Prosper peer-to-peer lending marketplace overview
Prosper is the market leader in peer-to-peer lending, a popular alternative to traditional loans and investing options.
Prosper is America’s first marketplace lending platform, with over $9 billion in funded loans.
Prosper allows people to invest in each other in a way that is financially and socially rewarding. On Prosper, borrowers list loan requests between $2,000 and $35,000 and individual investors invest as little as $25 in each loan listing they select. Prosper handles the servicing of the loan on behalf of the matched borrowers and investors.
Prosper Funding LLC is a wholly-owned subsidiary of Prosper Marketplace, Inc.
Prosper Marketplace is backed by leading investors including Sequoia Capital, Francisco Partners, Institutional Venture Partners, and Credit Suisse NEXT Fund.
Prosper is an online marketplace where creditworthy borrowers can request a loan and Investors can invest in notes (or pieces) of each loan. Investors receive a portion of those payments directly to their Prosper account proportional to their pro rata share of the loan. Building a diversified portfolio of many different Prosper notes is more likely to generate a stable yield as well as monthly cash flows. Prosper’s notes are offered by Prospectus which is an official document that describes all the key information for the investments we offer.
Here’s how it works:
- Borrowers choose a loan amount, purpose and post a loan listing.
- Investors review loan listings and invest in listings that meet their criteria.
- Once the process is complete, borrowers make fixed monthly payments and investors receive a portion of those payments directly to their Prosper account.
What type of borrowers use Prosper?
Prosper targets a super-prime and prime customer base. As of January 2016, the average credit score for borrowers on the Prosper platform is approximately 703 with an average $80,000 stated yearly income. The average Prosper borrower is in their mid-40’s.
What happens if a borrower is late on a payment?
If the borrower is more than 15 days late on a borrower loan, the borrower will be charged a late fee. The late fee is divided up pro-rata among the investors in the corresponding notes, subject to deductions for collection fees and servicing fees. If the borrower loan is more than one day past due, we may collect on it directly or we may refer it to a third party servicer or to a collection agency. Borrower loans that become more than 120 days overdue will be charged-off. Charge-offs are eligible for sale to a debt buyer. A borrower whose loan has charged-off will never be able to borrow again from Prosper, and since we report delinquencies to credit reporting agencies, the charge-off will adversely affect their credit report.
How does a borrower make monthly payments to Prosper?
Borrowers can utilize an automated payment deduction from their primary bank account. A large majority (92%) of Prosper borrowers use the automated payment deduction option. In addition, borrowers can sign in to their accounts or mail checks to make manual payments and pay downs.
Every loan application is assigned a Prosper Rating –our proprietary system that allows us to maintain consistency in our evaluation. Prosper Ratings allow potential investors to easily consider a loan application’s level of risk because the rating represents an estimated average annualized loss rate range to the investor.
The Notes that correspond to specific borrower listings are offered pursuant to the prospectus. Investors should read the complete description of the Notes and risks associated with making an investment in the Notes, as well as other information about Prosper and our platform.
How is the Verification Stage different from the Prosper Rating?
The Prosper Rating is our proprietary system that allows us to maintain consistency when evaluating each loan application. Prosper Ratings allow investors to consider a loan’s level of risk because the rating represents an estimated average annualized loss rate range.
In contrast, Verification Stage is not a measure of potential credit risk. It is only an indication of the progress of a loan application based on verification of required information and documents. However, a loan in Verification Stage 3 indicates that the borrower’s information is farther along in Prosper’s verification process thereby increasing the likelihood that the loan will originate.
Estimated Loss Rates
The estimated loss rate for each listing is based on the historical performance of Prosper loans with similar characteristics. The base loss rate is determined by two scores: 1) a custom Prosper Score and 2) the FICO®08 score. Adjustments can be made to the base loss rate based on additional characteristics, such as the presence of a previous Prosper loan. Any adjustments are added to the base rate to get the final loss rate, which then determines the Prosper Rating. The loss rates are not a guarantee and actual performance may differ from expected performance.
Base Loss Rate
The matrix below provides an example of how the base loss rate is determined. The FICO®08 score is divided into 12 distinct bins and the Prosper Score is divided into 11 distinct bins. An applicant’s base loss rate is determined by the intersection of the relevant FICO and Prosper Score bins. For example, a borrower listing with a Prosper Score = 7 and a FICO®08 Score = 730 has an estimated base loss rate = 3.74%, as shown in the table below. Both the ranges and the loss rates will be updated as more performance history is obtained.
Final Loss Rate
Adjustments can be made to the base loss rate that increase or decrease it based on additional characteristics, such as the presence of a previous Prosper loan (i.e., the borrower has already taken out at least one Prosper loan). Any adjustments are added to the base loss rate to get the final loss rate. The applicant’s final loss rate determines the Prosper Rating.
Here is an example of how the final loss rate and Prosper Rating for a loan listing are calculated:
– Borrower FICO®08 score = 730 and Prosper score = 7
– Borrower has a previous Prosper loan
|Base Loss Rate:||3.74%|
|– Previous Loan:||-0.50%|
|Final Loss Rate:||3.24%|
Loss rates for a particular group of loans will be a function of the group’s delinquency and loss behavior over time, pre-payment behavior over time, and responsiveness to collections activity. For Prosper loans, the largest driver of the loss rate is the rate at which a group of loans becomes delinquent and charges off. A loan becomes “charged off” and is considered a loss when it becomes 121+ days past due.
Modeling Loss Rates. The loss rate is the balance-weighted average of the monthly loss rates for the group of loans over the term of the loans. The gross loss rate is adjusted for principal recovery net of collection expenses to arrive at a net loss rate.
Estimating Losses. We determine the loss component of the loss rate calculation by analyzing losses for historical Prosper loans and adjusting to reflect anticipated deviations from historical performance that may exist due to the current macro-economic or competitive environment. Changes in delinquency and losses have the largest impact on the expected loss rate of a group of loans, and so changes in loan performance are monitored on at least a monthly basis.
Calculating Average Balance. To calculate the average balance for each period, we used the amount of loan principal on loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each loan declines over time.
When a loan pays faster than its amortization schedule (pre-payment), the portion of the principal that is pre-paid is no longer included in the outstanding balance for subsequent periods. Once a loan has been charged-off, the principal associated with this loan is considered a credit loss and is no longer included in the outstanding periodic balance.
Collection Expense and Recovery Adjustments. When an account becomes more than 30 days past due, it is referred to a collection agency. Collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule. Once an account has been charged-off, any subsequent payments received or proceeds from the sale of the loan in a debt sale are considered recoveries and reduce the amount of principal lost.