Prosper Marketplace’s recent fee changes on P2P loans are further separating P2P lenders’ interests from those of Prosper. Prosper is loading up more fees at the front of the loan so they will be earning a far greater percentage of their income from loan origination. Lenders, on the other hand, earn all their money from loan payments being made. There has long been concern that Prosper creates and packages loans and moves on to originate the next loan while forgetting about collections. Collection (or even loan fraud) becomes someone else’s problem, but unfortunately the lenders are not allowed to attempt collection leaving them with no recourse other than complaining via the internet.
The fee changes detailed in the Prosper September newsletter:
AA loan closing fees changed to 2%
The borrower loan closing fee for AA borrowers has changed from 1% to 2%. Listings created on or after September 24, 2008 will be subject to this new closing fee…
Minimum loan closing fee changed to $75
The minimum loan closing fee for all borrowers has changed from $25 to $75. Listings created on or after September 24, 2008 will be subject to this new minimum closing fee.
This indicates that they will now be earning a greater percentage of income from originating loans rather than worrying about if the loan is ever paid back. Of course, Prosper still collects 1% of the interest paid.
Prosper Copying the Mortgage Industry
This greatly reminds me of the beginnings of the current mortgage crisis. Mortgage brokers and banks were packaging up ever riskier loans to earn their origination fee and sell the mortgages to investment banks who repackaged them and resold the risk to others. The brokers, retail banks, and the investment banks all made their fees regardless of whether the loan was ever paid by the borrower. Their interests were not at all in alignment with the investors actually holding the mortgage and the risk.
Prosper needs better alignment with lenders for the long-term
I have no issue with Prosper raising its fees, but I would much prefer the changes to align Prosper with lenders’ interests. In the long run, this would be better for Prosper because the pool of lenders will eventually dry up due to poor collections.
I can only hope that the higher origination fees will be spent on better validation of borrowers. If so, this will help lenders, but rather than asking for more up-front fees, I would rather see Prosper have more long-term skin in each loan. Maybe they should charge a 1.5 to 2% of interest over the lifetime of the loan rather than the current 1%. Lenders should immediately respond to that change by asking for a 0.5 to 1% higher interest rate on loans. However, in the long run, lenders would be better off due to Prosper increasing collections since the collection is where Prosper would also earn more of their money. This would reduce risk to lenders which should drive interest rates back down in the favor of borrowers.
Lenders are Customers Too
Prosper obviously needs to earn money to survive, but the company needs to remember that the money they are earning from origination fees is actually coming from Lenders. They have been able to survive with a high churn in lenders to date because of the cheap publicity due to the interesting business model. (A NPR story was how I opened a Prosper account.) Eventually, that free publicity will dry up and Prosper will need to start thinking of their lenders as customers. And like other businesses, they will need to reduce customer churn to keep marking costs low.
See why I quit lending with Prosper.
Did anyone else see this problem with the fee changes?
this is the best analysis I’ve read of the current Prosper situation. I too started on Prosper for the same reasons and at the same time as you. the only reason I’m currently lending is to complete the diversification of my portfolio, so that any one bad loan won’t have quite the same impact and potential of dragging down performance.
I think in the long run, Prosper has (very recently) just dug their own grave. at first I did not understand the gravity of the increased closing fees. now I see it as an immense problem. only if Prosper uses these increased fees for operational funds in the short term, but more importantly AGGRESSIVELY step up collection efforts before and after charge-off / default loans, and to take the beneficiaries of these bad loans to court will their marketplace survive and “prosper”.
I too await an alternative lending venue, and I’m very patient. I’m interested in keeping some of my money aimed toward P2P lending (as long as I can beat a high-interest savings by a percentage point or two) for the long run.
Prosper likes to bill themselves as the “eBay of lending”. that’s fine, but they’re nowhere near as secure in their position and a lot more likely to be cast by the wayside because of their increasingly careless business model and policies.
SERVICING IS MORE IMPORTANT (for ALL parties involved) THAN ORIGINATING. FOCUS ON SERVICING AND COLLECTION, OR EVERYTHING ELSE IS WORTHLESS!
Brian, thanks for taking the time to add your two cents and I am glad you found my post valuable. completely agree with you that Prosper should work more on servicing, but unfortunately the model that they have created favors origination. I don’t see myself putting more money in until Prosper improves the default rate and reduces fraud.