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.

I have always loved magic. As a kid I was amazed at how the magician could make a beautiful lady disappear and reappear in a different outfit or cut her in half and put her back together. My favorite trick is the one where the magician is able to pull deck after deck of cards out of thin air, fan them out, and toss them to the ground and pull more cards out of nowhere. I used to buy books and videos on how to perform my own magic. I even learned how to levitate a few inches off the ground. So how are these tricks performed? Well, few magicians may really have magical powers, but most others magicians practice the secrets of illusions and sleight of hand. The key is knowledge and practice.

After working at Prosper for over a year and a half, I have seen many borrowers hope for something magical to happen to their listing without any knowledge of how to get funded. But just like a magician, you’ll first need the knowledge and then go and practice it. It does take some time and practice to create a good listing.

Some things to remember when creating a listing:

1. Include a meaningful picture: A picture is worth more than a thousand words. When I was a child my favorite books were the books with the most pictures. People like pictures and if they like your picture, you might win that bid.
2. Include a description that makes sense: Everyone already knows you want the money, so this is the place to explain the reasons why. Make sure everything you explain makes sense.
3. Double check your grammar and spelling: Your teacher is not going to grade your listing, but lenders are going to make assumptions based on what they see. If your listing looks like it is well organized and well thought out, then that reflects the type of borrower that created the listing.
4. Answer lenders’ questions: If any lender took the time to ask you a question, they must have some interest in your listing, so reply promptly with an honest answer and you might win that bid.
5. Get recommendations with bids from friends and family: Just like in the real world, a few good words from a good reference will help build trust and narrow the gap between two strangers. Recommendations are strong because actions (money) speak louder than words.
6. Loan Amount and Interest Rate: Prosper listings with low loan amounts are funded more often than listings with high loan amounts. So if your loan amount is too high you might want to try lowering it to attract more bids from lenders. And increasing your starting interest rate may attract more bids and drive your interest rate down!

With these secrets, you too can now perform some Prosper magic. Voilà!

-

Alex Hung is a member of Prosper’s Support Team

Starting a business is a daunting task – but for many it is a desire to follow a dream. To embrace risk…and the possibility of failure. It’s impressive how many people start businesses, follow their dreams and take those risks. And we see it everyday on Prosper – interesting stories about members’ business ideas.

As I glanced through the site I was humbled by the number of members driven by an idea - the possibility of becoming their own master and provide a service or product to others. You can search by Business Use and read about some of the business uses – funding a trade show booth; expanding a store, expanding a driving service, opening a pizza store and so on.

One of our borrowers, Lara Miller, started her business just a few years ago. Lara has had three loans with Prosper, one paid off and two current. She is a successful designer and her business continues to flourish. We love to read about our community members who have successfully launched a business, put themselves through college, gotten out of debt and many other stories.

We featured Lara in one of the Prosper commercials. You can also learn more about Lara by reading her story or watching the behind the scenes video.

Lara is now in the midst of generating more buzz by entering an interesting competition from www.ideablog.com  where you can submit your idea and let the community vote. Only eight contestants are selected to be in the monthly competition which lasts about 22 days. The top two winners then go on to enter into the monthly showdown. Every month one winner is selected and wins $10,000. The community decides the winner by voting for their favorite idea.
You can check out Lara’s idea here Lara Miller’s Wear It Your Way Sustainable Women’s Wear which focuses on green issues and reinforces the need to wear sustainable materials.

Acknowledging the impact that we have on our environment, my collection mixes hand-loomed “convertible” knits and tailored wovens made of sustainable materials for a contemporary customer. I have tripled my sales in one year. Please help me manufacture my orders as I continue to grow the business.

You can also check out Lara’s website at http://www.laramiller.net

Good success and planning to all our Prosper members with businesses of their own! If you are looking for a personal loan for your business, apply for one on Prosper.

Snowflaking is a way to save on interest. The general principle is to pay in a small extra amount towards a loan every month, a $5 snowflake here, a $10 snowflake there starts to build into a snowball which, if rolled downhill, compounds. These small amounts might not seem like much, but they definitely add up.

This process is traditionally used for reducing credit card payments but it’s also viable for a Prosper loan since any snowflake you put in will reduce the overall interest you’ve spent for the entire term of the loan. You will also end up paying it off early.

You will see below that that snowflaking is more valuable the higher your interest rate goes.

For example:
Let’s look at a very simple example of how this process can save you money. Let’s say you got the minimum amount possible for a Prosper loan, $1,000 and let’s say it was at 9%. Let’s snowflake at a 1% rate, meaning that you put in an extra $10 (which is 1% of the loan amount) a month towards the principal, and see what happens:

• Your 36 month loan term has been shortened to 27 months
• Your total interest paid has been reduced from $144 to $106, a savings of $38 which adds up to a savings of 27% on interest
• That’s 3.8% of the $1,000 principal

It may not seem like a huge amount, but if you pay a higher rate see below, it gets better.

Scaling it out
Now, a $1,000 loan is not a lot of money, and $10 is not a lot extra to pay in, but if you scale the 1% rule up you save a lot more money. If you borrowed $10,000 and snowflaked at a 1% rate ($100 extra a month) you’d save almost $400 in interest payments! Scale it up to the maximum loan amount for a Prosper loan of $25,000 and, at 9%, you’d save $1,000 in interest - nothing to sneeze at.

Scaling it up
I mentioned it gets better. We looked at how much you can save on a Prosper loan by looking across different loan amounts. What happens if we look vertically at different interest rates as they go up, how much more will you save?

Turns out a lot. Let’s start with that $1,000, and let’s say that interest rate is 25% instead of the 9% rate used above:

• Your 36 month loan term is still shortened to 27 months
• Your total interest paid has been reduced from $431 to $309, a savings of a whopping $122 which adds up to a 29% reduction on interest
• $122 on $1,000 is 12.2% of the principal!

Now that we are scaling these calculations up to higher interest rates, let’s scale it out again for higher loan amounts:

At $10,000 and 25% interest, the 12.2% still applies, so you’ve saved $1,222 in interest payments. That’s a lot of money. At the $25,000 maximum the savings are a whopping $3,050!

The 1% rule
I like the 1% rule because it’s easy to calculate and easy to do. No matter how much you borrow and no matter how much your interest rate, a 36 month Prosper loan will always be reduced to 27 months by simply paying 1% of the loan amount on top of your regular payment.

GenX Finance offers How to Tell if You Have a Bad 401k Plan.

Rich Credit Debt Loan tells you How to Keep Cash Flow Coming In.

LazyMan covered a recently reemerged story in Extreme Foreclosure!.

The Digerati Life laments Lost Money: How Money Drains Add Up To $175,000 In 10 Years.

Cash Money Life discusses the need to Get It In Writing.

Brip blap has a desperate addiction – political news is a disease.

Mrs. Micah is discussing The Logistics of Snowflaking Extra Payments

Prosper Facebook Application Reaches 5,000 Users

A rare solar eclipse was caught on camera from Siberia…

Want to be a part of this round up in the future? It is easy… leave a relevant blog comment and/or link to a Prosper blog post in a relevant way from your own blog. Then, when I stop by your blog to see who you are, be sure to have fresh content as most of the posts that will be highlighted here will have been published in the last week.

Plus blogs that send trackbacks that are approved will be featured in the sidebar while their trackback remains one of the last 5 received.

While this will not guarantee that you will be included it will certainly get my attention… The blogs featured here already have my attention. Will you be next?

—

RateLadder is a Prosper lender and has been since July, 2006. He has a passion for p2p lending. He owns RateLadder — My Prosper.com Journey and other P2P Lending Adventures, P2P No Bank the P2P Blog Aggregate, and ProProsper — Professional Tools for Prosper Lenders featuring SQL access to Prosper data.