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Interview with New Prosper CEO Stephan Vermut

by Peter Renton on February 13, 2013

I am in San Francisco this week meeting with the management of Prosper and Lending Club. The main reason for this trip, though, is to meet the new management team at Prosper. They came on board three weeks ago and I wanted to get a feeling for how everything was going.

I sat down for a lunch meeting in the Prosper offices yesterday with new CEO Steve Vermut. Below is an edited transcript of our interview.

Q. When did you first get interested in the peer to peer space?

A. It was around 18 months ago when my business partner, Ron Suber, brought it to my attention. The more I looked at it the more I liked it. Here is an asset class with high yield and consistent returns that is non-correlated with other investments. I felt that it was such a unique proposition. I have been investing in the p2p space since then.

Q. You are now three weeks into your role as Prosper CEO. What changes have been made so far?

A. We have really tried to hit the ground running. I have a whole list of changes that have been implemented or are about to be.

  1. We created an operations group that will now reconcile all activity every single day instead of monthly. This will reduce errors as well as the time taken to produce monthly statements.
  2. Extended our call center hours from 8am – 5pm Pacific time to 6am – 6pm Pacific time.
  3. There is a small customer service team now working on weekends so emails will be responded to in a much more timely manner.
  4. Overhauling the way collections is done with an emphasis on being more aggressive.
  5. We have 71 employees right now and 30 of them are in IT. We are going to continue to expand our capacity in this area.
  6. We are opening an office in New York City for institutional sales and we will also be hiring experienced IT professionals from the financial services industry for that office.
  7. We are about to release a new version of the API that will have over 500 data points on every borrower including FICO score.
  8. We are rewriting Automated Quick Invest to make it run faster.
  9. We are evolving the credit model and will be eliminating the highest risk borrowers from the platform.
  10. There have also been a large number of internal changes such as realigning departments that will lead to greater efficiencies as we grow.

Q. Well you certainly have had a busy three weeks. Let’s talk about collections for a second. Investors want more done in that area – what changes are you planning?

A.   Our Chief Risk Officer, Josh Tonderys will now be in charge of collections, He has a great deal of experience in this area from his previous job at Barclaycard. We are going to be more aggressive now with one person solely dedicated to early collections. We will be identifying those borrowers who have the ability to pay and will pursue them more aggressively. We are also considering adding more transparency to the process for investors.

Q. With your extensive background with institutional investors there is concern among retail investors that they are going to be ignored. What are you doing for the smaller investor?

A. Retail investors will start to see some real changes soon. The website is receiving an overhaul where there will be added functionality for sorting and querying the available loans. The site will be more flexible and there will be fewer clicks needed to invest in a loan. At the same time, as I said before, Automated Quick Invest is being rewritten so that it will run much faster than before.

Q. The fourth quarter of 2012 was not kind to Prosper with declining loan volume. Can we expect to see that reversed any time soon? Can you share any projections?

A. While I can’t provide any projections let me say this. The response we are getting from lenders is very encouraging. There is huge demand waiting to come on to the platform and as we ramp up the supply of borrowers I expect our growth to be rapid.

Q. Are you planning on creating an LC Advisors-type operation for your institutional investors?

A. No. There will be no Prosper subsidiary similar to Lending Club’s LC Advisors. We will not compete with our lender clients.

Q. Do you expect to be able to take Prosper through to being cash flow positive with the current cash you have or can we expect additional funding rounds?

A. The plan is to take the existing money from our recent funding round, invest it wisely in the business and get to cash flow positive with this money. That doesn’t mean there will not be another round but I don’t expect we will need it.

Q. I know you invested your own money in this latest funding round. So what is your exit strategy?

I am three weeks in to my new role at Prosper so I am focused on the entry strategy. It is way too early to talk about an exit.

Q. Any parting words for Prosper investors?

A. I want to stress that Prosper has a focused and energized management team that is making decisions that are driven by our investors and borrowers. We are going to become a more efficient organization that can handle rapid growth. At the same time I want us remain nimble so we can make quick decisions and implement them rapidly. There will be many more changes in the coming weeks and months that I have not discussed today.

Editor’s note: I chatted with both Steve Vermut and Ron Suber, Head of Global Institutional Sales, for a couple of hours yesterday. While it is too early to tell how they are really doing it was clear to me that both men had a passion for this business and were intent on shaking things up at Prosper.

As I mentioned in my post three weeks ago about the new management team they are executing on their 100-day plan. While it is easy to create a 100-day plan it is another thing to implement it into an existing corporate culture. But in my time at the Prosper offices yesterday there was an energy and excitement that was not present on my previous visits. It will be interesting to see if this energy manifests itself into higher loan volume and a path to profitability. Time will tell but I am not betting against them.

{ 26 comments… read them below or add one }

Dennis February 14, 2013 at 12:59 am

Peter,

You asked some great questions and I pretty much liked what I heard in the answers. Collections on lates have been a real sore spot with Prosper and I’m glad to hear that there will be some changes there – very much needed. I wasn’t as thrilled with the institutional vs retail answer though, I would have liked to hear that there will be a better balance between the two where institutional investors wouldn’t be allowed to swallow up loans so quickly.

Anyway you size it up, it sounds like there will definitely be a shake up coming soon with Prosper, and that is something I’m sure we’re all excited about. One more thing, I’m very skeptical that cash flow positive will happen that soon. That would take a HUGE increase in loan volume over a relatively short period of time (without further funding). We’ll see……….

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Peter Renton February 14, 2013 at 6:52 am

Dennis, The institutional versus retail debate I think will come up regularly with Prosper. Their focus is clearly going to be on institutional investors because that is the strength of the new management team. I don’t think they are really looking for a 50/50 balance in this area. They did say that they will be increasing loan inventory dramatically which will help availability of loans for both retail and institutional investors.

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Andrew N February 14, 2013 at 8:17 am

I thought the December’s declining loan volume was due to Prosper’s largest investors being unwilling (for whatever reason) to put any money to work. This interview seems to imply that the problem was a lack of loans to invest in. Can someone offer clarification?

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Peter Renton February 14, 2013 at 8:28 am

The main reason for the December decline was that Prosper’s largest investors remained on the sidelines. There was a decline in available loans as well but that was driven by the lack of investor demand.

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matt feldman February 14, 2013 at 8:50 am

any plans to expand to other states….I am chomping at the bit

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Peter Renton February 14, 2013 at 8:51 am

Yes. They did mention that expansion to other states is a high priority. What state are you in?

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matt feldman February 14, 2013 at 8:56 am

I am in Pennsylvania, I know that I can use the after market service, foliofn, it just seems more complicated and harder to turn a profit

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Peter Renton February 14, 2013 at 5:09 pm

I have no information about PA unfortunately. But I do know that Michigan and West Virginia have been added this month. So there has been some movement.

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Roy S. February 14, 2013 at 12:07 pm

“We are rewriting Automated Quick Invest to make it run faster.” –I might actually start using the automated investing function if this is the case. Hopefully they will announce it a few days prior to initializing it so I can reactivate it and see whether it actually works well.

“We are evolving the credit model and will be eliminating the highest risk borrowers from the platform.” –Does this mean no HR Notes? If they can’t appropriately price (i.e. set a proper interest rate) the high risk loans, then I would agree. However, I think a lot of people like to invest in the higher risk Notes due to the potential for the higher returns. Maybe a little clarification here is needed.

“Overhauling the way collections is done with an emphasis on being more aggressive.” –As long as they aren’t spending dollars to save pennies. I think there are a lot of people upset about the collections procedures at Prosper (and LC, too). I would like to see some changes, but the concern is that they might go from being (or at least perceived as being) too lax to becoming too aggressive.

Well, here’s to hoping the new management initiatives work out well for Prosper. They have an uphill climb to be competitive (based on loan volume) with LC.

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Peter Renton February 14, 2013 at 9:08 pm

Roy, Regarding the high risk borrowers they didn’t want to provide any details just yet but clarification will be coming soon.

And I think they realize it is an uphill battle to be competitive with Lending Club but they certainly are going to give it a try.

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Matt February 15, 2013 at 6:48 am

Peter,

Great job as usual. Did Mr. Vermut elaborate on what Prosper is doing to become more aggressive on the collection side? Does more aggressive mean they are using a different collection agency? Does it mean they are now going to contest borrowers who take out loans weeks before filing bankruptcy? Does aggressive mean Prosper will now take court action against default borrowers?

If Prosper wanted to minimize the cost of collection, they would have all borrowers sign a confession of judgment which effectively allows Prosper to avoid filing an action at the trial court level and simply allows Prosper to obtain a judgment against the debtor based upon an affidavit from a Prosper employee that the debtor defaulted on his or her note.

Even if Prosper does not do anything on the judgment (i.e. no garnishment, no levy of bank accounts etc.), the judgment would prohibit the debtor from transacting real estate and other personal property in his or her name. This is often times enough for the debtor to pay off the debt in full.

With a well thought out collection strategy, I guarantee that the average lender’s total return increases by at least 2%.

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Dan B February 15, 2013 at 7:29 am

Matt………..Guarantee 2% more, huh? That’s very brave. No offense Matt but while I’m not quite as brave as you, I “guarantee” that if half the people who talk with such certainty & eloquence about being able to “collect”………. were ever in the type of financial scenario that some of the borrowers are in they’d comprehend how frivolous & silly the threat of the curtailment of transacting in “real estate & other personal property” really is in most of these cases……………& further to that, I suspect they’d be far more reluctant to make percentage increase “guarantees”.

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Matt February 16, 2013 at 6:57 am

Dan,

No offense, but you appear to not know very much about the collection industry. A guarantee on anything can be construed as unreasonable, but the point is that a more aggressive well thought out collections campaign can reap huge rewards for investors.

Their would be no threat to the borrowers regarding the “curtailment of transacting in real estate and other personal property.” For better or worse, many borrowers do not have the legal prowess to understand the significance of a judgment being entered against them. The entry of a Judgment against a borrower would occur after the borrowers defaults on his or her note. The remedy I proposed is the same remedy you would seek to obtain in a civil court action, it is just a much more cost-efficient way of getting there.

While a 2% higher return may seem high, how many of your defaulted notes are homeowners? How many will buy, sell, or refinance a home? How many will buy or sell a motor vehicle, motorcycle, rv, etc? The judgment acts as a passive lien, and many of your defaulted borrowers will make some of these transactions during their lifetime.

Peter Renton February 15, 2013 at 6:53 pm

Matt, The new management team did not want to elaborate on their collection efforts because the details are still being worked out.

And I think an extra 2% is a bit optimistic with a rigorous collection effort but they can certainly do better than they do now.

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Dan B February 16, 2013 at 8:10 am

Matt……….You’re right, I don’t know much about the collection industry…………except that theory & reality are 2 different things. Thank you so much for explaining the process to me though. I must confess that as a former deadbeat borrower I was completely ignorant of that. :)

Perhaps you should go advise Prosper as to how they should implement this.
I can only imagine that they must be ignorant of them & will be so thankful. I mean who could pass up a “guaranteed” increase of 2%. Good luck with that………….You will need it, on so many different levels.

PS…………I haven’t had a defaulted loan in over 2 years, so I guess I won’t personally get a 2% bump & benefit from your grand plan. :)

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Matt February 16, 2013 at 8:53 am

Dan, you lost me at you haven’t had a defaulted loan in 2 years.

For what it’s worth, I am an attorney and I have collected on behalf of businesses. I have personally experienced theory meet reality.

By no means are borrowers deadbeats. Just as borrowers are able to protect themselves by filing bankruptcy, creditors also able to protect themselves by obtaining a form of security (in this case a judgment) against the borrower.

I won’t respond to your personal attacks, but if you m.o. is to attack lenders on P2P forums, I’m afraid you are the one that needs help.

Dan B February 16, 2013 at 9:47 am

Matt…………Personal attack? Where did I personally attack you? Furthermore, where did I attack “lenders”? And why would you accuse me of attacking lenders when pretty much everyone that’s been here for any length of time knows I’ve been a active multiple account p2p lender myself for over 3 1/2 years? Being an attorney, I’d have thought you’d be more precise/logical with your statements/accusations.

I’m going to now exit this conversation because attorney or not, you’re unlikely to convince me of squat on this matter. Besides, I like that you feel “lost” in apparent disbelief or something that I own thousands of notes without having a default in the last 2+ years, :)

Peter Renton February 16, 2013 at 9:16 pm

Matt, Dan B has a long history on this blog and I can tell you that he is a smart cookie who is very supportive of p2p lending. But he is not very tactful when he disagrees with someone as is demonstrated by the above exchange. So please don’t take it personally.

As to your collections point I agree that a rigorous collections program can make an impact. In a previous life I sold products to credit managers and I saw what a huge difference disciplined collections can make. The new management at Prosper seem to be very much numbers guys so no doubt they will have some metrics to measure exactly how much they will improve their collections efforts.

nealS February 15, 2013 at 1:05 am

Thank you Peter. I can’t tell you how helpful it is to have your ongoing insights on prosper.

On specific takeaway for me is the new API that’s coming. Using the API has been on my to do list but now I’ll wait.

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Peter Renton February 15, 2013 at 6:48 am

Neal, I have spoken with another programmer who has seen the new version of the API and he said it is awesome – much better than what they had before.

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Roy S. February 16, 2013 at 10:14 am

“Regarding the high risk borrowers they didn’t want to provide any details just yet but clarification will be coming soon.”

This response actually concerns me that they will be doing away with the Prosper rating with the highest “seasoned returns.” I was actually expecting something more along the lines of…Well, our studies show that listing a borrower as “high risk” actually leads to an increase in default rates. So instead we will be changing the HR Notes to be listed as G Notes (and not F because F connotes “failing” in the US), and we project that the change from HR to G will lead to a 5% decrease in defaults…or some such fluff. Now I just hope that the whole situation is that they have been able to further refine their credit model to one that more accurately calculates risk and thus reduces defaults across the board and increases investor returns across all Note ratings. I guess we’ll just have to wait until they provide more details… :-/

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Peter Renton February 16, 2013 at 9:18 pm

Roy, I wish I could say more but much of what they said in this area was off the record. But they are certainly looking to reduce defaults and increase investor returns.

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Bilgefisher February 18, 2013 at 11:08 am

I sure hope prosper begins to actively find borrowers again. I haven’t put money in prosper in a couple months now. There are just not enough quality loans to send my money too. If they don’t pick up the pace soon, they will become irrelevant.

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Peter Renton February 19, 2013 at 7:15 am

I agree. My own cash has been building up this month as there are not enough loans for me to invest in. But after speaking with their head marketing guy this past week they are poised to increase the number of loans substantially soon to meet investor demand.

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Bilgefisher February 19, 2013 at 11:40 am

Good news. I just hope these will be quality loans and not filler.

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Roy S. February 19, 2013 at 5:01 pm

Agreed, but it is a little funny that we now consider 8% overall return as sub-par, and those loans as “filler.” Any other investment achieving 8% return would be fantastic.

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