Prosper Corrects Annualized Return Calculation

Today Prosper sent an email to their retail investors notifying users of a change in calculating Annualized Net Return and Seasoned Annualized Net Return. The company recently discovered an error in their calculation which they are now correcting. The note to investors clarified that no other parts of the account were impacted including payments, deposits, monthly statements, tax documents, and note and loan level information – including estimated returns.

We reached out to Prosper to get more information on how stated investor returns were affected. If you login to your Prosper account and view more information about how returns are calculated you’ll see the following statement:

To calculate annualized net returns, a total gain or loss is calculated by summing all payments received (including investor rebates received from Prosper) net of principal repayment, credit losses and servicing costs. The gain or loss is then divided by the average daily amount of principal outstanding to get a simple rate of return. This rate is annualized by dividing by the dollar weighted average Note age of your portfolio in days and multiplying by 365. The calculation (i) excludes Notes bought or sold on Folio; (ii) only includes Notes issued after July 15, 2009; and (iii) is updated monthly.

The Seasoned Annualized Net Return is the same calculation but only includes notes that are at least 10 months old. Prosper clarified that the method of calculating returns is the same and that the error was with the inputs into the calculation. The majority of investors will see a corrected annualized net return lower, although in some cases returns were understated or not impacted at all.  We learned that the error was discovered a little over a week ago and the company has been working on a fix since then. The time period that returns have been misstated ranges between investors but is up to several quarters.

I took the below screenshots from my account showing the original net annualized return and the corrected net annualized return. In my account the stated annualized net return dropped from 13.55% to 9.27%.

Prosper account before Annualized Net Return correction.
Prosper account after Annualized Net Return correction.

Conclusion

In the past p2p lending investors have relied on different ways to calculate returns outside of what the platforms provide. This is because calculating returns is complex and there is no consensus on what method is best. At Lend Academy we prefer using XIRR in addition to platform stated returns to calculate returns in our own portfolio. We wrote a post last year on the different ways of calculating returns with Lending Club and Prosper. However, many investors rely solely on the stated returns provided by the platforms. Although it is disappointing that Prosper had an error in their calculations we are glad they were transparent about the issue and addressed it head on with the retail investor community.

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Jen
Jen
May. 3, 2017 4:39 pm

“In my account the stated annualized net return dropped from 13.55% to 9.27%.”

Did they say when this error was spotted? For what period have the returns misstated to investors?

Ryan Lichtenwald
Ryan Lichtenwald
May. 4, 2017 11:17 am
Reply to  Jen

Hi Jen,

They discovered the error a little over a week ago and have been working on the fix since. It ranges for impacted investors up to several quarters.

Eric
Eric
May. 4, 2017 4:54 pm
Reply to  Jen

I just got a reply to my email I sent them and they reported incorrect return numbers dating back to July 1, 2015.

Jen
Jen
May. 4, 2017 5:27 pm
Reply to  Eric

Whoa! They can’t afford the litigation costs associated with this. First LC CEO fraud, now potential fraud from Prosper CEO. Curse of the Lendit Keynote Speaker.

Peter Renton
Admin
Peter Renton (@peter)
May. 5, 2017 6:30 am
Reply to  Jen

You say potential fraud but that would mean there was an intention to deceive. I have seen absolutely nothing that would indicate this was intentional. I am confident this was an honest mistake on their end but a serious mistake nonetheless.

Zoran
Jun. 3, 2017 11:49 am
Reply to  Jen

I have been investing with Prosper since 2013, and I have always calculated my returns using the XIRR method. Ever since 2013, my XIRR calculated returns have been lower than what the Prosper dashboard has showed. Only recently after Prosper put in the fix did my XIRR returns match what Prosper’s website shows. This issue goes back at least to 2013.

Gino T
Gino T
May. 3, 2017 11:00 pm

Mine went from 13% to 6%. Sign me up for the class action.

Matthew
Matthew
May. 5, 2017 8:22 am
Reply to  Gino T

Seriously.They do deserve to be sued. Anyone working on this? It would’ve been nice to know this before the trading platform closed. Now my money is held captive at a much lower rate than I expected. My stated returns went from 13.9% to 5%. Had I known it was so low I would’ve joined the sell bandwagon when I had a chance, instead, I actually bought several loans.

Brandon
Brandon
May. 4, 2017 5:51 am

I went from 15% to 8%. I will also sign on to the class action when it happens.

Grant Parks
Grant Parks
May. 4, 2017 7:32 am

I had 2 years that went from double-digit rates to 3.3 and 4.5%. Regardless of the inputs that can be used, as a retail investor I rely on that reported rate as close to an apples to apples comparison to the other investments in my portfolio. To paraphrase Seinfeld,, I just got fluctuated.

Gerorge
Gerorge
May. 4, 2017 8:52 am

this loan business is going to the toilet, just look at charter banks like bank of internet, so called lenders use them to get around usury laws, super shady

Tom Robertson
Tom Robertson
May. 4, 2017 10:38 am

I think mine went up, although I didn’t pay much attention to it before.

Eric
Eric
May. 4, 2017 12:14 pm

I noticed a discrepancy between what they were reporting on my summary page and what I was calculating based on the account balances over time. I chose a 6 or 7 month period where I had no deposits or withdrawals and all proceeds were being reinvested. And this was going back more than a couple of quarters ago. I emailed them back in fall of 2016. They just pointed me to a page that shows how they calculate it. I went from 8.3% to 5.3%. But I had been calculating something closer to 4% so I’m not even sure the 5.3% is correct.

This is a bad mistake.

Kevin OBrien
May. 4, 2017 1:26 pm

Last year, I noticed that my stated returns remained around %15, even as my defaults increased. I stopped reinvesting last June because I was beginning to lose trust in the company. the fact that it took this long for them to report on it sounds like fraud to me. I bet they wanted to be sure our Folio options to trade notes was gone before they came out with the truth about the returns.

It is only a matter of time before Prosper goes bankrupt. It will be interesting to see how much of the investments will be returned to the investors after that takes place.

Dave
Dave
May. 4, 2017 1:28 pm

From what I can see the new numbers might be incorrect as well.
Total Gain / Total deposits / years on platform gets me the same number they now display.

I’ll have to scrape the data and dump it to a DB to do real calculations on it later. I’ve paused my investments and reinvestments until I sort out what they did. An error of this type and magnitude does shake my confidence in their platform.

Jen
Jen
May. 4, 2017 4:37 pm
Reply to  Dave

Since most of the returns were overstated…..was it an error or intentional? People relied on their stated returns (which were materially misstated by Prosper) to make additional investments.

Eric
Eric
May. 4, 2017 4:57 pm
Reply to  Jen

But what I don’t understand is that I noticed last year that based on my stated account balances, I was not seeing the return they were claiming. I emailed them but got an unsatisfactory answer. But I can’t be the only one to look at the balances and not see the purported returns?

Jen
Jen
May. 4, 2017 5:08 pm
Reply to  Eric

So if a number investors made inquiries about issues with their returns that begs the question of why this was not “discovered” earlier.

Peter Renton
Admin
Peter Renton (@peter)
May. 5, 2017 6:39 am

There are clearly some frustrated investors here and rightfully so. I thought I would chime in and give my perspective. As many of you know I share my returns quarterly and have been doing so since 2011. I have never relied on the returns that LC or Prosper state on their website, I have found that neither company has accurately reflected what I consider to be my own returns. I use the XIRR method of calculating returns based on my monthly statement balances.

The reality is, though, that this is not an exact science. Even among professional investment funds there are differing methodologies for calculating returns. Several funds have changed the way they calculate returns in the past year but even today there is still no industry standard for calculating returns.

Investors have a right to be angry at this mistake that was made at Prosper. But I will continue to ignore the numbers they show because I like the consistency and transparency of my own method. To read how I calculate it go here:
https://www.lendacademy.com/how-to-calculate-your-real-p2p-lending-return-with-xirr/

David Weidner
David Weidner
May. 17, 2017 2:25 pm
Reply to  Peter Renton

I believe that Prosper did not intentionally deceive investors, however, I am concerned that their underwriting is not very accurate. I am curious about how many loans does an investor need to have to achieve returns based on the “estimated return” metric on each loan.

For example, a higher risk loan may have a 27% rate, but the estimated return is perhaps 9%.

I would think that having invested in over 100 loans I would achieve something near to the estimated return for those loans. But after Prosper’s correction, I am getting a fraction of that rate.

Are there any metrics related to this?

Thank you,

Peter Renton
Admin
Peter Renton (@peter)
May. 18, 2017 9:51 pm
Reply to  David Weidner

David, I think a sample size of 100 loans is too small to have a high degree of confidence that you will achieve the estimated return. Also, the estimate is exactly that. I have found rarely do they reflect what actually happens. Back in the old days the estimated returns were mostly understated but in the last couple of years that has changed and the estimates have been too high. Let’s hope it has started to swing back now.

Tom Robertson
Tom Robertson
May. 5, 2017 7:16 am

I agree with Peter. I have my own way of figuring my return, so I never paid much attention to their figure. I wonder if what kind of notes were invested in is correlated with the direction of the mistake. My return says 15% and I thought it said 11% before the change. I invest in the lower rated notes and have done well. I’ve invested with them for 6 to 9 months. I estimate my return to be 11.4%. Lending Club also has a figure 2 to 3% higher than my estimate. Maybe neither takes an estimate of unrealized losses due to late payments into account, as I do.

Tom Robertson
Tom Robertson
May. 6, 2017 8:13 am

Lending Club has a presumably frequently updated figure for adjustment for past due notes, which is based on a formula that estimates the average future collection of notes based on how late they are. Does Prosper have anything like that? Does either include that in their monthly statements?

John
John
May. 6, 2017 10:06 am

That’s analogous to stating that you should not really on the returns from a fidelity fund and its your responsibility to calculate them. Overstating returns for TWO years is not a “system glitch”. Their misrepresentations caused real people to lose real money.

Eric
Eric
May. 9, 2017 10:35 am
Reply to  John

I understand the frustration, I am too, but I think this is not an accurate way to characterize it. It’s more similar to Fidelity misstating your account return whereas if you looked at your balances and did the math yourself you’d get the correct figure. No one has actually lost money. We just weren’t earning as much as we thought we were.

J
J
May. 8, 2017 3:48 pm

My returns went from around a 11% to a 4.5% Seasoned. I knew their calculation was off since last November and stopped investing with them. I thought it was closer to 6%, but not 4.5%. This had to be known by them months ago and they chose to ignore it.

I am having much better returns with lending club and their calculator appears to be more accurate.

Pissed at Prosper
Pissed at Prosper
May. 9, 2017 10:08 am

I too noticed that there was something very fishy about the stated returns that I was seeing from Prosper. The returns were not falling even though the figure for gain/loss has not changed in about 2 years, meaning that my return has been zero during that time. Some time ago, I stopped reinvesting and started withdrawing my money as it became available, but now I’m worried that this entire thing might be a scam. I hope I can get my money out before it all falls apart. I too want in on the class action lawsuit!

Eric
Eric
May. 9, 2017 10:39 am

It’s worrisome and certainly lawsuits seem like they will happen, but the whole enterprise is not a scam. Money was loaned and those loans are being paid back.

gil
gil
May. 9, 2017 11:16 am

It might not be a scam, but I suspect a lot of people utilized the net annualized return numbers to continue to invest. What’s the average return across the board now, they advertise 8.04% on their site today, is that accurate? I’m at 4.2% now after the “fix”. I asked them to buy back all the loans that I purchased when this started, however was told there was nothing they could do, short of advise me how to turn off auto investing, which I had already done. Seems like a fair request seeing how I made those purchase decisions based on bad information.

Peter Renton
Admin
Peter Renton (@peter)
May. 9, 2017 9:21 pm
Reply to  gil

Gil,

I agree that it is a fair request but given where Prosper is right now as far as cash goes I think it would be difficult for them to buy back everyone’s loans.

As for returns, the AltFi people in the UK have access to the entire Prosper loan book as well as cash flows and have produced a chart of their returns over the past 5+ years:
https://www.altfi.com/article/2913_the_real_returns_for_prosper_marketplace_investors

Dan Rudolph
Dan Rudolph
May. 17, 2017 5:27 pm

Anyone with a lick of sense and a calculator should have known that the returns were being grossly overstated. This applies not only to investors, but to the platform. So yes, I think it was a lie, but an obvious one.

I am actually glad that we now have a number that we can pay attention to, and I will continue to do my own math.

Linda
Linda
May. 17, 2017 5:54 pm

I noticed that over the past six months my defaults had Increased significantly, and yet, my annualized returns did not change. By my calculations, including defaults and service charges, my returns were 2 or 3%, and they were reporting seasoned returns of 8%. I contacted Prosper about this several months ago, and was told that they were not able to take defaults into consideration in determining returns. What?? That makes no sense. I was told that they were working on a fix for this problem.
They are now showing my returns at 4%.

I agree that the returns that Lending Club shows are much more accurate.

Christopher Caruso
Christopher Caruso
May. 18, 2017 7:43 pm

From 15% to 5.5% here. Have been with them for 4 years.

Gave Up
Gave Up
Aug. 17, 2017 9:50 am

I halted reinvesting about a year prior to the announcement. I noticed a significant number of defaults, but my annualized net return never waivered from 11.32% which made me suspicious. It stayed at exactly that number for the next year until they finally “fixed” the calculation and it went down to 4.53%. Also, because of their ambiguous tax status I was going to have to hire a tax attorney if the yearly losses exceeded that magical $3,000 barrier, which didn’t seem worth it.

Don
Don
Sep. 9, 2017 8:16 am

8.3% to .94%. I notified Prosper of their calculation error… took 3 calls but finally got someone’s attention. Prosper gave me $200 to “make it right”. I was using their return figure on the overview page to continue to re-invest. They make money when I re-invest…. it was either a scam or they’re complete idiots. Either way I have been withdrawing my account every month. Do not like this company.

Tom Robertson
Tom Robertson
Sep. 9, 2017 8:45 am

I’m surprised at all the people who blindly accepted Prosper’s number. I would have noticed the difference between whether I was getting 8.3% or .94%. How do you know the .94% is accurate? It’s not hard to figure out.