan well enough to come up with it in a 30 day period.

Ratings and scores aren’t everything. I know a system needs to be in place to “protect” investers, but they tell you nothing about the person.


NewHorizon | September 16th, 2009 at 10:14 am

“Ratings and scores aren’t everything. I know a system needs to be in place to “protect” investers, but they tell you nothing about the person.”

This is a common sentiment. But over the years, Prosper borrowers before you have gone on to show that “ratings and scores” are *indeed* the best predictor of their ability to repay the loan. Lenders have otherwise lost a lot of money looking past the numbers.

Don’t get me wrong. You’re probably an upstanding trustworthy person. But being trustworthy doesn’t mean there’ll money in the bank to repay debts.

Anyway, I suspect you’ll have an easier time convincing people you already know in real life that it’s safe to lend to you than convincing faceless lenders here…?


Linda | September 16th, 2009 at 9:53 pm

Re: Marilyn/Sept 16
As a lender looking at the loans, I don’t always understand funding. E.g., I don’t understand why some loans with minimal information are funded quickly, but other loans that seem more solid are unfunded.

Whatever the case, I look at the description to get the personal aspect. That is the place for a borrower to make his/her case in a personal way. And many don’t, and that affects whether I bid. E.g., you could (and perhaps you did) explain about now using only one card and paying off the others.

A high bankcard utilization turns me away fast. Explaining that that utilization is dropping, and the plan you are using to do so, can help. Borrowers need to provide as many details as possible. “Need a loan” doesn’t cut it.

Hope this helps.


Mike Massey | September 17th, 2009 at 8:18 pm

After posting yesterday I received an email from Prosper assuring me AmSher is doing a good job.

Well then certainly lenders should rejoice that the rating system has changed since my portfolio constructed from the old rating has performed so poorly and collection effort was not the reason.

Today here is where my AA, A and B rated loans stand.

I have 13 AA loans of which 3 have been charged off and 1 is past due. (31% of my AA loans)

I have 9 A rated loans of which 3 have been charged off and 1 is past due. (44% of my A loans)

I have 13 B rated loans of which 2 are charge off and 1 is past due. (23% of my B rated loans)


CG | September 17th, 2009 at 9:44 pm

I kinda like the new Prosper borrowing system. My EX scores on here are 760-780 and I had to take the minimum-maximum amount that would allow me to have an “A” loan. Mind you, I needed at least $2200 more, but was happy I was able to get funded. I currently hold a mortgage, a car loan (that I will attempt to use Prosper to refinance that) and various major credit cards and store cards (and one gas card).

I did have credit issues in the past. I was young, dumb and full of stupidity. Those days are long gone. I hope to have my loan paid by the end of the year (at at the extreme latest by March 2010). I know lenders like seeing interest, but they care more that they have their principal back. I also await the day I can invest in Prosper…but I’m in NJ. :-(


posted in Featured,Lenders,Prosper News 11 comments »

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