About Us  > Blog

Conservative Underwriting For Uncertain Times

by Prosper on 08/10/11

A Message from Prosper’s Head of Credit Risk Management

With the recent turmoil and uncertainty in the financial markets, many investors are re-evaluating their investment portfolios and determining current risk levels of the asset classes they hold. It would be natural for you to have questions about how the current environment may affect the performance of your existing Prosper Notes and of new loans originated through the Prosper Marketplace.  We continue to have strong confidence in the risk and return performance of Prosper Notes, and we believe our disciplined, conservative underwriting practices will continue to make Prosper Notes a profitable and important addition to an investor’s portfolio.

This confidence in Prosper Notes is based on the following:

1)   Our strict credit policy has yielded better-than-expected returns (10.6%*) with lower-than-expected losses (annualized loss rate is 5.2%*, compared to a forecast 6.6%*) since 2009. Despite the fact that losses have come in below expectations, we have chosen to maintain substantial risk buffers in all our underwriting to protect investor returns in an uncertain environment. 

2)   Our credit policy already incorporates an expectation of economic deterioration as a margin of safety.

  • Loss performance on 2010 vintages was better than 2009 vintages, which in part reflects improvement in the economic conditions coming out of the 2008-2009 recession. We have not incorporated most of the 2010 improvement into our risk expectations.
  • We employ a statistical scorecard that is tuned to performance in the adverse part of the economic cycle. Specifically, we treat populations that tend to be fragile in adverse economic conditions especially conservatively. For example, heavily indebted borrowers are underwritten more conservatively than would be merited in good economic times.

3)   Our pricing accounts for a wide margin of uncertainty in loss performance. Based on today’s pricing, the average expected investor return is 1.3x the expected loss rate on the Notes.** That means losses on those Notes would need to come in at 230% of expectation before investor principal would be at risk.  Furthermore, because actual losses have been coming in below expectations, the multiple based on what we have been recently observing is much higher.    

Prosper Rating

Estimated Effective Yield**

Estimated Annual Loss Rate**

Estimated Annual Return**

Return to Risk Ratio**

AA

7.99%

1.95%

6.04%

3.1

A

12.85%

3.80%

9.05%

2.4

B

16.69%

5.95%

10.74%

1.8

C

20.50%

8.70%

11.80%

1.4

D

25.34%

11.20%

14.14%

1.3

E

29.57%

14.70%

14.87%

1.0

HR

29.17%

16.50%

12.67%

0.8

Overall

21.37%

9.23%

12.14%

1.3

While disciplined credit risk management is critical all of the time in consumer lending, it is especially crucial in times of economic uncertainty. At Prosper we are committed to rigorous, conservative underwriting, and we are confident it will continue to bear fruit for our investors even given these uncertain times.  

Thank you for investing with Prosper.

Best regards,

Jim Catlin

EVP Acquisition & Risk Management

* Net Annualized Returns represent the actual returns on Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculation of Net Annualized Returns, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through August 31, 2010. To calculate Net Annualized Returns, all payments received on borrower loans corresponding to eligible Notes, net of principal repayment, credit losses and servicing costs for such loans, are aggregated then divided by the average daily amount of aggregate outstanding principal for such loans. To annualize this cumulative return, the cumulative number is divided by the dollar-weighted average age of the loans in days and then multiplied by 365. Net Annualized Returns are not necessarily indicative of the future performance of any Notes. All calculations made as of June 30, 2011.

Annual loss rate represents the actual losses on Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculation of annualized loss rate, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through August 31, 2010. To calculate the annual loss rate, the net credit losses corresponding to eligible Notes are aggregated then divided by the average daily amount of aggregate outstanding principal for such loans. To annualize this rate, the cumulative number is divided by the dollar-weighted average age of the loans in days and then multiplied by 365. The forecast loss rate represents the Estimated Annual Loss Rates we provided for the borrower listings corresponding to the Notes included in the calculation of annual loss rate.

We only include Notes that have been outstanding for at least 10 months in these calculations because we believe loss rates on less seasoned Notes are less reliable indicators of likely loss rates on such Notes over their lifetime. For comparison’s sake, the annual loss rate on all Notes booked from July 15, 2009 through June 30, 2011 is 3.7%. All calculations made as of June 30, 2011.                                  

** This example reflects current pricing for three-year Notes for first-time Prosper borrowers and is weighted according to the dollar-weighted distribution of Notes originated since August 1, 2011. The Return-to-Risk ratio is calculated by dividing the Estimated Annual Return by the Estimated Annual Loss Rate. Estimated Annual Return is the projected average annual return on funds invested in all loans with a certain Prosper Rating originated on our platform during the month. Estimated Annual Return is calculated by subtracting the Estimated Annual Loss Rate for those loans from the corresponding Estimated Effective Yield. The Estimated Annual Loss Rate is the estimated principal loss on charge-offs for loans originated during the month, and is based on the historical performance of Prosper loans for borrowers with similar characteristics. The calculations of Estimated Effective Yield, Estimated Annual Loss Rate and Estimated Annual Return require significant assumptions about the repayment of loans, and lenders should make their own judgments with respect to the accuracy of these assumptions. Actual performance may differ from estimated performance.

Notes Offered by Prospectus.


Leave a Comment

Prosper moderates all comments and will approve those that are directly relevant to the post. We do not publish comments that are spam, are offensive or appear to pass you off as another person.

(required)
(required) Email will not be published.
 

Comment Policy

 

*
To prove you're a person (not a spam script), type the security word shown in the picture. Click on the picture to hear an audio file of the word.
Click to hear an audio file of the anti-spam word


posted in Featured,Lenders,Prosper News no comments »

Connect with us

Search

Lenders

PROSPER HITS ANOTHER RECORD: $100 MILLION IN APRIL ORIGINATIONS

By Prosper on 05/1/14   [ 3 ]

Just one month after announcing that we crossed $1 billion dollars in loans, I’m happy to report that we’ve hit another significant milestone. In April, a record $100 million in loans was originated through the platform. This is up 400% from one year ago and 30% month-over-month. More importantly, it is indicative of the incredible [...]

Read More

Prosper Gives Back: A Social Timeline Recap

By Prosper on 04/10/14   [ 0 ]

As of yesterday, the Prosper Gives Back campaign has come to a close. After hitting our $1 billion dollar mark, we connected with the whole Prosper community, we spoke with you guys, and we celebrated our butts off! While giving out $2,000 a day was exhilarating and fun, the greatest reward to us was hearing [...]

Read More

Prosper Crosses $1 Billion in Loans Funded

By Prosper on 04/3/14   [ 0 ]

Today is a huge day for Prosper. We crossed over the $1 billion mark in peer-to-peer loans. Its been a long road since the first loan in 2006. Since then the $1 billion dollars issued through Prosper went towards helping people fix their debts, pay medical bills, chase their dreams, and much more. The greatest [...]

Read More

« Older Entries

Monthly Archive


Notice: Blogs and other materials posted on or linked from this page that use the name "Prosper" generally use that name to refer to Prosper Marketplace, Inc. if published before January 31, 2013 and to refer to Prosper Funding LLC if published on or after February 1, 2013.