Prosper Groups Put the Social in Social Lending

When Prosper began back in 2006 they encouraged borrowers to form groups. A group consisted of a group leader and a bunch of borrowers who all shared something in common. The idea being that having some social connection between borrowers would reduce delinquencies.

Back then these groups were described as “the heart of the Prosper marketplace” and borrowers often received better rates by being a member of a group. Also, group leaders were sometimes given monetary rewards for recruiting borrowers on to the platform.

Fast forward five years and groups have been very much de-emphasized at Prosper. I think the main reason is that groups didn’t really make a big difference to defaults. As a borrower, if you are a member of a group, your loan has to be approved by the group leader before it becomes live on the platform.

But groups haven’t gone away. You have to search for a link to the groups page om Prosper but there are several groups that are still active and some are doing very well for investors.

LendersClub and Socorro Capital Partners

According to Lendstats, the LendersClub group is the number one group (with more than 50 issued loans) for investors on Prosper. Their 15.9% return and less than 1% default rate are certainly very impressive. Particularly when you consider LendersClub started back in the Prosper 1.0 days.

Socorro Capital Partners (SCP) is also doing well for investors with a 13.9% return according to Lendstats – they have also just had one default. Full disclosure, I am a member of this group and also a supporter of LendersClub.

I contacted the leaders of both groups to get some background on their group and to chat briefly about the groups concept. Below is our dicsussion.

SLN: When did you start on Prosper and when did you form your group?
JGuide: I started the group after about 6 months of lending in 2008.
Jason: I also started in 2008 and formed SCP about two months after I began investing.

SLN: Why did you start a group?
JGuide: . I started LendersClub originally for a number of other military members to share tips and good investment work we did. Soon we allowed others (non military lenders) to join.
Jason: SCP was one of the first lender groups on Prosper (as opposed to groups focused on borrowers). I formed the group to network with other investors and bounce ideas around. At the time Prosper was also encouraging groups with a 0.5% bonus for group leaders.

SLN: How do you go about vetting borrower members?
JGuide: For borrowing members we look at if the member can afford the listings/loan – often we turn them down as a group listing and help them find a bank product (especially USAA) that better meets their needs.
Jason: I like to talk with borrowers on the phone to get a feel for whether they can afford the loan. I like borrowers to also have an investor account and will only approve loans as a group listing if I am very confident in the borrower.

SLN: Do you actively promote your group to try and get new investor members?
JGuide: The group mostly grows on it’s own – although I did invite a number of folks in the beginning.
Jason: If I see a lender investing in the same kinds of loans that I invest in I will sometimes reach out to them. But these investors need to be active and frequent investors.

SLN: How do you feel about the de-emphasis on groups at Prosper?
JGuide: Prosper made the right call in de-emphasing groups – it was not working as most groups had as many if not more defaults as non groups. At some point Prosper should consider bringing groups back. Properly managed a group can have a much lower default rate.
Jason: At one stage I thought they were going to eliminate groups on Prosper but I am glad they decided to keep them going even though they are not promoting them.

The other benefit of being in a group from an investor perspective is education. JGuide sends out regular emails to group members that always has great content including a tip of the day. I have actually learned quite a lot from these emails. Jason at SCP also send out emails whenever he approves a group listing and will also send some educational content.

What is the Future for Groups? 

It is interesting that when Prosper launched in 2006 the social aspect of the web was really only just beginning, Today, it seems that nearly everyone has a Facebook or Twitter account and the web is far more social than it has ever been. Maybe Prosper groups were just ahead of their time?

The idea of groups certainly has tremendous potential but there are two big hurdles as I see it. Privacy and anti-discrimination. A borrower may not want everyone in their group to know their income, mortgage and credit card payments. Then there is the federal law that prevents discrimination in lending decisions which could become an issue in a more socially connected lending environment.

Even though they have been de-emphasized it doesn’t look like Prosper groups are going away. If they wanted to abandon them they probably would have done so already. And I know that CEO Chris Larsen still likes the idea of a more social p2p lending platform.

What do you think? Are Prosper groups a good or bad idea? Are you a member of a group? Let me know in the comments.

 

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Dan B
Dan B
Dec. 16, 2011 5:38 pm

You’re talking about 2 groups who have both been around for 3-3 1/2 years & yet have only invested in 103 & 43 loans in their entire history. That’s 1 to 3 notes PER MONTH. Hey, I’m all for being “selective” but wow, these are not exactly active investors. That in itself doesn’t bother me in the least but I’m not sure I’d go around highlighting the performance of a group like SGP that has only invested in 43 loans in 3 years & has only 21 loans currently invested in !
I mean what type of conclusion do you really want to draw from that portfolio size? Do you have any idea what just 1 default would do to the annualized return of a portfolio of 21 active notes? No, I don’t either, but it won’t be pretty.

Now as for the general idea of “groups”, who knows if it’s good bad or whatever. I found it interesting that one of the group leaders mentioned something about talking to borrowers on the phone. I didn’t know that was still permitted.

Most people don’t remember that there were other “social” type attempts by both Prosper & Lending Club back in the not too distant past. Around 2 years ago Lending Club had a get together social for lenders at Tesla Motors (electric sportscars) showroom in San Mateo. I was planning on going, mostly because I like cars & figured I’d get a test drive while I was there but something came up so I ended up missing that.

Back in 2007 someone at Prosper came up with the brilliantly half-assed idea to have lender/borrower get together/socials. I wasn’t a p2p investor back then (thank God) but I did help a friend do the paperwork for a Prosper loan. Believe me when I say that my help was completely unnecessary. Anyway she showed me the info about the “event” & was as perplexed as I was. She had no desire to meet lenders that she’d be likely defaulting on but the real deal breaker for her was that there was no mention of an open bar. Needless to say, I have no idea who went to those nor how they turned out.

Boss Hogg
Boss Hogg
Dec. 20, 2011 10:32 am

How can Prosper allow this to happen and still maintain individual privacy? As a borrower, I would not want the lender to reach out to me for a collections call, nor should they have the ability to pre-screen me over the phone before investing in a loan. I find these comments disturbing.

“Jason: I like to talk with borrowers on the phone to get a feel for whether they can afford the loan. I like borrowers to also have an investor account and will only approve loans as a group listing if I am very confident in the borrower.”

“Jason: If I see a lender investing in the same kinds of loans that I invest in I will sometimes reach out to them. But these investors need to be active and frequent investors.”

Dan B
Dan B
Dec. 20, 2011 6:31 pm

The whole line of thinking that this guy Jason employs makes little sense to me, And that is another reason why I suggested that it wasn’t the best idea to highlight him. Aside from privacy issues & aside from a gut feeling, I also see no reason why he should “like” borrowers who also have an investor account. Unless the borrower is borrowing to invest in loans, I see no logical reason why they would be a better or worse risk.

Then he goes on & says that he sometimes reaches out to people who pick the same loans as he does. That is also illogical. What I would imagine a person would want to do is get other individuals who consistently pick different loans than yourself & yet perform well…………….thereby strengthening the group as a whole. What’s the point in getting clones of yourself? Then the comment on frequent & active investors, which is great in theory but obviously not the motto of a group that barely invests. None of it makes much sense to me…………….but maybe I miss whatever point there is.