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what if eBay were a bank?   


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qc@squirtonline.com
 
prosper.com

Don't they always say to invest in what you know? Well, I don't know anything. I don't understand the stock market and I'm not motivated to educate myself. I mean, I turn on CNBC and it's like trying to learn Spanish by watching Telemundo. For me the market has been a crapshoot running on fear and bullpucky. And what I know about real estate is that my home is worth less than what I paid for it a year ago.

But I can grasp the basics of a loan. I lend someone a few George Washingtons, they pay me back with a little extra on top. Yeah, I like that, but how does an ordinary schmo enter the loan sharking business?

Well, hello, Prosper.com. Prosper is a Peer-to-Peer (P2P) lending site that has received backing from eBay's founder, Pierre Omidyar. Imagine eBay as a bank -- people coming together to ask for and bid on loans. Genius!

Prosper completed the federal regulatory process and re-opened on July 13, 2009. However, they must complete a different regulatory process for each state before lenders in that state may invest though their marketplace. The current states eligible for participation by Prosper lenders can be found at http://www.prosper.com/help/investing.aspx#states.

(As of September 15, 2008, Prosper is not accepting "new lender registrations, and new bids from existing lenders, from residents from the Commonwealth of Pennsylvania", due to "ongoing discussions with regulators in Pennsylvania, which led us to believe the change was necessary to comply with their current interpretation of their state regulations." You can still borrow money if you're a PA resident.

I'm terribly disappointed at PA getting booted out of Prosper. So since my loans are paid off (or defaulted) that's the end of Squirtonline's Prosper.com Experiment.)

Borrowers put up a loan request and lenders make bids starting at $50. It's like you're a mini-Godfather, but without the goons. (Prosper has hired several collection agencies.) Potential borrowers post a plea on Prosper, and essentially they're like, "Oh Godfather #2345712, I really need to renovate my kitchen to properly feed my growing family, can you please help me?" And you're like, "Well, maybe, if you can explain the delinquency on your report, here is $50 @ no less than 10.75%."

Most lenders bid between $50 - $200, so their risk is spread out over several loans. Bidding on Prosper occurs in a Dutch auction format -- winning lenders get varying sized slices of the same loan, but everyone gets the same interest rate. After the loan has been fully funded and approved, Prosper debits the accounts of all the winning bidders and sends the borrower the proceeds. The borrower makes monthly payments to Prosper, who collects the money and distributes it to the lenders.

Prosper can be a great opportunity for borrowers with either good or bad credit ratings. If your credit rating has taken a hit or is non-existent, let's face it, you're lucky to get a loan at all. (There is no guarantee your listing will get bids. Two potential Prosper borrowers sought my advice on their unsuccessful loan requests. The first had a very risky credit rating with a low interest rate. The second party showed current delinquencies, and they had withdrawn several listings already which didn't inspire confidence.)

If you have good credit, you can get money for things a bank wouldn't finance -- like an office move. And if lenders continue to bid on your loan after it's fully funded, your interest rate drops. Experienced lenders are even asking for loans to reinvest in Prosper!

I love eBay as both buyer and seller, so I found Prosper.com appealing on so many levels. In fact, I dove right in with $1000. This is the most fun I've ever had investing. Actually, it's the only time I've had fun investing. It seems less risky than rolling the dice on a stock pick, and I feel like I'm sort of helping someone. But mostly what I love about Prosper.com is that just like eBay, strangers are trading together and depending on each other to do the right thing. Getting to stick it to the banks is just gravy.

It took about a month before my original $1000 investment was fully vested. The loan request has to be 100% funded by the end of the auction to qualify for review. And then several of the loans I bid on were withdrawn because Prosper couldn't verify the borrower's income.

Bidding Strategy.
I don't really have one, other than trying to reduce risk by sticking to the prime select category -- AA and A credit ratings. Prosper provides a tool that helps you choose a rate depending on the return you want. I used to use this, until I realized I was getting outbid by .01% since Prosper only lists increments of .25% or .5%. You can type in any rate you want, so now I will enter a rate that's off a little, like 13.99%. I also look for a low DTI (Debt To Income) ratio. Although I have gone slumming in the Near Prime Select Category -- I have one "B" rated borrower -- I feel my loans are safer than most other investments, and the rates are much higher than my online savings accounts.

There are two ways to bid on loans. You can browse listings and manually place bids. (When you are outbid, Prosper emails you.) You can select a Portfolio plan which is an automatic bidding tool. The Portfolio Plans are customizable, or you can build your own from scratch. I haven't used the Portfolio Plans as I don't have a lot of money sitting in my account, and I like to know the story behind the loan I'm bidding on.

I always snipe any eBay auctions I'm bidding on. That means I place my bid in the last few seconds before the auction ends, either manually or through a bid sniping website. (JustSnipe.com is free.) This way I don't get sucked into bidding wars, I don't encourage others to bid on auctions I'm watching, and I pay the lowest final bid price possible.

I suppose you can manually snipe Prosper auctions, but I don't feel the same compulsion to get the best deal (in this case, the highest rate). It doesn't bother me if the borrower's rate drops a little more than if I had waited until the end. Plus earlier bids have precedence over later bids with the same interest rate. I figure the lower the rate, the less likely he'll default. It almost makes me feel like a philanthropist.

Prosper has added a feature where you can trade notes on Folio Investing Note Trader. You have to open an account with Folio. A 1% transaction fee is charged by Folio Investing for every note sale, and the proceeds from any sale go directly into your Prosper account.

Final Loan Standings.
As of September 22, 2011 (all loans have been paid off or charged off):

Member Since:Jan 2008
Principal Invested:$2,599.84
Principal Value of Active Notes:$0.00
Out of Pocket:$262.88
Active Loans:0
Paid Off Loans:17
Avg. Interest Rate:14.57%
Payments Received:$2,286.96
Principal Paid Off:$1,867.10
Payments in Excess of Principal:$419.85
Principal Charge-Offs:$732.74
Net Loss:($312.88)
Withdrawals:$1,737.12
Late:0
Charge-offs:9

I had soured on Prosper borrowers starting late summer 2008. From January through August 2008 I was pleased with my loans' performance. Since September 2008 I had nine borrowers not making payments (out of 26 total loans). I'm hardly surprised -- with industries, corporations and state governments queueing up for a handout, why should individuals take their obligations seriously, even though they promised they would? Let me also remind you that almost all the borrowers had A or better credit grades, with the exception of one B grade. (The B is one of the bankruptcies. Two of the charge-offs have AA grades, the highest grade.)

Eight loans have now been charged-off. (The charged-off loans are not included in the 10 active loans.) Three borrowers filed for bankruptcy. Prosper accounts in bankruptcy are in a holding pattern; no payments are collected and collection activity ceases.

Let's talk about these defaulting borrowers. The first defaulting loan was originated on 2/21/2008 for $15,000. The borrower's combined income was $236K last year, and he purported to be a top real estate agent in Atlanta. He made five payments on his loan, filed for bankruptcy on 9/1/2008, and received a discharge on 12/29/2008. This loan has been charged off and I'm SOL.

The second borrower takes home $4,700 per month. His loan originated on 6/10/2008 for $15,000. He made two payments on this loan and filed for bankruptcy on 8/29/2008. He received a discharge on 3/24/2009. This loan has been charged off, and there is no possibility for recovering any more of the principal owed, as it has been reduced to 0. This borrower claimed he was using the Prosper loan to consolidate some high interest credit cards and loans, and to keep a few thousand dollars for "summer-related expenses" for his wife and two children.

It was a mistake to lend this person money, but he had an "A" credit rating, he had no delinquencies and I figured the Prosper loan would give him breathing room with his credit card payments. For some reason I disregarded the part about the summer-related expenses. What was I thinking?

I have to assume that filing for bankruptcy is a serious decision that required family discussions and strategy sessions for a few months prior. How can someone file for bankruptcy less than ninety days after receiving $15,000? And why set aside several thousand dollars for summer fun if you have over $16K in credit card debt? This is total bullshit! Bankruptcies only stay on your credit report for ten years.

The third borrower whose loan is in collections claimed over $2100 monthly income available after expenses to cover a $900 monthly payment. His loan originated on 5/09/2008 for $25,000. It has been charged-off because the payment is over four months late.

The fourth charge-off originated on 4/1/2008 for $24,000. The borrower claimed $3,350 after expenses available for a $856 monthly loan payment. His last payment was on 10/1/2008.

The fifth loan originated on 3/13/2008 for $19,500.00. His income was stated at $100,000+. He made 8 payments and the loan has been charged off.

The sixth charged-off loan originated on 2/22/2008 for $20,000 @ 14.15% to start a restaurant. The last of 11 payments was made on 1/22/09.

The seventh charged-off loan originated on 6/04/2008 for $25,000 @ 16% to pay off old debts. His 13th and final payment was made 7/04/09. He claimed $3,000 monthly income left after expenses, and that with his recent promotion he would receive a bonus every March that could pay off the loan in full.

The eighth loan originated on 2/1/2008 for $18,000 @ 14.5% to pay off a car note and help with college expenses. Looking back at her record, her payments often failed but she hasn't paid successfully since 2/12/2010.

The ninth loan originated on 3/24/2008 for $24,000 @ 15% (rate includes a 1% servicing fee since listing was created before 10/15/2008) to purchase trailers for a mobile home park in order to qualify for refinancing. His last payment was on 4/24/2010. He claimed it was a great business and expected $140K/year cash flow after debt service, and at the time of the listing was receiving $7K/month in cash flow.

Prosper will continue to collect on five charged-off loans until they are sold to a debt buyer. I remain skeptical as I don't believe I received anything from collections.

"Out of Pocket" are personal funds I transferred into my Prosper.com account, minus withdrawals and cash balance. The difference between Out of Pocket and Principal Invested are any bonuses and reinvested principal and interest. Prosper keeps changing (hiding) the information that is displayed in my account, but they returned important lines like Net Income/Loss and Value of Loans. Although they no longer break down Payments Received into principal, late fees, interest or servicing fees, they provide a line called "Payments in excess of principal" which is Payment Received - Principal paid off. The account value goes down as the loans are paid off (I didn't realize this immediately). Prosper.com charges lenders a 1% annual loan servicing fee.

The credit ratings of my borrowers range from AA to B. Payments Received includes principal, interest and late fees minus servicing fees and collection agency fees. I used to login to my account every few weeks to see if I had enough of a cash balance to invest in a new loan, but now I've withdrawn all the funds.

Join Prosper Now and Get $25!
If you join Prosper through my link, Prosper will give you $25 once you fund your account. You can only get this bonus if you are referred by a current member. (The $25 bonus shows up about three days after you transfer money into your Prosper account.)

Here's my link again to Prosper.com

That's all, folks! Thanks for reading!