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A Visit With Prosper

by Peter Renton on September 12, 2013

Prosper New Officce Reception

This week saw my first face-to-face meeting with Prosper management in several months and there was a lot to talk about. So, on Tuesday morning I sat down with several of their senior managers for an in depth conversation.

This meeting was my first in their shiny new offices (pictured above); Prosper has moved across town to the SoMa (south of Market St) district of San Francisco. While their previous offices were in a beautiful historic building I like the new space better. It has a more modern feel that is more fitting to a cutting edge company like Prosper.

When I last met with the Prosper executive team they were 20 days into their new jobs and president, Aaron Vermut, was yet to come on board. They talked about hitting the ground running with their 100-day plan and righting the Prosper ship that had been struggling for several months. Now, we are more than 200 days into their tenure and they reported everything on their 100-day plan has been accomplished and they are ahead of schedule on many items.

They provided a list of some of their recent accomplishments:

  1. Switch to FICO from Scorex (more on that later)
  2. New borrower funnel to increase conversions
  3. Sustained growth in new loan volume
  4. New API for investors
  5. Simplified data download for investors
  6. New internal accounting system
  7. New and less expensive office space
  8. Settlement of the class action lawsuit

Prosper now has 77 full time employees in their San Francisco office. They also have retained an outsourcing firm that provides them with 24 independent contractors (full and part time) in a Texas call center dedicated to supporting the borrower funnel in the gathering of documentation, a very time consuming and labor intensive process. This call center provides a similar service for companies like American Express and Sallie Mae.

I asked about their most recent 10-Q filing and the large quarterly loss they experienced in the second quarter that I know caused some concern for investors. Even ignoring the $10 million lawsuit settlement that was booked in the second quarter Prosper still lost over $6 million in the quarter. They allayed concerns by saying the loss was part of their plan as they continue to invest in the business and build an infrastructure for sustained growth over the next 12-18 months.

So when will Prosper break-even? While they wouldn’t give me an exact projection they anticipate that they will not become profitable before late in 2014. Which brings up the logical question of cash. With that kind of timetable they will need another funding round before they reach profitability. When I posed that question they simply said that another funding round is certainly a possibility at some point. But they would provide no more details than that.

A couple of other quick questions that I had were:

  1. When were improvements to Automated Quick Invest coming? They continue to work on AQI but have no firm date when it will be on par with the API for speed of investing.
  2. Are sales of charged off loans going to start soon? They are currently reviewing proposals from many firms and are considering the best options.

The Switch to FICO

While at the Prosper office I sat down with Josh Tonderys the Chief Risk Officer at Prosper, and talked about the new change to FICO and some of the implications for investors.

The switch to FICO for all new loan originations was done last weekend and now borrowers have a FICO score instead of an Experian Scorex Plus score. They are still using an Experian generated FICO score whereas Lending Club uses TransUnion so for investors looking for exact apples to apples comparison between borrowers on both platforms it still will not be possible. This is because your FICO score at TransUnion is often different from your Experian FICO score (which is also different from your Equifax FICO score).

Unfortunately there is no easy mapping of Experian Scorex Plus to Experian FICO but Tonderys shared several data points with me. He said that last month the average borrower credit score (using Scorex) was 720 – this month it will be around 707 (using FICO) for a similar pool of borrowers. Also, they will be keeping the same minimum credit score for new (640) and repeat (600) borrowers while maintaining a similar risk profile as before.

Also interesting here is that Prosper recalibrated their credit model to go with this change. You will see different loss rates and interest rates charged to borrowers. There are also some new eligibility criteria that make it a little tougher for borrowers than before.  These include:

  • Need fewer than 7 inquiries in the last six months
  • < 50% Debt-to-income ratio
  • >= 2 open accounts on credit report
  • No trades 30+ delinquent in the last three months
  • No bankrupcy in the last 12 months

An Adjustment to Interest Rates

Along with the switch to FICO and the new credit model is an adjustment to interest rates. This was not a major change, there were mainly tweaks done here. The minimum interest rate is basically unchanged at 6.05% for a 3-year AA loan and the maximum is still 31.34% for a 3-year HR loan.

However, within each grade there have been changes. For example, a 3-year C-grade loan used to have a range of 17.34% to 21.59%. With this new credit model a 3-year C-grade loan ranges from 16.60% to 20.45%. Most grades, with the exception of AA, have seen a decline in interest rates.

You can see the complete list of interest rates on Prosper’s help page here (just click on the section: What are the loan interest rates).

Going Slow to go Fast

When I asked about what we can expect in coming months from Prosper as far as loan volume goes this is what Ron Suber said, “Sometimes you need to go slow to go fast”. What he meant by that is Prosper’s growth rate would be slow this month as it was last month but by the end of the year we will see some very rapid growth again. He expects Prosper’s volume will increase significantly in the fourth quarter of 2013 and again in the first quarter of next year.

I will give the new executive team credit for turning Prosper around and increasing the loan volume so that the company is on a healthy trajectory now. It will be interesting to see if Prosper and the executive team can continue to execute well and hit their numbers going forward.

{ 9 comments… read them below or add one }

Xandman September 13, 2013 at 10:08 pm

After manually investing in several hundred loans over 3 years, I have a developed an “eye” for credits. These days. I am finding loans that I previously regarded as C loans being listed as A loans. The 1 or 2 loans from the C, D, E tranches are practically toxic waste. Of course, the loans I’m looking at have been picked over.

So, I do hope that growth comes to Prosper and makes some space for the small investor. I’ve been privileged to make friends with some of the best lenders P2P lending has had on a risk adjusted basis since the beginning pf P2P, but a lot of them are moving to greener pastures.

If you believe in conspiracies, P2P was one of the few great investment ideas that came to the Non- Accredited investors. So now, the institutions are gonna kick us in the teeth.

20% return on seasoned loans for 2013, baby! I’m out !

Reply

Peter Renton September 14, 2013 at 6:28 am

I would agree with you that on average over the last three years Prosper has adjusted the pricing on their loans up a couple of loan grades. But as someone who primarily invests in grades C and below I would disagree that C, D and E loans are “toxic waste”. I am finding many loans that I consider very high quality and my returns continue to bear that out.

The difference today is that you have to be quick. I am investing through the API so I am able to get all the loans I want. For manual investors it is a lot more difficult today than ever before both at Prosper and Lending Club. The p2p lending world has changed so I understand long time investors wanting to move on. But for me, I don’t know anywhere else where I can get double digit returns with low volatility so I continue to invest here.

Reply

Simon Cunningham September 14, 2013 at 1:04 pm

I love me some quality D, E, HR-grade Prosper loans. No toxicity at all. Elevated default rate – yes. But the interest rates more than make up for it.

Reply

Simon Cunningham September 14, 2013 at 12:35 pm

This is (paired with the LC article) really great Peter. I continue to hold cautious optimism for Prosper. On the one hand, I’m interested if they’re able to hold their work level and enthusiasm all the way to profitability, or if they’ll start to get bogged like the past team. The 10-Q feels in this direction. On the other hand, their transition to FICO, their consistent monthly growth, their refreshing new focus on premium borrowers, and the management’s integrity gives me confidence.

Care to make a gentle prediction on when they might hit profitability Peter?

Reply

Peter Renton September 15, 2013 at 7:13 am

My best guess is 1st quarter 2015. I think it will take a little longer than they predict.

Reply

Dan B September 15, 2013 at 10:53 am

2015 huh? Look at the upside, at least we will then all know the answer to the trivia question…………In the history of internet based companies, which existing US company took the longest time to achieve profitability? :) Or can anyone correct me?

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Peter Renton September 15, 2013 at 1:42 pm

I have no idea if you are right or not. I think Amazon took about 8 1/2 years so Prosper will be running just slightly behind them I expect. Regardless, in the long run I am confident they will be a very profitable company.

Reply

Dan B September 16, 2013 at 8:49 am

Amazon took 5 1/2 before posting their first quarterly profit & almost 7 before becoming consistently, albeit at the time, marginally profitable. Prosper would start their 10th full year of operations in Jan 2015.

Simon Cunningham September 16, 2013 at 3:27 pm

Solid. Thanks Peter. Here’s to a bright and meaningful journey towards profitability for our 2nd St friends.

Reply

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