It’s been a little over two months since CEO, Steve Vermut and Head of Global Institutional Sales, Ron Suber, joined Prosper’s management team, and this week, I am excited to be joining them full time as President. I wanted to let our community know that we intend to use this blog as a method of communication to continuously inform both our borrowers and lenders of what we are working on here at Prosper, and of what new and exciting things are coming in the near future. It’s important to all of us that our customers understand we are striving to make Prosper a leader in customer service and technology. With valuable feedback from our customers, we are able to deliver products and solutions that will enhance the user experience across the platform.

I want to give everyone an idea of all the exciting things the Prosper team has been working on since bringing on the new management team. In February, we focused on building and launching tools and improvements vital to the platform’s performance. Our new API gives lenders the tools they need to customize their Prosper experience in ways never before possible, and Prosper Funding LLC provides increased security and protection for our lenders. We also extended our customer service hours to provide more one-on-one support for more hours of the day.

As we come to the end March, we’re excited to report $15.1 million in loan originations, a 60% growth over February and our best month since October. We also project $25 million in new loan listings on the platform this month. In fact, at the time of this post, there are 200 new loans now available to lenders.

We have also been looking at various ways to improve our service and product offerings for our retail and institutional lenders, as well as for our borrowers. Here are some of the priority items that we’re focusing on over the next few months (in no particular order):

•   New Prosper Logo/Identity: Along with the technology enhancements to our product, on April 2nd we are launching a rebranded web experience including a new logo and identity. We have been working on this for a while and are excited about the changes. Let us know what you think.

•   Improved collections: Over the past several months, we have focused on improving collections by increasing call intensity, and working with our delinquent borrowers to be the payment of choice during tax refund season. As a result of these changes, we have had 3 consecutive record months of collections. Moving forward, we will be adding a new collections agency and will send delinquent accounts to collections at 16 days past due rather than 31 days past due. This will enable us to expand our call coverage and skip tracing capabilities, which will provide better results for our lenders.

•   Washington State (and more): We are currently engaged in communication with the Security Division of Washington’s Department of Finance and hope to reopen the platform to Washington lenders very soon. We apologize for the inconvenience to our Washington customers – the blackout is a result of the implementation of Prosper Funding LLC’s New Note Offering. With this implementation, we have also added West Virginia and Michigan, and plan to have several additional states join the platform in the near future.

•   Whole Loans: In April we are launching a whole loan product in beta for our institutional lenders, which will be separate from our traditional pool of fractional loans. The beta version of this product is in test mode and we will communicate more details as they develop.

•   Additional Improvements: Some of the many other things we are working on are a new IRA trading option on Foliofn, an increase in the loan cap on the platform to $35,000, enhancements to our Automated Quick Invest tool (AQI), and expansion to both our customer support and technology teams.

Steve, Ron and I are committed to creating a transparent relationship with our borrower and lender communities. This asset class and market place are changing rapidly. We will continue to make ourselves available to answer any questions. Please check back here regularly as I publish new posts with updates as well as gather questions and feedback from our community at large. We welcome any comments and/or questions below.

Thank you,

Aaron Vermut
President

At the beginning of March, we announced the launch of our new, enhanced API service for lenders. The new API gives our lenders the tools they need to customize their Prosper experience, as well as build more robust tools in less time. Among other features, the new lender API service encompasses a RESTful interface which supports OData query operations, making it easier and more convenient for our lenders to code against. With the new API, we also offer more than 550 data points to each credit profile as well as individual Note details including specifics about payments and reasons for default.

As a result of launching this new API, effective May 1st, the existing API service will no longer be available. Over the next month, all lenders have the opportunity to convert and map their applications to the new API service, which offers a much more comprehensive set of data points, including access to raw listing data and enhanced data sets for analysis and reporting.

To obtain access to the new API for your lender account, please email us at investorservices@prosper.com. We always welcome your comments and feedback below as well.

We are excited to announce three new enhancements that we believe provide our investors with more decision-making data than any other peer-to-peer lending platform.

Expanding Investor Data Access

First, we now support a CSV download format for a view of our loan performance data. For each loan, you will find a selection of credit attributes from the loan application as well as variables related to the performance of that loan, like final loan status and total principal and interest paid. By combining these sets of data, we have made it possible for investors to more easily construct and test their own investment strategies. This simplified data format will replace the more cumbersome XML format that we’ve used to date. Note that this means that certain types of data, including information related to group membership, member profiles, and bids, will no longer be available in the data export.

You can find the Loan Data Export file on our new Download page. (You can also access this page via the “Download Data” link on our Performance page while logged into your account.) This file will dynamically update on a daily basis.

Expanded Underwriting Information Preview

We are also working to make new sources of data available to guide your decision-making where we can. In 2011 we initiated a project to expand the amount of information considered when determining our Prosper Score. This expanded information will allow us to make better underwriting decisions across the platform, and we are also making it available to you today.

The first component of this data is the Expanded Underwriting Archive, also available on our Download page. The Archive file has a large number of application attributes and performance variables, allowing you to test and develop a wide variety of investment strategies.

Most of these variables are not yet available to investors through our API, however. To enable you to execute your new strategies based on the expanded dataset in the short term, we are also making available a Recent Listings Sample with Expanded Underwriting Data. This file includes a sub-set of recent listings for which we have these expanded bureau attributes.

Finally, we are releasing an Underwriting Archive Data Dictionary for use with the Archive and Listings Samples. There is a lot of data included in those files, but the Data Dictionary should make it easy to understand what you’re working with.

We are truly excited about these developments and believe that they provide our investors with far more information than any other investment platform. Thank you for continuing to invest with Prosper, and please contact us directly at investorteam@prosper.com or leave a comment below if you have any questions about the new data enhancements.

OCTOBER MEDIA BRINGS INVESTORS LOOKING FOR POSITIVE RETURNS

Buoyed by press appearances on CNBC and NPR, in October Prosper posted $27m in new loan requests from potential borrowers and signed on more than 750 new investors. Loan and risk performance also continued to be strong, as the platform delivered its 38th consecutive month of positive returns to investors. In aggregate, Prosper has now returned more than $37m in interest payments to investors since its registration with the SEC in 2009, a figure that grows more rapidly with each passing month.

ASSET MARKET TRENDS SUGGEST STEADY ECONOMIC GROWTH

Election results changed investors’ focus from who will run the country to how Washington will handle the impending fiscal cliff. In many economists’ opinions, an impasse over the fiscal cliff could result in a recession as the combination of increased taxes and reduced government spending suppresses economic growth. Obviously, such a scenario would cause concern regarding how an investor would allocate capital to different investments, including Prosper loans. Do recent asset market trends support the fear of many economists? What potential strategies can a Prosper investor enact if the underlying health of the economy were to deteriorate?
Below we attempt to answer these questions.

Notwithstanding recent equity market weakness, it should be noted that the S&P 500 has had a very healthy year-to-date return, up 11.8% as of November 12th. Additionally, all major world equity markets are positive this year, with the exception of Spain and China. In short, 2012 world equity performance suggests an underlying global economy strong enough to support equity prices. Corporate high yield bonds have also shown strong performance. The BA Merrill Lynch High Yield index is up 12.9% as of October 31st. Perhaps more importantly, this index’s yield has remained remarkably steady over the past three months, suggesting that fears of a weakening economy are misplaced. If economic strains were beginning to appear, high yield bond’s interest rates should be rising.

Finally, consider two-year US government swap rates. For those not familiar with swap rates, they represent the price where two parties agree to exchange interest rate cash flows. Without getting over-complicated  a high and rising swap rate indicates greater investor uncertainty about the course of future interest rates such that an investor pays more for a swap rate given this uncertainty. Note that swap rates rose prior to the beginning of each of the last three recessions (1990, 2000 and 2008) and are now back to levels not witnessed since 1993. The current level of swap rates seems to imply that fixed income investors are not overtly concerned about the direction of interest rates, or a recession. This suggests a slow but steady economic growth rather than any rapid increases or recessionary shocks. In other words, asset market data appears to suggest things will be ok.

Regardless, if investors are concerned about a recession they should look to the high credit grades of Prosper loans. Consider our back test analysis that estimates the potential variance of returns by Prosper credit grades throughout an economic cycle. Assuming an economic downturn one-third of the time in our simulation, we saw that steady performance, with little chance of principal loss, defines the likely performance of high credit grade Prosper loans. Of course, there is no free lunch, and an investor will give up additional yield by adding these to their portfolio. But the benefit of more stable returns could be exactly what the doctor ordered if tougher economic times were to prevail.

More information on October’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

Joseph L. Toms
Chief Investment Officer

¹To calculate the Annualized Returns on Principal By Monthly Loan Vintage, all payments received on borrower loans originated during that month (i) minus principal payments (ii) minus servicing fees (iii) minus chargeoff’s are aggregated and then divided by the average outstanding principal balance. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. Seasoned vintages are categorized as those vintages that are at least 10 months old.

August saw Prosper’s platform produce a 1.027% return, our 37th consecutive month of positive returns. Interestingly, in the past few months we have witnessed a strong increase in demand from borrowers in our highest credit grades, AA and A. Today an investor can purchase a five-year AA-rated Prosper Note with a current yield of 11.08%, an estimated loss rate of 1.74% and estimated return of 9.33%.¹ As we will discuss in more detail below, we think that these Notes represent compelling value.

Last week all eyes turn to the Federal Reserve. In accordance with what many economists predicted, the weak August jobs report contributed to the Fed initiating new quantitative easing at its September 12th meeting. Combined with the European Central Bank’s recent announcement of “unlimited” bond buying of shorter-term European sovereign debt, it looks as if interest rates will remain low for an extended time. In fact, recent forecasts indicate that the Fed funds rate will remain below 0.5% through August 2015.

Not surprisingly, given the benign outlook for interest rates, investors have poured money into fixed income instruments, driving prices higher and yields lower. A recent Morgan Stanley research report highlighted the risks of rising fixed income prices, citing that long-dated investment grade corporate debt may represent the “biggest risk” in the U.S. corporate bond market and that they could lose 25% in value if rates were to return to pre-crisis levels. In short, it is our (and many others’) opinion that the sustained period of low rates has indeed altered the traditional risk/reward relationship for many fixed income instruments.

Consider current yields, durations, and long-term weighted average default data for corporate grades in contrast with Prosper’s platform inventory. As the Morgan Stanley report identifies, it is clear that high grade corporate debt (AAA-A) yields are indeed extremely low and that the average duration of 6+ years place these grades at risk if yields were to rise.

What also stands out is that Prosper’s historical seasoned default rate of 6.86% is similar to the equivalent of a B-rated corporate bond. Yet the pre-default yield is currently 2.9 times higher than corporate B bonds. Further, the average duration is 60% lower! In short, we think the data makes a compelling case to consider the risks and opportunities that exist in fixed income today. In the case of corporate bonds it appears that investment grade debt, while avoiding default risk, could suffer significant price risk since yields can’t make up for the length of the typical duration. In lower grade corporate debt investors incur default risk but receive some compensating yield, albeit perhaps not enough to completely offset price risk. In light of these options we would argue that Prosper’s platform, while incurring default risk, offers investors the chance to earn substantive yields with less price risk since the durations are significantly below those of typical corporate bond portfolios. For that reason an allocation to Prosper represents not only a sound investment but also provides substantive portfolio benefits in this trying fixed income environment.

More information on August’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

¹Estimated return is the difference between the estimated effective yield and the estimated loss rate. Estimated effective yield is equal to the current yield (borrower interest rate minus the 1% servicing fee) (i) minus estimated uncollected interest on charge-offs, (ii) plus estimated collected late fees. The estimated loss rate is the estimated principal loss on charged off loans. All estimates are based on the historical performance of Prosper loans for borrowers with similar characteristics. The calculations of estimated return, estimated effective yield, and estimated loss rate 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.

²To calculate the Annualized Returns on Principal By Monthly Loan Vintage, all payments received on borrower loans originated during that month (i) minus principal payments (ii) minus servicing fees (iii) minus charge-off’s, are aggregated and then divided by the average outstanding principal balance. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. Seasoned vintages are categorized as those vintages that are at least 10 months old.

³The current yield is based on the dollar weighted current yield for all loans originated in August of 2012.

⁴The Prosper Default figure of 6.86% is the “Seasoned” annualized loss rate associated with our annualized “Seasoned” return of 10.02%. To calculate the annualized 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 providing a gross loss rate. To annualize the loss rate it is divided by the dollar-weighted average age of the portfolio in days and then multiplied by 365.

IMPORTANT DISCLOSURES:

Notes offered by Prospectus.

This presentation includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. You should carefully read the factors described in the “Risk Factors” section of the Prospectus for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements speak only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements above and in the Prospectus. We undertake no obligation to update or revise forward-looking statements that may be made in this presentation to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.