Back in 2005, Prosper was the first peer to peer lender to launch in this country, offering online unsecured consumer loans. It was a sea change at the time when offering a loan online was a novel idea. Now 12 years later, the company is leaning on their experience in the personal loan space to enter a new product category: HELOCs, or home equity line of credit. Around the time Prosper first launched, HELOC lending was at all time highs. It subsequently fell during the financial crisis, but is now on the rise again.
Prosper noted that according to a 2017 TransUnion Study an estimated 10 million consumers will take out HELOCs between 2018 and 2022 which would be more than double the number originated from 2012-2016. Part of this trend is the increase of home values over the years with homeowners wanting to to unlock the equity in their homes.
The new HELOC product will launch officially in early 2019. We spoke to Prosper CEO David Kimball to learn more about the new offering. The press release noted that Prosper “will be partnering with banks to improve the application process and reduce the time from application to closing”. What’s most interesting is that the move represents a significant change compared to their personal loan business when it comes to business strategy. While HELOCs will be offered directly through Prosper.com, they are also providing the offering as a white-label service to banks. We don’t yet know which banks they will be working with initially, but this is a trend we’ve seen more and more with fintech players. There are very few fintech lenders with traction today that operate a monoline businesses, most have grown to have a separate business line, many with a private label type offering for banks similar to the one Prosper is going to offer.
The banks will benefit by offering a tech forward product that leverages Prosper’s customer base and all of the data that Prosper has collected over the years. Prosper will be paid a fee for the use of their technology engine. It will be the bank’s underwriting model and capital which means the terms will vary from bank to bank.
One of the main sticking points for HELOCs is the arduous application process, it currently takes between 5-7 weeks to secure a HELOC through many banks today. Prosper’s HELOC origination process will be similar to that of their personal loan business that has been refined over the last 12 years. An online application will take minutes and homeowners will receive an instant pre-qualification offer. Kimball noted that the application process will be dynamic and it will only ask questions which are pertinent to each specific borrower, something that is not typically done by banks. The HELOCs will not have an origination fee.
Given that the HELOC is backed by an asset it will often be at a cheaper rate and as consumers compare their options side by side it will inevitably lead to some cannibalization of their current business. However, expanding into multiple products is a better strategy for Prosper over the long term. Prosper is the first to market with a white label HELOC product and it’s going to be interesting to see how the competition responds.
Prosper also reported their Q3 2018 results today. Originations were $640.3 million, down 22% over the prior year period. Prosper attributed the decrease to credit tightening as well as the increase of interest rates to borrowers. The company has now originated $13.4 billion since inception. Net revenues also decreased as a result of decreased originations, with net revenue falling from $28.8 million in Q3 2017 to 20.6 million in Q3 2018. Below is a summary of Prosper’s other financial highlights that are availing in the company’s 10-Q.