We are thrilled with the results from Prosper’s first two months of operations since re-launch. Lenders are really capitalizing on Prosper’s best in class rating system and auction pricing model. Here are some of the highlights:

• The average credit score for loans originated in September was 714.
• The average yield to lenders is nearly 15.9%.
• The average expected loss on the loans originated since inception is 5.9%.
• The expected return to lenders is 10.0%.

I can hear some of you saying these loss rates and returns are estimates of future performance and could be wrong. So how is this good news? Before you start posting your important insights to your favorite forum, there are two points I would like to make:

First, the Prosper Rating System incorporates both national credit bureau scores and the most robust historical performance data in the peer-to-peer industry. In addition, the historical performance that underlies the Prosper Rating System is derived from a poor economic environment. As a result the estimates of loss are biased higher than if the economic environment had been more benign. The variance between actual performance and estimated performance (for better or worse) will be significantly lower than what we saw with the pure score driven rating system.

Second, the chance that actual losses are different than expected losses is the primary risk that lenders should consider when pricing their bids on loans. In my opinion lenders are now pricing in appropriate cushions to compensate for the risk. 

For example, since re-launch lenders have priced AA loans to yield 8.5% and E loans to earn 28.0%. 

As a result the expected return for AA loans is 7.3% and the expected return for E loans is 13.4%. Losses for E loans are expected to be 14.5%, so even if losses increase by 50%, the return on these loans would still be greater than 6%.  Of course, there is an equal chance the loss rate will be lower than expected by 50%, in which case E loans will return greater than 20%. 

Lenders that priced appropriately for risk in the past and diversified appropriately, have historical returns that beat almost any comparable asset class over the past three years.

If lenders demand appropriate rates to compensate for risk and diversify across a broad group of loans, the combination of a rating system based on both national credit bureau data and historical performance and the flexibility to price for risk through an auction is a winning combination.