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Why is This E-Grade Loan Paying Just 6% Interest?

by Peter Renton on January 24, 2012

I first noticed this in one of my Lending Club accounts about a year ago. It was a C-grade loan that went from 14% and was suddenly paying 6%. I thought it must have been a mistake but when I did some investigating I discovered this 6% rate was indeed correct. How can that be?

I didn’t think much more about it because it was an isolated incident that hasn’t happened since. Then yesterday, I noticed this tweet from Michael at Nickel Steamroller. There are several low grade loans for sale right now on Folio with a 6% interest rate including this E-grade loan. What gives?

Active Duty Military Can Only be Charged 6% While Deployed

These loans didn’t start out at 6%. They were normal loans with an interest rate commensurate with the credit risk. But there is a law called the Servicemembers Civil Relief Act (SCRA) that states that when active duty military are deployed they can only be charged a maximum of 6% on any debt incurred prior to their deployment. Here is the pertinent information. This act:

Clarifies and restates existing law that limits to 6 percent interest on credit obligations incurred prior to military service or activation, including credit card debt, for active duty servicemembers. The SCRA unambiguously states that no interest above 6 percent can accrue for credit obligations (that were established prior to active duty or activation) while on active duty, nor can that excess interest become due once the servicemember leaves active duty – instead that portion above 6 percent is permanently forgiven. Furthermore, the monthly payment must be reduced by the amount of interest saved during the covered period.

This is not an issue that impacts many investors. Of the more than 30,000 loans that are active right now at Lending Club only 11 of them have been adjusted down to this 6% rate. I don’t have the numbers for Prosper but I imagine it is a similar tiny percentage.

So sure, as an investor you may lose a little in interest but that doesn’t worry me in the least. In fact, I look at it as just a way to provide support for those hardworking men and women serving our country. In my case the 6% C-grade loan stayed that way for several months and then it returned back to its normal interest rate and the borrower continued making payments.

{ 57 comments… read them below or add one }

Dan B January 24, 2012 at 7:36 pm

So does this mean that whatever credit card balances they are carrying will also decrease to 6% during the active duty period? I don’t feel the same sense of ‘civic duty” that Peter feels as I believe that all this goodwill towards those in service today is nothing more than a misguided overreaction to the residual Vietnam era guilt for abuse & disrespect that was heaped upon soldiers back then. And I don’t see anyone going out of their way trying to make it up to the Vietnam vets that did in fact suffer.

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Shawn January 24, 2012 at 9:55 pm

In response to the actual question, yes it does apply to credit card balances, too. And though it’s really mainly aimed at reserves/NG that are activated and their debt incurred prior to activation, many banks also extend it to regular active duty that are deployed (and some extend also to things like mortgages, etc, but that is at banks discretion). Prosper does not extend it past the law and holds directly to the letter of it (i.e. not to already active duty members). Other stipulations include that they cannot charge late fees. This is due to the fact that despite myself having occassional access to internet, it doesn’t mean everyone does and can’t necessarily pay their bills on time.. and the interest rate is because, especially for those activated from civilian jobs, it’s hard to forgo that difference in pay. And I’m either going to have to assume you’re either a bitter Vietnam vet or just a bitter non-vet… I honestly can’t tell because while your last sentence indicates the former, the anger towards those serving today suggests you have never worn a uniform. If you honestly think that those serving today don’t suffer, I’d suggest you take a visit to one of your local VA hospitals… or perhaps look at the divorce statistics… or perhaps merely google “PTSD.” And sacrifice today in no way takes away from what those before did… and your argument in no way addresses whether or not that even if it is a reaction to Vietname that maybe it’s still the proper level of respect to those serving. I personally don’t like to be thanked for doing my job, but I make sure to know my Soldiers are appreciated for what they do and what they give up. I personally have spent 3 years of my 5 in the service overseas, so maybe you’ll think I’m biased, but you can ask my family and failed relationships and get their opinion. Perhaps I could put you in touch with one of my good friends that is paralyzed from the neck down yet still a humbling inspiration for how much he still loves life and everything he did. But maybe you’re right, maybe we should continue to cycle and disrespect him because of what happened during Vietnam….

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Dan B January 25, 2012 at 2:33 am

Shawn, I’d like to apologize to you. Clearly I’ve been misinformed because I wasn’t aware that someone had forced you into the military. Or perhaps I’m confused & don’t realize that the draft has been reintroduced. Either way it seems that someone kept the truth from you & other service members in that there are physical & emotional risks to the job. I mean who would have thought that becoming a soldier involved the chance of getting injured or killed.
No, I’ve never been in the military, but my previous job involved interacting with a number of foreign high ranking officers. Officers from much much lower paying armies, might I add. Officers who served 10+ years fighting insurgencies far away from home in the late 60′s & 70′s in Africa while under a UN arms embargo. Officers who rose through the ranks having to account for every bullet used. And officers who lost body parts & were also abused when they returned home. Officers who never got breaks on their debt, mortgages etc. Officers who lived in conditions you probably couldn’t even imagine. And some officers who were subsequently arrested after a regime change, accused of war crimes & tortured while in custody…………….& I’m not talking sleep deprivation, water boarding or loud music either. So no, you’re right, I have no idea how horrible life must be in the best armed & most highly paid army in the history of the world.

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Peter Renton January 25, 2012 at 3:57 am

@Dan/@Shawn, Ok, ok, ok. You have both made your positions clear. But please, this is a blog about p2p lending, and we are quickly getting way off topic here. If you want to verbally duke it out I encourage you to go over to the forum.

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Moe January 25, 2012 at 9:57 am

Ok so that’s the law, but it’s still unfair of LC and Prosper not to disclose this important information to insvestors. There should be a notice on these notes when up for funding.

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Roy S January 25, 2012 at 12:59 pm

I wish I had known this! There were times where I have specifically invested in a low that matched my criteria over other loans because their employment was military. Unless they are a low risk borrower, I think this will adversely affect my decision to invest in these borrowers in the future. I’m not going to take the risk that I will end up with a low interest rate on a high risk borrower simply because they are in the military. I understand their rationale in that we don’t want our active military members distracted when they are on the front lines. But if the government is going to put a ceiling on the interest rate, then they should also be the ones to subsidize these loans (though I disagree with both). I apologize to all active military members for my views on being more hesitant to fund loans for active military members.

On a side note, Peter, the returns for all loans on Prosper is no longer being advertised as 10.69%. They changed the loan period to 07/15/09 – 02/28/11 (the note actually states 02/28/10, but I’m assuming they meant 2011–if not Dan will have a LOT to say about them using arbitrary dates!) and now get a 10.46% number (calculation made 12/31/11). I’d like to see what return number they calculate using the original dates of 07/15/09 – 11/30/10. Any possibility you can use your contacts at Prosper to get that number calculated using a more recent date than 09/30/11?

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Charlie H January 25, 2012 at 1:16 pm

In other news laws like this SOUND good but in actual practice, they are not.

Let say you are a career Army. You choose to make it your profession. E6 or E7 and have 6-10 years in. You make ~3000-3500 a month. Lets not even talking stipens and allowences for housing you get. Thats $35,000-42,000. Not bad for some one who is in there mid twenties and does not have a degree.

This Law will cause credit issuers to rate your loan riskier then some one with a similar credit score because there is a chance you will be deployed and they will have there interest rate cut. There for they will charge you MORE in intertest when you are not deployed to make up for the chance you will be deployed and they will have your rate cut.

Net net, you don’t win. It just causes increased paper work and over head.

But hey… it sounds good.

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Peter Renton January 25, 2012 at 1:33 pm

@Moe, I agree this should be disclosed to investors. No one likes surprises.

@Roy, With only 11 loans on the platform I think this is a waste of time to focus on, but I can understand your hesitancy if you are investing in loans individually and investing in military loans. But with less than 0.03% of loans it is not going to make a big difference to your returns.

And yes, I have noticed the change from 10.69% down to 10.46% on Prosper’s site. I agree that there is a typo in the fine print – I think they meant Feb 2011. If you look at Lendstats their 2011 numbers are not quite as good as 2010, so I would expect we will see this number drop some more as more 2011 loans become “seasoned”. I will talk with Prosper and see if I can get those numbers for you.

@Charlie, I would be very surprised if the underwriters at any credit card company took this into account when deciding on an interest rate for active duty military. That would be discrimination and if it ever got out this was happening they would not only get their pants sued off them, it would be a PR disaster.

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Dan B January 25, 2012 at 4:41 pm

The funny thing is that I’m a big supporter of the military in general. If I wasn’t, I would have never been able to function in my previous job. My understanding transcends the simple, “have you been in uniform before” litmus test. I’m just trying to remind Shawn & others how good they really have it in what is without a doubt, the steak & lobster version compared to everything in the past. But there are limits……………

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Roy S January 25, 2012 at 4:42 pm

@Peter, For Prosper there are about 350 loans that have been taken out by those whose occupation is listed as either military enlisted or military officer. This is according to Lendstats with a beginning date of 07/01/09. Still a small proportion compared to the total of almost 20,000 loans taken out during this time period. But still, while I would normally give preference to those loans, I will be less likely to lend to those military personnel with higher credit risks in the future. I hope they don’t come back and sue me for discrimination! …and this leads to another interesting question…if Prosper or LC were to post descriptions of the borrowers gender, physical, religious, ethnic or other demographic information and investors shunned certain groups, could the investors be sued for discrimination?

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Peter Renton January 25, 2012 at 5:17 pm

@Roy, You bring up an interesting point. This is one aspect of p2p lending that has made regulators uncomfortable from the beginning. I believe this was also the driving force behind the removal of the open Q&A between borrowers and lenders last year.

This is also the reason that p2p lending is anonymous between borrower and lender. Because I think if a borrower knew you discriminated against them for whatever reason and they knew your identity then I believe they could sue you under the Fair Credit Act. This is why I think we will actually see less information for investors in the future (such as employer, town, possibly even occupation).

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Dan B January 25, 2012 at 6:23 pm

Everyone…………Letting the lenders know would be problematic because it would require that the status of every borrower who had ever been in the military be checked as to whether they could be reactivated in the future or not.

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Dan B January 25, 2012 at 6:24 pm

Roy S……….I didn’t even notice Prosper’s number change, so thx. for mentioning it.

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Shawn January 25, 2012 at 10:04 pm

Note again that the law is aimed at those that are National Guard and Reservists, not career and typically only applies to debt incurred prior to activation. This is in the same vein of protecting their jobs when they return. Also, the reduction in interest is only effective during the deployment, so at most it would be 1 year though mostly 9 months right now(yeah it has an effect but not the life of the loan or anything). Also, for Prosper, I believe they essentially just refund the borrower the amount that would have been saved in interest and don’t actually lower the interest rate, so Prosper takes the bite and both investor and servicemember get the win/win.

Also interesting to wonder is if either Prosper or LC will start something with the military that will allow for allotments (pay to just come out of the regular paycheck). This is a guaranteed method of payment and should lower the interest rate/risk for people.

And Dan I am lucky to be able to serve this country, so I do know how well I have it. If you want to continue the discussion (I do have some actual questions for you) then shoot me an email.

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Dan B January 26, 2012 at 1:53 am

Shawn……As long as that is understood, I have no argument with you whatsoever. I’m not sure how I’d go about sending you an email though, but you’re welcome to send me one if it’s apparent to you how that is done.

Peter………..You see Peter, we can in fact all get along. :)

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Peter Renton January 26, 2012 at 4:52 am

@Dan/@Shawn, I always appreciate civil discourse, so thank you both. I have every commenter’s email address, so I will be happy to act as a facilitator. Just let me know.

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Roy S January 26, 2012 at 7:40 am

@Shawn, Thanks for the clarification. I’ll have to go read up a little more on the specifics of the law at some point.

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Glenn G. Millar January 26, 2012 at 12:22 pm

@ Peter – Great conversation you started.

@Shawn, Moe and Roy – I am in the process of finding out what Prosper’s policy is, which military personnel we cover and where the reduction of interest rate comes from – whether we pass it on to the lender or eat it ourselves. We have not had this situation arise yet, although we have discussed it internally. I’ll keep you informed. Plus, if we do pass it on to lenders we should have it on our site and I’ll push to make that happen.

@Shawn – THANK YOU for your service. I’ve never been in the military, but I personally thank every one who has. I am probably more of a “dove” than a “hawk”, but I believe anyone who serves in the military should be thanked repeatedly and taken care of. I don’t know if you are aware, but Prosper recently made a substantial donation to http://www.militaryfamily.org.

@Roy – Peter is correct. The reason we took down pictures of people, stopped Q&A and made some other privacy changes was because of the risk of violation of fair lending laws. That being said, making a lending decision based on someone’s profession is not a violation of fair-lending laws, and thus the reason we show this to the lender.

@Roy – Yes, we lowered our interest rate slightly. Our defaults continue to come in less than predicted and thus ROI on previous loan vintages are higher than expected. However, we have also lowered rates to borrowers slightly to attract more borrowers and because of excessive demand for lenders. This is reflected in the slightly lower interest rate. And yes, there is a typo on the date. It should be for loans through February 2011, not 2010. This is being corrected. Mea Culpa.

@Shawn – We don’t currently take money out of people’s paychecks. There are legal and logistical problems there. But we do recommend ACH which is an automatic payment out of their bank account, so if they are depositing their paycheck into a bank, even overseas, this should serve the same purpose.

@Dan – Attack Prosper all you want, and even America’s policy on war, but before you attack military personnel, you might want to walk a mile in their boots.

Glenn G. Millar
Prosper Employee

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Glenn G. Millar January 26, 2012 at 2:55 pm

@Shawn et al – Follow-up Answer to how Prosper handles the Servicemembers Civil Relief Act – When Prosper lowers the interest rate of a loan due to the SCRA, we do not currently reduce the lenders’ interest rate on that note. Instead, Prosper eats the difference. This may not be true in the long-term future, but we have no immediate plans to change this policy.

Hope that helps.

Glenn G. Millar
Prosper Employee

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Dan B January 26, 2012 at 3:36 pm

Peter……..I believe Glenn’s comment is uncalled for & he should be cautioned…………or would you prefer that I take it upon myself to tear him a new one…………….for the umpteenth time?

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Roy S January 26, 2012 at 5:28 pm

Well, thank you federal government for your stupid fair lending laws. I should be able to fund Notes based on whatever criteria I choose. If Prosper had chosen to withhold this information for any reasons other than potential legal consequences I would not have a problem with it. You’d think that they’d realize that lenders are basing their decisions mainly on one color (green, the color of the good ole US$), especially since they are so obsessed with taking all of our money and giving it to their crony friends! Okay, my rant is over…

@Glenn, has Prosper updated the projected ROI of Notes issued 07/15/09 to 11/30/10? There is now almost 4 months more data available. I was wondering whether the model(s) Prosper is using has (have) been updated to get a more accurate picture for this specific subset. Based on the calculations made as of 09/30/11, the ROI was projected to be 10.69%. Has that number changed?

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Glenn G. Millar January 26, 2012 at 5:39 pm

@Roy – It appears I missed one of your questions on the change of interest rate. I believe you are asking what are our historical returns for the same period that we reported 10.69%, that is 7/15/09 – 11/30/10, now that they are 3 months more seasoned. We only do the calculations for three periods: all loans before the quiet period, loans from July 2009 that are at least 10 months old (seasoned); all loans in the last 10 months. (unseasoned.) For any other individual period, you can download the data from our site and run the calculation or it’s pretty easy to run on LendStats as well. Obviously we don’t do it for every possible period because of the amount of requests we would get.

I’m not sure I understand your second question about calculating it with a more recent date than 09/30/11. For unseasoned returns, we go through 12/31/11. See the second chart on this page. http://www.prosper.com/welcome/marketplace.aspx

By the way, we took the initiative to have our returns our now audited by an outside company. http://www.prosper.com/prm/pdf/ProsperAnnualizedSeasonedNotes9-30-11.pdf

Let me know if that doesn’t answer your question and I’ll see what I can do.

Glenn G. Millar
Prosper Employee
Notes Offered by Prospectus

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Glenn G. Millar January 26, 2012 at 5:47 pm

@Roy – our questions crossed and now my first answer is in moderation and I can’t change it. I just ran an idea up the flagpole that by quarter, we might report what we predicted and what came to pass, in terms of defaults and returns. I’ll let you know what I hear from Senior Management.

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Roy S January 26, 2012 at 6:38 pm

@Glenn, I just had the one single question. I tried to explain in too much detail to avoid confusion, but sometimes simplicity is so much better. I was just looking to know whether there was an updated prediction number for the reported ROI of 10.69% using that same subset of Notes 07/15/09 – 11/30/10. This way we’re not seeing the effects of the changes the Notes from 12/01/10 to 02/28/11. Sorry for the confusion.

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Glenn G. Millar January 26, 2012 at 6:46 pm

@ All – By the way did everybody wish Peter a Happy Australia Day, since he is our favorite Australian.

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Peter Renton January 26, 2012 at 9:41 pm

@Dan, I appreciate your restraint in not responding.

@Glenn, Let’s keep it on topic here and refrain from personal confrontations such as your comment directed at Dan. But I do appreciate you chiming in and clarifying Prosper’s position on the military loans. And thanks for the Australia Day reference. As you know I am in Sydney right now and I enjoyed my first Australia Day in Australia in many years – had a barbeque with friends and enjoyed some backyard cricket.

@Roy, I know exactly what you are getting at here. It will be nice to know that the 10.69% return claimed on the seasoned Prosper loans through 11/30/10 will be maintained. Of course, you can get a pretty good idea on this by running the query on Lendstats but it would be nice to get the official Prosper numbers, too.

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Shawn January 26, 2012 at 9:44 pm

Glenn,

I appreciate both the kind words and Prosper’s effort on behalf of military families. It is even harder on the families than it is on us. Also, I think it’s amazing that Prosper eats the difference on SCRA-qualified loans so that they can support the servicemember and the lenders who expect a certain return. It really speaks to the values of the company on a few fronts.

Also, for allotments, I don’t know the process but it might be something to look into, for it might not be as difficult as suspected. I say this because I see a lot of Soldiers getting loans (like car loans, or unfortunately pay day loans) and then have those loan payments set aside with allotments. I’m sure there’s still a process to set that up or difficulties based on timing, but it could be worth it. ACH is great but people don’t necessarily have to direct deposit into that same account and could be low on funds, etc.

Anyway, thanks again, and keep up the good work.

~Shawn
Prosper lender “shawnw2″

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Roy S January 27, 2012 at 12:03 pm

@Peter, It is specifically because the 10.69% was so much higher than what Lendstats returned when Prosper first posted it that I would like to know what ROI Prosper shows internally now that the Notes have aged another 4 months. The return on Lendstats has decreased, so I was wondering whether the return Prosper is projecting has also decreased, and more importantly, how much the number has changed (higher or lower).

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PeerLend January 27, 2012 at 3:16 pm

My view – a rather long one – is that reducing the debt burden on an active duty military borrower (and any dependents) in the short term will, in the long term, reduce risk sufficiently that this pays for itself / is a small price.

I didn’t know that Prosper was paying it, but, such is certainly quite nice…

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Dan B January 27, 2012 at 4:41 pm

And my view is that reducing the debt burden on virtually anyone (and their dependents) in the short term, will probably, in the long term reduce risk sufficiently as to pay for itself too………………so why don’t we just do it for everyone?

And before we give Prosper the humanitarian award for the year, let us remember that this “generosity” costs no one at Prosper a single dime. The people paying for this (& everything else for that matter) are the VC backers.

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Roy S January 27, 2012 at 4:57 pm

@Dan/PeerLend, According to Glenn, Prosper has not yet had this situation arise. So they haven’t eaten any costs yet.

@Dan, Aren’t the VC backers in essence a part of Prosper. They bought stock when they invested in Prosper, and those who buy stock in a company own part of the company. I know, it’s hard to say that a person who buys a single share in a company is a part owner because their power and influence over the company is so small. But you own a share of a company, and you are one of the owners…unless that share is in the Green Bay Packers…

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Dan B January 27, 2012 at 6:34 pm

Roy S………Yes, of course. All I’m saying is that it’s just so much easier to be magnanimous when it’s not your own money. Whose money is it? Well these guys have had quite a few different funding rounds so I’m not going to pretend I know the full list of VC investors. Suffice it to say that the VC money doesn’t belong to the person who spends time commenting here………………time that could be better spent perhaps by wearing a sandwich sign & drumming up much needed business. God knows it’s desperately needed!

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PeerLend January 27, 2012 at 8:17 pm

@DanB: Perhaps in your focus on a few trees you’ve missed the forest?

The very point of the P2P models is to reduce debt burdens for everyone, in the short term, which, due to the current spreads, will pay for itself, and, in the long term, generate wealth. (I’m sure the VC’s have had this thought…)

Your concern for the well-being of the VC’s is rather touching – though, not exactly correctly focused, as, if you were truly concerned, you’d understand.

As to military borrowers and SCRA, one, it’s the law so pointless to discuss, two, loans to which SCRA will apply are a ridiculously tiny fraction of loans.

You seem to have a problem with any one group being granted any “special exemption” – but I look at it from the other end, such that, as someone else has exempted me from the task of serving in the military, I’ll be benevolent.

I understand that there’s confusion, since we’ve a “volunteer” military – but should there not be enough “volunteers” such “jobs” wouldn’t be voluntary.

I’m quite happy to be so “benevolent” and I think I’m winning on the trade.

And even if that weren’t the case the real impact to your ROI is de minimis, and, with Prosper, non-existent, as they say they will pick up the difference.

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Dan B January 27, 2012 at 8:29 pm

Oof! I defer to you Perrlend, as I’d never argue with someone bold enough to use the term “de minimis” in this forum. :)

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Dan B January 27, 2012 at 8:38 pm

Peerlend………A question. Though it is an essential job, I have no desire to be a coal miner. So since someone else has exempted me from that task, should I be benevolent towards them? I mean I understand that it’s a voluntary job but if there weren’t enough volunteers then that job wouldn’t be voluntary, would it?

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PeerLend January 27, 2012 at 8:48 pm

This is about “priorities” – and could go on forever – but I’ll ask you an illustrative question which may clear things up – however tangentially:

Have you ever been angry that a schoolbus is allowed the right of way?

I’ve been annoyed, on occasion, but I don’t think I’ve ever been “mad”.

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Peter Renton January 27, 2012 at 10:34 pm

@PeerLend, Well are really getting philosophical now. There are many, many jobs that I would not want to do and I am very glad that some people decide to do them. And while I don’t think about it much, I am appreciative of everyone who does a job where they put their life on the line every day. It certainly is different to my experience sitting in front of a computer screen every day.

@Dan, To assume that you know what any individual at Prosper should be doing is a little presumptuous to say the least. Of course, you are entitled to your opinion but I, as well as many others here, have always appreciated Glenn’s efforts here in providing insight as to what is happening at Prosper. Since Rob Garcia’s departure several months ago we haven’t had the same insight from Lending Club.

And as to whose money it is, it is clearly not even the VC’s money. It is likely a bunch of high net worth individuals who have invested in some VC funds. Presumably this is money they can afford to lose. Everyone involved in Prosper and Lending Club is playing with OPM. Having said that, everyone involved has a vested interest in seeing them succeed, if for no other reason than to keep their job. But most people I have met at both companies also are investors and therefore have interests aligned with ourselves.

@Roy, I am going to talk to the investment people at Prosper and see if I can get the working formulae and data behind the seasoned returns calculation. Then if we work with Ken at Lendstats or Michael at Nickel Steamroller we would be able to follow along for ourselves. Stay tuned on that one.

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Dan B January 28, 2012 at 12:32 am

Peter………….I”m assuming that your comment “put their life on the line everyday” isn’t meant to refer specifically to the modern military. Because Shawn will be able to tell you what percentage of a modern military actually puts their life on the line everyday,…………….in the traditional meaning of that expression. A good friend of mine was injured while deployed to Saudi Arabia during Desert Storm in a non combat role. She put her life on the line. On the other hand you’d have a hard time convincing me that the guy piloting a Reaper out of an airbase in upstate NY or one of the other bases is really putting his life on the line more than you Peter sitting in front of a computer all day.

Presumptuous? Not at all. Merely a marketing suggestion to an employee of their marketing department. A department that clearly doesn’t market adequately. Otherwise they wouldn’t be getting their butts handed to them by their competitor Lending Club every single month. Nevertheless I give you my word that I will start showing Prosper & their people more “respect” when they, through their actions, show their investors & their customers more “respect”.

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Shawn January 28, 2012 at 2:42 am

Well, considering I’m sitting near Kabul right now, and am mostly based out of Logar province, it would, in fact, be hard to make your argument using the UAV analogy. Even though I’m unfortunately a fobbit (one who stays primarily on a FOB), there is still every day danger… such as constant threat of indirect fire (usually in the form of 107mm rockets that have no warning) or suicide bombers, etc. And by constant I mean hardly a day goes by when I don’t have to run to the protection of bunkers. In a highlight, on Thanksgiving Day, while getting my food in the chowline, I had to drop my plate and hit the ground due to the 3rd attack that day… does that take away from your friend? Not at all… does it take away from any of our heroes in the past? Nope. But should we, because of the past, take away from those sacrificing today? I don’t think so. Just because we have increased respect for Soldiers these days doesn’t mean it’s out of line of what is due to them. In fact, with the sacrifice, I don’t think you can heap too much help and appreciation on them. You mentioned helping out with loans and whatnot and how it compares with doing the same for everyone… if something is a handout then it is counterproductive in the long run especially with what it teaches… but I don’t think you get that with the military as long as standards aren’t lowered and I think the standards and sacrifice are as high as they have been in awhile. If comparisons want to be made, those in the first Desert Storm didn’t face multiple deployments and the buildup of that stress over years. For example this is my second deployment and I already know when my third is going to be so I know I have another couple years in which I still won’t find actual relaxation. And did I volunteer? Yup, and I will continue to do so and would do it again. And I’m not going to get on teachers for what they do just because they volunteered and I’m not going to refuse honoring an officer killed in the line of duty just because s/he volunteered, either. And you already know the pain of when something happens to a friend, too… and even if people aren’t in ‘constant danger’ that doesn’t mean they aren’t affected negatively… such as when I had to console a young Soldier this deployment for his first time really seeing death when he had to watch on a video three others burning in a vehicle, unable to be saved. And it kills me to see a tough, young, kid have to find a shoulder to cry on because of that. I don’t know what happened to you or your friends in the past or what caused you to be like this, but I encourage you to actually see and listen to what’s happening. None of this makes us special or deserving of anything, but by the same token, even I, humbled in their presence, feel compelled to honor these young heroes’ sacrifices, no matter personal politics or beliefs.

~Shawn
Prosper lender “shawnw2″

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PeerLend January 28, 2012 at 3:50 am

@DanB: Once again, my friend, I have to step in: Both Prosper and LC – while they have differences in approach, implementation, and reporting – are leveraging the P2P model “for everyone” (though to differing degree).

On marketing: LC’s slogan is “Better Rates Together” – they subscribe to the vision of the model I pointed you toward above. Prosper, whose very name is a high level categorical imperative, also subscribes to that vision.

Do they diverge? Of course… One of the “annoying” divergences, for me, happens to be that LC reports returns in a way that assumes the investor shall always continue investing – and will never withdraw – and, by doing, presents a somewhat “optimistic” return figure, which is dependent upon continual investment for the return figure to hold up against the defaults.

Certainly they’re aware of this deficiency – last year they hired a VP Risk – and are likely refining their risk assessment models and will, in time, find some way to rectify the disparity between their reports and actual returns.

Prosper made (almost) this very “mistake” in the beginning, though to be fair, no data yet existed on P2P loans, so, they, I believe, did the best that they could at the time by utilizing Experian’s risk projections (which are – to be charitable – a ‘less than perfect fit’ for P2P loans, as an “asset class”).

But they realized this deficiency and took time during their “quiet period” to work very hard on their risk models – and, as a result, are “beating” LC on the returns front (though not, as you point out, on origination volume).

The reason I find this “annoying” is that LC had second-mover advantage – the opportunity to learn from Prosper’s initial dataset (which was entirely public and completely transparent – a further annoyance with LC), yet LC either didn’t do much in the way of incorporating rigorous risk managing or what risk managing it did was insufficient by comparison with Prosper.

So, you’re right, in a way – Prosper is “losing” the volume game, but, it has shown substantial growth trends in that area, recently – and its risk model appears to be solid, with seasoned return coming in at or above projection.

But, you’re wrong, in a (rather important!) way, as well, as Prosper “wins” the return game (by almost a factor of 2) – despite its capacity constraints.

Put another way:

LC has high(er) volume with low(er) return – and Prosper has the inverse.

The question now, I think, is whether it’s harder to get volume – or harder to build (and build in) risk management. If LC’s returns are found out, by the investor community, to be substantially lower than Prosper’s, LC will, much as Prosper did as its early loans began to season in, see some loss of interest by investors (though their borrower pipeline functions very well), and will have to wait a not unsubstantial period of time to season in a new risk model, as well as to regain the credibility it will lose, as result of such.

So… it’s really a game of “leapfrog” – and LC has squandered its 2nd hop –
depending, of course, on whether it’s noticed LC’s NAR is a “whale-tale” -
allowing Prosper an opportunity to regain advantage / recapture volume.

Which – back to the marketing depts you don’t like all that much – means:

Both marketing departments are pressurized – but, in very different ways.

One (Prosper) needs to focus on acquisition – and the other (LC) needs to focus on keeping its investors from looking too closely, “anti-inquisition”, while their managers and quants are busy trying to shore up their return, without doing anything that may constrict or shrink origination volumes.

Personally, I think risk mgmt is the critical factor for the P2P models and, so long as borrower rates remain roughly competitive, will decide winner, at least in the very, very short term sense that either can “win”, right now.

Eventually, all of that stuff will just work itself out – one way or another…

Also:

I don’t know what you mean by “respect” – but I’ll settle for “real return”, and, if you’re the same guy who was just bemoaning the loss of a few pts interest on teeny-tiny chunks of a miniscule subset of loans, you will too!

;)

Anyway… on a more general note:

Why you insist on painting this as some sort of deathmatch between two companies who are going after a 2.5 trillion dollar market, and who both, combined, are quite literally a few drops in that bucket (from a captured marketshare perspective), is beyond my understanding – but I suppose it makes for conversation – and is often an easy X vs Y angle for journalists.

I think that’s just sort of intellectually lazy – and misses the “real story”…

Naturally, it’s fun to have competition – and healthy for consumers, too! – competition drives innovation – but, if you zoom out far enough, the real P2P competitors go by names like Omni Financial and Bank of America – Prosper and LC are, by comparison, originating 25 “jumbo” home loans, per month – they’re just ants who hope to one day bring down elephants.

I’ve nothing against real life elephants, but, within the metaphor, you’ll find me wanting ivory keys to tickle – and a nice new set of billiard balls!

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Dan B January 28, 2012 at 4:29 am

It saddens me to hear what you’re going through Shawn. It’s distressing to see that we still don’t have a mobile system that can deal with some of the incoming………….like the one the Israelis have been testing. Iron Dome, I believe is what they call it. Please understand that my comments are not meant to denigrate what you or others are doing. Perhaps my continued reference to it serves no purpose & I will cease & desist from it right now. Stay safe.

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Roy S January 28, 2012 at 9:05 am

Not sure whether anyone has noticed, but Aberdeen is about to drop from the third largest Prosper lender to number 4. Below is a list of the top 5 lenders (from Lendstats). Just so people know, intelligent-repayment8 changed to Index_Plus 27 Jan 2012. I’m not sure why Lendstats has both of the screen names listed…? It might have to do with the fact that the screen name changed yesterday.

1 worth-blanket2: $17,358,788
2 reflective-rupee: $2,405,326
3 Aberdeen: $1,992,819
4 Index_Plus: $1,961,687
5 intelligent-repayment8: $1,523,366

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Shawn January 28, 2012 at 9:51 am

A valid question and we do have systems to deal with incoming. However, the risks to the populace are too great to utilize it, so we accept risk to our force to prevent civilian casualties. I haven’t looked into Israel’s system but I’m sure they mitigate risk to their people by putting those on their borders at risk. And I appreciate the conciliatory tone and your passion for your views. If I didn’t agree with your right to state them, I wouldn’t be here. =)

~Shawn
Prosper lender “shawnw2″

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Bilgefisher January 28, 2012 at 10:58 pm

While not entirely on the p2p subject, I have to say the conversation is very interesting. My blood pressure went up a few times, but I respect folks right to their opinions. I will never begin to understand the life of the guys on the front lines, just like they would never understand the life on my sub. We all experience different things in the service, but rarely does anyone leave the service unchanged. Shawn thank you for your service.

Peter, thanks for the topic. I had forgotten about that act. I’m glad that it is in place.

Jason

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Dan B January 28, 2012 at 11:45 pm

Bilgefisher………..Los Angeles class? I know a guy who would relish the opportunity to”train” with you guys. He serves on a brand new AIP equipped U-214.

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Peter Renton January 29, 2012 at 3:53 am

@Dan, I am fine with your criticizing Prosper, I think it is productive for everyone to have a healthy debate, but I don’t like it when it gets personal.

@Shawn, Thanks for sharing your thoughts here – it is always good to hear different perspectives and I am glad we were able to keep the debate civil. Best of luck to you and everyone over there.

@Roy, Thanks for the heads up. Aberdeen is going to move well and truly down the list I expect in coming months (as is Reflective-Rupee) as these new institutional investors increase their holdings.

@Bilgefisher, You are welcome. I had no idea this simple blog post would spark such debate, but I am glad it did. I think we have all learned something.

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Dan B January 29, 2012 at 4:21 am

Reflective Rupee would make an interesting case study. He/she has a ton of money invested & all of it occurred post July 09. BUT if you looked at his investments from say a year or a year & a half ago you would have seen note purchases that were rarely less than $200 & at times in the $1k to $2k range. But today & for at least the last few months all you see are $25 buys.

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Bilgefisher January 30, 2012 at 8:58 am

Dan,

I was on an Ohio class. I have had a chance to see some subs from other countries. Its very interesting to see the differences and similarities. The deep rooted traditions all show up as well.

Jason

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Charlie H January 31, 2012 at 10:41 am

Ohio class Big Boomer!
One of the weapons we built that we hoped never had to be used.

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Dan B February 1, 2012 at 6:49 am

Bilgefisher……….About 10 years ago I had the good fortune to be invited aboard a French built Daphne class boat while in the Med. For a civilian that was one of those once in a lifetime things……………though I haven’t given up hope of being invited for a ride on its replacement, the U-214.

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Dan B February 5, 2012 at 5:36 am

Roy S………….With all the talk of soldiers & submarines, which was mostly my fault, I hope that you’ve nevertheless received some sort of response from Prosper to your very legitimate inquiry ? Please update us.

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Roy S February 5, 2012 at 10:54 am

I have not heard anything as of yet. I believe Glenn said he would run it up the flagpole and see what senior management thinks. Until I hear anything, I just have to go by what Lendstats has…9.16% as of today. (It has been hovering around 9.1 – 9.3% over the past week or 2.) The ROI jumps to 10.42% removing the loss factors for all but the loans that have defaulted.

So there’s still a wide range. My assumption is that it will ultimately end up around 8.5 – 9%, which is still a good return (and better than LC), but short of what Prosper is predicting.

My personal mindset has always been to under-promise and over-deliver. In my opinion, the only reason for Prosper to have posted that 10.69% would if they were expecting returns to come in at 11 or 11.5% percent. Likewise, if they were predicting 10.69%, personally, I would have put out a number closer to (or below) 10%. 10% is still above LC, but it gives them a little wiggle room (especially when they don’t have a lot of historical data). If you predict 10% and the ROI is only 9.5%, people will be a lot less jaded than if you predicted 10.69%. But that’s just my humble opinion…

Maybe this is me being a little jaded, but my other view is that they are currently projecting less than 10.69% for this specific subset of Notes. Why change the subset of Notes and have the ROI go down unless the ROI went down a lot further if they kept with the same subset? Obviously, they are trying to keep with the 10-month “seasoned loans,” but it’s still a question in the back of my mind.

Overall, it is really difficult for me to trust anything that comes from Prosper. The problem is that, a year later, my investment is still doing well. So I’m just a little conflicted over Prosper. In the end, though, regardless of what Prosper puts out there the only thing that really matters is whether I’m making money. As long as I’m making money, and the ROI is higher than I can get elsewhere for the same or less risk then I’ll stick with them. So far that has been the case…

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Peter Renton February 6, 2012 at 5:29 pm

@Roy, I think having accountability like this would be a great thing for the industry. Not just for Prosper but Lending Club as well. Lending Club don’t claim one number any more but they claim a number for each credit grade which is in essence the same thing. I am talking about this page here:
https://www.lendingclub.com/public/steady-returns.action

What would be great would be to see the difference between the return that was promoted and the final return. According to Lendstats the returns for Lending Club loans issued in 2008 (which have all reach maturity now) was around 2%. Not a great return at all and nowhere near the 9% number bandied around back then. We know Prosper’s numbers from that year are much worse.

It will be interesting to see by the end of this year how the small batch of loans issued by Prosper in 2009 fared. So far, it is looking pretty good but it will most likely be well below 10%.

I am chatting with Joe Toms, Prosper’s chief investment officer later this week and I will certainly raise this issue with him. A look back at actual returns versus predicted returns would be very useful for investors.

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Dan B February 6, 2012 at 6:17 pm

Peter said……….It will be interesting to see by the end of this year how the small batch of loans issued by Prosper in 2009 fared. So far, it is looking pretty good but it will most likely be well below 10%.

Really? I think that’s a pretty safe bet considering that it can’t actually be any higher than 8.5% unless some of the late loans come back to life. Fat chance of that occurring. Furthermore, if ever single one of the close to 900 notes still out there remains current & completes the 3 years then it’ll come in at 8.5%. That, of course won’t happen either. My best estimate is that another 40-50 of the current notes will go bad before it’s all said & done. So it should end up at 8%. A good number no doubt, but keep in mind this is a number achieved when investors set the interest rates, as opposed to how it is today with Prosper 2.5 (post Dec 2010) where Prosper sets the rate.

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Peter Renton February 6, 2012 at 11:47 pm

@Dan, I think 8% is pretty good, particularly when you compare it to previous years. I expect investors who took the plunge in 2009 will be happy with their returns.

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Dan B February 9, 2012 at 3:15 pm

Peter……….Make sure you ask Prosper’s chief investment officer why they’re heavily pushing the benefits of 5 year loans to investors today when not 3 months ago it was written right on this blog that Prosper stayed away from 5 year loans as they were seen as high risk.

I can see the answer coming now. Some BS about constantly reassessing risks & combined with spin, propaganda & more BS. All that would be completely expected. The only thing that remains to be seen is whether you, Peter, allows them to get away with it or not.

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Peter Renton February 9, 2012 at 4:01 pm

@Dan, Wow, you are starting to sound like some of the guys on Prospers.org – that absolutely everything that Prosper does is bad and all their marketing is BS and everyone who works there is inept. I am not buying it.

I try and look objectively at both Lending Club and Prosper – but as we have discussed before I do look at things in a more positive way than most. The bottom line for me is are they producing excellent returns for investors. If the answer is yes, which it has been for me, then I will continue to be a cheerleader for the industry.

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