Peer-Lend™

Prosper has recently done something *wonderful* for current and future Prosper Lenders. But I bet you don’t know what it is - or, if you do, why it’s so unbelievably important.

Since it’s garnered very little attention in the P2P Lending Community thus far, I wanted to shine a little bit of light on it here, because, quite frankly, it’s a monumental step - both for Prosper Marketplace *and* for the evolution of the entire Peer to Peer Lending space. Ok, alright already… enough pre-amble.

Let’s hear it:

Since Prosper’s launch in February 2006, lenders were presented with Experian default projections as baseline guidance for predicting default rates for each credit grade. Judging by the bidding behavior of many lenders, these default projections were trusted, to a large degree, as being both accurate and applicable. I won’t go into why they turned out to be so grossly inapplicable to Prosper loans (or online Peer to Peer loans in general) - since I covered it a long time ago, and since I’m so happy to see them go! - but if you’re interested in the history behind the story, you can see one of my old posts on Prosper Default Projections.)

Regardless, they *are* history! Gone. Finito. Outta here. And none to soon.

On October 29th, 2007, Prosper released a site update which leverages historical Prosper Marketplace performance data to present lenders with *enormously* improved bidding guidance. And not only that, but they chose to display it directly on the bid entry screen. My heart goes pitter patter for all the lenders who will be saved time, money, and a considerable amount of frustration by getting a much more accurate picture of what rates they *ought (more) rationally* to be bidding.

Here is the (understated) announcement of that release:

Improved bidding guidance for lenders

As the Prosper portfolio has grown and matured, we finally have a volume of loan payment activity that has allowed us to replace the Experian historical default data with Prosper’s own estimated default data.

We have also performed some analysis on the differences between borrowers within the same credit grade, and segmented the borrower population into 54 unique segments (one segment, for example, is C-grade borrowers with no automatic funding, 0 now delinquent accounts, and 2 or more inquiries). Based on which segment the borrower belongs to, we will display the estimated loss (due to default), rate adjustment (uncollected interest and fees), and annual servicing fee, and come up with an estimated return for loans to borrowers of that type.

Here’s an example of the new bid input for the example borrower:

What the above translates to in practical language is that each time a Prosper Lender places a bid, they will now see a detailed breakdown of the past performance of Prosper loans with similar credit characteristics. Not only that, but Prosper also breaks down the estimated default loss percentage, adjusts properly for interest loss and service fees, and provides a properly calculated Estimated Return figure - all based on the past performance of *actual loans made in the Prosper Marketplace*.

Read: REAL GUIDANCE.

It took Prosper a year and a half to implement it, but, it’s important to understand that you can’t roll out a feature like this in the absence of data to base it upon. It simply took a while for the first Prosper loans to age enough for data to be available - and getting this feature out, this soon, and available to every lender, is a MAJOR coup.

At nearly the same time, on the borrower side, Prosper began providing initial interest rate guidance to borrowers, also based on historical marketplace performance data.

So, let’s look at a couple of charts.

First, loans by credit grade per month (chart courtesy of Prospers.org Statistics Wiki):

Are those the early signs of a sharp decrease in low quality loans being funded? And, if so, could there be a related increase in interest rates for loans that *do* fund?

Let’s take a look at the rates of funded loans by grade (courtesy: EricsCC.com):

The sharp up-trends in interest rates for funded loans, especially those of lower grades, tell the story quite well.

It might be too little or too late to save some of the early-adopters from lending pain, but you really do have to give Prosper the credit they deserve for this one.

From now on, we might still be flying partially blind - but at least now we’ve got a map!

(We now return you to your regularly scheduled Prosper-drama, already in progress.)