When I was at Prosper headquarters earlier this month I sat down with Nancy, the operations manager, who is also in charge of loan collections. She walked me through the collections procedure they follow for all borrowers who become past due.
For a start she said that around 98% of borrowers are on an automatic ACH withdrawal so Prosper is alerted immediately if there is not enough funds to make the loan payment. Here is the procedure they follow when that happens:
- With an ACH failure an email is immediately sent to the borrower.
- Make two more attempts at ACH payment, notifying the borrower each time there is a failure.
- Make regular phone calls to the borrower until they are able to get an answer. Try and work out some kind of payment on the loan.
- If after 30 days no payment has been made hand off borrower to the collection agency, Amsher.
- Amsher will send letters and continue to make phone calls. Amsher emphasizes the peer to peer aspect of this debt to try and persuade the borrower to pay back the loan.
- If Amsher is unsuccessful after 120 days past due the loan is charged off.
- The loan is then often handed to a different collection agency, IC System, where they continue to try and collect on the charged off loan.
The collection process at Prosper is not set in stone. They are always working to try and improve their success rate. Right now Prosper is testing manual phone calls rather than using an auto-dialer. This is less efficient but results in fewer hang-ups. They are also testing different wording in their collection letters.
The success of the Amsher is also monitored closely by Prosper. Nancy can listen in on collection calls and she works with the management there to try and improve their success rate. She has also spent some time in Alabama visiting Amsher headquarters to meet the people doing these calls to borrowers.
Prosper does not file judgments against borrowers at this time primarily because of the court costs involved. Before the financial crisis they used to get judgments against homeowners and attach liens. But with so many homes underwater this strategy is no longer effective. The real estate market would have to improve for Prosper to consider this again.
In a bankruptcy filing they will immediately pull the loan back from collections. If it is a Chapter 7 filing then all debts are discharged so Prosper will usually get nothing. With a Chapter 13 filing the borrower has to file a plan to make payments and Prosper will file a proof of claim in those situations.
Some people had questions about those borrowers who take out a loan, never make a payment and then files for bankruptcy. Prosper has sought to challenge some of these people in the past but the success rate was not worth the cost associated with challenging.
While there is no log available to investors regarding collection efforts on Prosper it was pretty clear to me in my discussion with Nancy that there is a detailed procedure that is strictly followed. Of course, we would all like to see better success at collecting past due loans but I came away from this talk satisfied that Prosper is doing what they can to return some money to investors from delinquent borrowers.