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.
Today’s topic focuses on what in the industry is called “Recoveries”. A recovery is the amount of money that you can extract from a debtor once a loan has been charged off and the value of the asset has been written down to zero. Although effective collections on charged off loans can reduce the impact of credit losses, Continue reading Collections Series - Part 2: Debt Sales and Charge-off Collections – Status and Plans
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.
