Your guide to peer to peer lending

My Five P2P Lending Predictions for 2012

by Peter Renton on January 1, 2012

Happy New Year! I hope you enjoyed the arrival of the new year last night whatever you did. As for me, I am getting ready to go on a big trip, so it has been a busy holiday weekend for me. Tomorrow, my family is flying to Sydney (my home town) for an extended visit. So, you won’t be hearing much from me for several days until after we get settled in.

Here on the first day of 2012 the entire year lies before us, full of possibilities. So I have spent some time peering into my crystal ball to come up with five p2p lending predictions for 2012.

1. Lending Club Will Reach $1 Billion in Total Loans

Lending Club closed 2011 with $460 million in total loans issued since their inception in 2007, more than half of which were issued this past year. I expect they will issue around $550 million in new loans in 2012 bringing their total loans issued to over $1 billion. The high watermark in new loans issued will be somewhere just over $60 million a month, roughly double what they did in December, 2011.

2. Prosper Will Reach $500 Million in Total Loans

Prosper will also keep their growth record going albeit with smaller numbers than Lending Club. Prosper issued $75 million in loans in 2011 to bring their total since inception to $290 million. I expect 2012 to be a banner year for Prosper with a three-fold increase in volume from 2011. This should take them past $500 million in total loans issued with a high watermark in monthly volume of around $24 million.

3. Lending Club Will Post a Profitable Quarter

I predict by the third quarter of 2012 Lending Club will be close to break even (based on the financials in their SEC filings) and will post a profitable fourth quarter. I don’t expect to see much improvement in the first half of 2012 as they are really focusing on growth. But I think we will see some dramatic improvement in their bottom line performance in the second half of the year.

4. A Third Competitor Will Take on Lending Club & Prosper

For several years now p2p investors have really only had two choices. Some, such as Loanio have tried and failed. Others have had big ideas but have failed to get off the ground at all. Now, we have Peerform that has been in operation for over nine months and seem to be getting at least some traction. There are also many operations that are in stealth mode and I expect one of these newcomers will pick up some traction in 2012. It would be great for everyone to end the duopoly that we have in this industry. Although, for a newcomer to attract investors there will really need to be the promise of something as good or better than what is currently available.

5. More States Will Become Available for Investors

Ok, so this one is more of a hope than a prediction but I want to throw it in here. This year there was absolutely no change to the status quo as far as available states for p2p investors. When I speak with the legal teams at Lending Club and Prosper they insist they are trying to rectify this. I am hoping 2012 will provide some movement on this front.

So that is my list of predictions. I will make sure and check back in 12 months to let you know how I did. I am very interested in hearing the predictions of others. What do you think will happen this year?

{ 46 comments… read them below or add one }

Dan B January 1, 2012 at 9:38 pm

Happy New Year! Ok, I’ll play.

1. I predict that sometime in 2012 Prosper will increase their posted “actual returns” number from 10.69% regardless of what the real returns are.

2. I predict that sometime after prediction #1 occurs & after someone eviscerates them over it, an employee from Prosper’s Propaganda, I mean marketing department will come here & strenuously defend that number as something that is based on reality……………despite overwhelming evidence to the contrary.

3. I predict that in 2012 Lending Club will continue to take NO MORE than “several” days each month to do the volume that Prosper does for any given ENTIRE month. For the purposes of this prediction I’m using the Renton definition of “several”, which can range anywhere from 3 to 12. (for an example, pls. reference Renton’s definition when describing his own Prime account late/default numbers throughout 2011)

4. I predict that Prosper will introduce another new term (just like they did this year with the term “seasoned”) in order to shed a more positive light on their own return numbers.

5. I predict that on overwhelming number of bloggers (over 80%) will regurgitate & report as fact virtually everything that comes out of p2p marketing departments without any regard to due diligence.

6. Finally, I predict that Peter will go 1-3 on his first 4 predictions. I have no opinion on his prediction #5.

Shawn January 2, 2012 at 12:16 am

I honestly don’t understand bitterness and hatred like that. Granted, not the only one that is that bad, but I still don’t get it.

Dan B January 2, 2012 at 2:58 am

Hatred & bitterness? I think you throw those words around too casually. I think Lending Club is doing great these days………….& the BS is well within acceptable parameters.

As for Prosper, I don’t hate them. And why would I feel bitter? I’ve never lost any money with them. But for some reason I get this strong need to take a vigorous shower after hearing, reading or having any contact with something that comes from anyone at Prosper. I’ve talked to others who have felt similarly soiled or afflicted upon each contact. I wonder why that is? :)

So Shawn, you’re not actually challenging the accuracy of my predictions…………you’re just commenting on your perception of my disposition. That is interesting too :)

Roy S January 2, 2012 at 6:55 pm

@Shawn, I think the word you’re looking for is cynicism. I think Dan feels the way I do about Prosper’s marketing department having been in overdrive massaging the numbers to put the best possible spin on their results. The “seasoned returns” numbers take loans that have been aged 10 months. Really, 10 months? What’s so special about that number? My assumption is that the returns looked better than if they were to use a year. A year is an understandable demarcation, 10 months is not–unless you’re trying to keep the returns in the double digits. And this is not the only instance where questions arise as to whether they are intentionally being deceptive. What Prosper needs to really internalize is that the real returns are going to start rolling in this year. And it will be very interesting whether those returns are closer to Prosper’s 10.69% or the 8.3% Lendstats is showing. I think a lot of people would be happy with an 8% ROI, but being promised 2 percentage points higher than the reality of the situation hurts their credibility. I feel that Prosper is over-promising, which will only lead them to under-delivering. But regardless, unless Prosper continually adjust their definition of “seasoned returns” or comes out with a new term (as Dan predicts) they can only keep the returns they list artificially high for so long.

My prediction: Prosper will sign on another worth-blanket2 type ($10+ million) investor and possibly 2 to 5 more. I think with the higher risk borrowers listed on Prosper that you need to have greater diversification than you would on LC–that means more funds with which to invest. I think that Prosper may be having more difficulty attracting the smaller lenders and will start to focus on larger investors/firms. Prosper needs to have higher and quicker turnover instead of Notes sitting around waiting 2 weeks to be funded. Currently about 200 lenders make up ~35% of the funding dollars; and worth-blanket2 is a quarter of that 35%.

312-lender January 2, 2012 at 11:00 pm

Any Prosper investor who uses should be able to beat whatever Prosper’s advertised RIO is.

Dan B January 3, 2012 at 1:15 am

Roy S…………Thank you for presenting some of my argument in a less cynical fashion.

312-lender………..Lendstats is an excellent resource. However it’s not a crystal ball. It simply provides a reference of what has already happened. It is in fact much more complicated than just going over there, noting which categories & loan parameters are doing well & then implementing that strategy going forward.
For example, 6 months ago the best performing subgroup for Prosper by far over the past few years has been “repeat borrowers”. That fact has been discussed endlessly here as well as on other blogs. Today, that subgroup is still the best performer by far…………but the overall returns have already declined by about 3/4% during the interim. A year from now it will almost certainly be lower than where it is today. What’s my point?……………Someone who realized months ago or realizes today that the subgroup was/is outperforming must still make a determination as to whether it’ll continue to do so before implementing a strategy of investing in it. Do not confuse an outlier with Valhalla. Doing so will assure one of never reaching the latter. Suggesting that someone should be able to beat an already highly inflated ROI by simply using a past performance statistics site is silly, bordering on irresponsible.

Dan B January 3, 2012 at 3:14 am

Well, perhaps not silly & irresponsible………….more like wishful thinking & inadvisable.

Glenn G. Millar January 3, 2012 at 11:25 pm

As a member of Prosper’s “propaganda” department and as a Prosper lender, I feel compelled to answer some of the questions raised here.

1) Prosper did not make up the term seasoned. It is used in the investment world and means, “Relating to a security issue that has traded in the secondary market long enough to establish a track record for price variability and trading volume.” Prosper applied it in a similar fashion to notes that had sufficient time to default. We feel that is far more accurate than counting notes that are far to young to be able to default, thus artificially raising the lender’s ROI.

2) Why 10 months? Because this was the shortest period of time where we felt the pattern of default rates was fully illustrated and predictable. One writer said, “My assumption is that the returns looked better than if they were to use a year.” This is not true, but my question is have you done any calculation that indicates that? Is your assumption based on anything other than emotions? I don’t believe it’s fair to call someone’s calculations into question if you are not presenting your own evidence.

3) Over-promising and under-delivering is a bad idea for any business. Since we came out of our quiet period, we have continually had default rates less than we predicted when the notes were originally offered for sale. Remember – every one of our notes comes with an estimated loss rate. Our goal is to always come in at or lower than these rates. That is not to say our ROI might not drop or go up in the future. Yield on notes is determined by a market balance of borrowers and lenders. So for someone to say, “we’ll see in a year if Prosper can hold the returns” is a 50-50 chance. Returns are determined by market forces. The way we serve our lenders is to accurately predict loss rates and then let lenders decide if the estimated returns fit their portfolio and are more appealing than other investment vehicles.

4) Lower Rates for Repeat borrowers – Yes we did do that. It was fully intentional and made public . It turns out that repeat borrowers have far lower default rates than initially expected when compared with similar first-time borrowers. Thus, they are lower risk for the lender. Many lenders love investing in them. Lower risk means lower returns and lowering the yield on their notes means we can attract more repeat borrowers for which we have pent-up demand.

5) Dan – you say you have been “soiled” after talking to people at Prosper. I would love to know in what conversation or interaction you have had with a Prosper representative that was anything but professional. Please tell me if you have ever had a bad incident and I will be happy to follow up with it. However, the real question is why, would someone who’s writings indicates he hates our company, continue to invest in Prosper loans. Obviously, with all that bad things you say about Prosper, there must be something pretty compelling that you like about Prosper. Perhaps you might like to share what we are doing right occasionally and we’ll keep working on getting better.

Glenn G. Millar
Prosper Employee
Notes offered by Prospectus

PeerLend January 4, 2012 at 4:34 am

I predict that DanB – whomever that is – will continue bitching about P’s use of seasoned return while LC speed-boats to the tune of like 500 bips!

Do I win something if I’m right? Even if I’m wrong, I still win. I like it…

Dan B January 4, 2012 at 8:28 am

Peerlend………Hey my long posting history provides ample evidence of evenhandedness. Besides, the owner of this site knows I’m just another investor. Of course your posting history, well let’s just say it does leave some of us us wondering where your allegiances may lie. I’m past wondering, but maybe that’s just me.

Unfortunately there are no prizes for being correct on the predictions. But that’s ok because like you said, even if you’re wrong, (& I am silenced or remain silent) YOU still win.

The thing is though, if MY predictions are wrong & I hope they are, then ALL OF US as p2p investors, win.

Charlie H January 4, 2012 at 10:46 am

Q1-2012 is LendingClubs End of Fiscal year.
According to the 10-Q filings, losses have been increasing both on a quatertly basis and and year over year basis.
$48M in losses since inception
Laster year losses rate was about 2.8M a qter and is now running ~3.3 a quater.
At some point I would think LC would need that loss rate to start shrinking. Last year they projected what they would need to do in loans issued to break even. They are at that volume now, and yet the loss rate has grown.

Not being alarmist, I just don’t know if one can make a prediction of profitability yet.

Lou lamoureux January 4, 2012 at 4:40 pm

@Glenn take a chill pill, Dan’s just having a little fun. As to your point about repeat lenders, Dan was trying to point out in his comment that past performance is not a guarantee of future results. That’s something we should always keep in mind.

For the record, I am an LC lender. I looked at Prosper in the 1.0 days, and was turned off by the sob stories, pictures, group systems, and auctions.


Roy S January 4, 2012 at 7:22 pm

@Glenn, re: “Why 10 months? Because this was the shortest period of time where we felt the pattern of default rates was fully illustrated and predictable.”

Does this mean that when you post 10.69% returns that this takes into account potential future losses based on the notes that are currently late or the rate that notes will go late/default in the future. Just taking a quick trip over to, I was able to come close to your 10.69% (I actually got 10.65%) when I removed the loss factors that Lendstats uses for all Notes during the same time period, except for defaults where I listed the loss factor as 1 (i.e. 100% loss). So I can only assume that your calculation does no forward projection of future defaults even though you state, “we felt the pattern of default rates was fully illustrated and predictable.” If it was fully illustrated and predictable, then why not use that to predict the returns investors are more likely to be seeing once the Notes fully mature?

I feel that the returns listed are artificially higher than they will be when all is said and done. Until then, I will just keep an eye on the returns for this subset (07/15/09 – 11/30/10) of Notes until they fully mature. If the 10.69% that Prosper currently has posted is close (I’ll give Prosper +/- 0.5%) then I will be less skeptical in the future–I feel that some skepticism is always prudent, hence the “less.” But I believe the returns will be lower than 10%. And, in my opinion, Prosper is stating that the returns on this subset of Notes will be 10.69% or rather close to it.

So, for someone to say, “We’ll see in a year if Prosper can hold the returns,” is fully valid when discussing this particular subset of Notes. You are essentially selling the fact that the return for this subset of Notes is 10.69%–I am not talking about returns on Notes sold after 11/30/10. Would it really be any different if you were to take the returns for all Notes (even those younger than 10 months) and post that as the actual returns? It would be true, just like posting the 10.69% returns is true. The issue I have is that I believe you are calculating returns in the way that would maximize the ROI, and not necessarily the one that would be the most accurate when the notes are fully mature (i.e. you’re using the fully illustrated and predictable default rates). And as a result, I believe you are misleading potential investors into believing that this investment has a more appealing return than it actually has.

These are just my opinions from my observations, and I acknowledge that I may be wrong. As for you lower rates for repeat borrowers, the issue that I had (and already wrote about) is that you were comparing the original projected returns of Notes to the new projected returns and stating to investors that the new projected returns were higher and better for investors. What Prosper failed to mention is that it had actual returns that were different from the original projected returns. Further, the actual returns were higher than both the original returns and the new projected returns. So the real world returns were actually going to go down on this subset. I’m not saying that there weren’t benefits to improving the pricing model Prosper employed, I was upset at them trying to present it in a misleading way (which is how I feel about the 10.69% returns!).

Regardless of all of that, 8% is a good ROI for me. I am still an investor since the lowest ROI for Prosper as a whole that I’ve seen is still above 8%. This may or may not hold out, especially since no loans as of yet have matured. Of course, I’ll keep evaluating my investment and make adjustments as needed—up to and including withdrawing from Prosper or p2p lending as an investment option altogether. But I like the idea of p2p lending, and I support the industry as a whole. In the end, however, the only thing that matters is whether I’m making money.

As for Dan…if I recall correctly he is no longer a lender on Prosper. Dan, you can chime in and correct me if I am wrong.

Dan B January 4, 2012 at 7:25 pm

Prosper has a long history of attempting to frame & control the discussion just as Glenn has attempted to do here today. From aggressively countering to removing criticisms in forums, in wikipedia, to deleting the entire history of dissent from blogs, it’s all been done during their 6 year history. For a comprehensive discussion/information on these & other indiscretions please visit here…….

Points 1 & 2…………..Prosper has been around for 6 years. Why the introduction of the “seasoned” returns now? Why not a year or 2, 3 years ago? Why 10 months? Glenn answers and I quote” Because this was the shortest period of time where WE FELT the pattern of default rates was fully illustrated and predictable.” (caps mine). Because “you felt”? Very convenient. Well that’s good enough for me, how about everyone else. lol. Next year, they might conveniently come up with another term to showcase something else. And Roy S. is correct, by the way. Prosper’s numbers would have been lower if the one year mark was chosen instead of the 10 months. It’s not even close.

5……………Glenn obviously doesn’t subscribe to the belief that the customer is always right, but putting that aside……………Glenn believes, as evidenced by his #5 comments that anyone who is critical of a company has no place investing with said company. That’s a very interesting position. He further believes that an explanation is owed to him as to the reasons for such an investment. Are you kidding me? The term delusional doesn’t do justice to that attitude Glenn. Let’s get something clear. We investors don’t work for you or for Prosper, Glenn. If anything, you work for us.

I’d like to go through more point by point rebuttals, but right now I’ve go to go take that vigorous shower again to rid myself of all the dirt that I’ve been exposed to while reading Glenn’s post.

Peter Renton January 5, 2012 at 12:45 pm

Well I take a few days offline and I see a verbal Tyson-Holyfield bout has broken out.

@Dan, I expected a keen rebuttal from you about my predictions but I would also prefer you to keep the tone respectful. You are entitled to your opinions but to say repeatedly that you feel “soiled” when reading or discussing Prosper is disrespectful at best, even if said tongue in cheek.

I always encourage rigorous debate and that is what we have here most of the time but I will not stand for personal attacks and we are getting close to that right now.

@Roy, Your points are well taken. Of course Prosper (and Lending Club for that matter) spin numbers to put everything in a positive light. Just read through any financial publications and you will see companies like T. Rowe Price, Fidelity, etc. doing a similar thing. The difference here is that the track record is far shorter and there is no agreed upon standard to measure ROI.

@Glenn, I appreciate you chiming in here knowing full well your comments will provoke further criticisms.

@Charlie, Lending Club’s losses have certainly been increasing but what I have been told is that has been by design. When your investors prefer you to focus on growth over profitability in the short term then that I don’t see that as a problem. Eventually, though, we will need to see the needle move in the other direction.

Charlie H January 5, 2012 at 1:36 pm

@ Peter

Indeed LC is a growth story, not a profit story. At some point that growth needs to be profitable. The reason why I bring this up now is because of LC waving their service fee’s on Loans >$19,999. This will effect potential profits 3-6 years out.

Dan B January 5, 2012 at 2:11 pm

Peter…………Oh I see, so a comment like “soiled” directed to no one in particular but towards a company is considered close to a “personal attack”? Really? Did I attack Glenn? So Prosper is now afforded the same protection as a person?

I’ve done nothing wrong here. The truth bothers people, but that’s just too bad. I made my predictions. If Glenn, others or Prosper (the company or the person) doesn’t like it they can make their own. And to think that I actually went out of my way not to bring up the more incendiary items out of respect for you Peter because I realize you’re running a business here.

Peter Renton January 5, 2012 at 3:16 pm

@Dan, To say you need to “take that vigorous shower again to rid myself of all the dirt that I’ve been exposed to while reading Glenn’s post” is hardly impersonal. I am all for the truth and I think you do a great job of keeping everyone honest, I just wish you showed a bit more decorum and tact.

@Charlie, That decision by Lending Club may not end up having a negative impact on profits. If they can indeed increase the number of large loans that fund by around 20-25% the increased revenue from origination will more than make up for the lost investor revenue. If it doesn’t lead to much increase then I think you can predict this special deal won’t be around very long.

Dan B January 5, 2012 at 4:03 pm

I have no personal issues with Glenn. For all I know he’s a swell guy who volunteers in his spare time rescuing small animals . However his post response & the general aroma that has come out of Prosper marketing over the years is as unpleasant to myself & some (maybe many) others as to require the occasional borderline tactless response. I’ll risk lack of decorum & lack of tact………… order to balance the blatant untruths, borderline apologists & borderline mouthpieces every time.

Roy S January 5, 2012 at 5:26 pm

@Peter, I understand that all companies are trying to sell their product and will put a spin on anything they can to accomplish that goal–this is why I always remain a little skeptical. I just find that some try to put a little more spin on things than others. And when that happens, I always get a little nervous. With such a short track record that p2p lending has, I’m even more nervous.

There are currently so many changes going on within the industry. Every new investor gives another data point with which to adjust their UW and their rates. As more people become aware of p2p lending and try it out, both supply and demand will be fluctuating to find an equilibrium. And the number of D borrowers versus A borrowers will be changing daily, monthly and yearly. So the overall ROI will continually be fluctuating. Really, the 10.69% overall return is, at face value, ultimately a meaningless statistic to use. Where it is useful (to me) is to figure out how accurate and honest Prosper is in their self-promotion. If that same subset of Notes ultimately only provides a 5% return once they have all matured to their 36-month lifespan, then it will adversely affect my views towards Prosper and anything else they put out. If these notes do actually perform around 10.69%, then I will have gained a lot more confidence in them and trust their marketing a little more…but obviously still remain skeptical.

As Prosper’s record lengthens (and the record of p2p lending in general), I will be judging them as a company, the returns I receive and the industry as a whole. I am still optimistic about the industry (even with it falling flat on its face when it first started), but it may turn out to be an investment option I just don’t wish to partake in. Or it may turn out to be one of my better performing investments, even if they are overestimating the returns by 2%. In the meantime, I will be questioning everything and take everything said/posted with a grain of salt…and generally take things VERY slowly and cautiously.

Ryan January 6, 2012 at 10:37 am

I would expect Prosper to promote their product, and that means presenting their results in the best light possible. As a consumer, I expect their ROI estimate to be a little high. Luckily, Prosper has been very open with their data so that we have third party websites that also present returns. Lendstats measures/predicts the ROI to be in the 8-10% neighborhood, which is quite what Prosper promotes, but it is still a good return. As long as Prosper continues to allow third parties to publicly analyze their results, I am willing to look past their advertised return.

While my ROI was slightly negative in 2007, it was much more favorable than my mutual fund portfolio. Since the quiet period, my return has been solidly positive. As the industry develops, I am looking forward to continued positive returns.

Glenn G. Millar January 7, 2012 at 6:24 pm

@ Peter – Hope your trip went well. As a clarification this is not Tyson – Holyfield. I believe it is MMA. ;)

@Lou – The problem with written word is sometimes it does not show voice inflection. I did not mean to come across in such a way that I would need to “chill.” I am just passionate, as many are, about my company. I truly believe in Prosper and what the founder of the company is trying to do. Your concerns about Prosper 1.0 are certainly reasonable. We hope that people are more pleased with the new model and will give it a chance.

@Roy – Believe it or not we are saying the exact same thing. I think we both misinterpreted each other. When evaluating defaults and subsequent ROI, we use vintage reports, meaning we follow a subset of notes from start to finish. You are correct, what is important is if we say that the expected loss over 3 years of a subset of notes will be “X”, (thus predicting ROI for that subset) we need to be at or below “X”. If you saw my boss’s office and all the charts, you would agree we watch that like a hawk, and have been good in the last 2.5 years at predicting it.

On the 10 months seasoned number, if you would like, I can set up a call with someone who is more experienced in calculating ROI than I am and they can answer all your questions. Then if you like, you can write publicly about the answers you got, good or bad. What do you think? The one thing that I think we can agree on is that we are excruciatingly transparent with our numbers and our data. So anyone can calculate exactly how we are performing. We are proud to be that transparent which is why I invite you to publicly write about the answers you receive.

@Dan – Actually I own two rescue dogs. They are Labs from the same litter. They are named Pudding and Sugar. (They were named by my twin 7 year-olds, so don’t give me grief.) :)

Glenn G. Millar
Prosper Employee
Notes Offered by Prospectus

Dan B January 8, 2012 at 10:05 am

Grief? I’m truly dismayed by your perception of me, as it couldn’t be further from my mind. I’m sure it’s just incidental but by mentioning your kids & your pets you’ve just inoculated yourself from any criticism for the next few years. In fact, I don’t know if you’re aware of this but as we speak some people are submitting your name for canonization! :)

Roy S January 9, 2012 at 12:57 pm

@Glenn, You can put forth all of your models and statistics, but in the end the only only thing that matters is the final ROI when everything shakes out. Models are best known for one thing: GIGO (garbage in, garbage out). Reality is another thing entirely. I hope that your models are as accurate as you believe they are. I am not so sure, but I am a patient person. I can wait until the final numbers are in before making a conclusion one way or the other. I am currently just looking at the information I have to form my beliefs. As much information as Prosper makes available to investors, Prosper obviously has access to more information than we do. Prosper also has access to greater resources than we do. In the end, I hope I’m wrong and you’re right!

Dan B January 9, 2012 at 4:47 pm

Roy S……..The problem is that most people don’t have a good memory & don’t keep track of what is said or what is done. I’ll give one example…………..As much BS that is spoken about Prosper’s post quiet period returns & as much as the wishful thinkers like to accept the “seasoned” returns crap as legitimate, I find it very curious that no bloggers, no supposed experts, have pointed out that 90%+ of the data that is used to arrive at those numbers are as irrelevant today as Prosper themselves have claimed there 1.0 numbers to be. December 2010 was a major change for Prosper, was it not? All the 10 month or older returns going back to quiet period were based on the auction model were they not? What relevance do they have to todays returns when that model no longer exists? In fact it can easily be argued that it was a superior model that was ditched.

Simply put, if you accept July 2009 as a demarcation line then you have to accept Dec/ 2010 as one too. But Prosper doesn’t, because it’s not convenient to do so. Because doing so shreds their 10.69% beyond repair. It’s just another sleight of hand that goes unnoticed or unreported.

Glenn G. Millar January 9, 2012 at 6:46 pm

“In the end, I hope I’m wrong and you’re right!”

@Roy S – I hope so too!

Roy S January 9, 2012 at 8:02 pm

@Dan, My concern is their projection for a specific subset of Notes. They are continually adjusting their UW, rates, models, etc. There have also been outside factors that determine the ROI on all Notes purchased during a specific time-frame (e.g. fewer people who would be rated as D take out loans than those with a A rating). So Notes purchased in 2011 will have a different ROI than those purchased in 2012. My concerns are different than that. I have two concerns: 1) How honestly Prosper portrays the ROI it posts on its website; and 2) How accurate are their projections. If the ROI of this specific subset of Notes returns 6.5% rather than their posted 10.69%, then it either means that they are deceptive or incompetent–I guess it could also mean that they are overly optimistic. To me, it really doesn’t matter what their demarcation line. They’ve drawn the lines in the sand, and I will hold them accountable to those numbers.

I think your beef with them is that those numbers wouldn’t hold if you were to use other dates. Really, the issue I am having is whether one should expect the same ROI whether they purchase an A Note or a D Note. The idea is that the interest rates for D Notes are higher because more of them are expected to default. But accounting for defaults, should the subset of D Notes return the same as the subset for A Notes. If not, then Prosper, in my opinion, should not be attempting to portray one single ROI for all Notes within a given period as the ROI for different time periods would fluctuate based on the number and dollar value of Notes funded for each category fluctuates. And since market rates will change the rates on the different grade of Notes (e.g. an A Note in 2011 might be 8% but then in 2012 it would be 7%), should they be posting an ROI at all?

Obviously, they want to project strong returns as a selling point, but you are right, Dan, in that the returns will continually fluctuate and when you change the time-frame the ROI will change, which changes when you change the definition of “seasoned returns.” The question is whether Prosper is doing a better or worse job or are there factors beyond their control that are affecting an individual investor’s returns? I’m assuming the interest rate on your savings account (assuming you have one) has a lower interest rate than it did in 2008. Is your bank doing a bad job because the interest rate they are paying has fallen from 4 years ago, or is that just the market rate? If their models are accurate, and the expected return is close to what they project it will be when you purchase an individual Note, then probably all that matters is that you are able to compare that projected return with the projected ROI for other investments. (Ideally, these projected numbers should match up very close to the “seasoned returns” and to the final returns once all Notes have fully mature–so really, there shouldn’t be any need for “seasoned returns,” should there?) Just like businesses, you have to look at the projected ROI’s of different investment options and invest where you can obtain a higher expected return (hopefully taking into account your risk tolerances, too!).

I’ll take a moment to apologize for my rambling…Sorry, I understand that my train of thought can sometimes be very confusing. My thoughts are such that sometimes even I feel like I’m getting a little senile!

Dan B January 9, 2012 at 9:23 pm

I understand where you’re coming from Roy. Our positions are close. I would expect that the final ROIs for an A or D portfolio be substantially different in all but the most extreme economic cycles (such as 2008-2009).

I have always supported no artificial lines of demarcation whatsoever. Total returns should be from inception just like they are for other asset categories. Notice that very few if any people talk about pre this date or post that date when referring to Lending Club. And Lending Club doesn’t run around encouraging people to do so despite the obvious fat that their numbers would look better if it were done. Prosper on the other hand manipulates & re-manipulates, slices, dices the numbers to come up with this assorted BS of terms & numbers. They remind me of the stock pick newsletters/websites who post multiple return numbers with especially big numbers if you invested between this date & that. All these artificial demarcations we see here with Prosper are just another version of that deceptive game.

Unfortunately not enough of us are aware or sufficiently outraged & so the deception is sure to continue. It is frankly offensive to me that this game is allowed to go on. It’s doubly offensive & insulting that Prosper is allowed to do this while simultaneously touting “transparency”. Meanwhile the BS solidifies & becomes fact.

Bryce M January 10, 2012 at 12:58 am

Hey everyone! This year I began investing with Lending Club. I’m excited. Did a ton of due diligence, most I’ve ever done on an investment and I feel confident I understand the risks. I agree it’s going to be an interesting year with LC.

You might be interested in a back-of-the-envelope calculation I did looking at the 10Qs. The expense-to-revenue ratio (“how much did you spend to make a dollar”) went from 5 to 2 in the last couple years. This means that despite the increase in expenses in marketing/sales/promotions that we all saw, they are gaining some economies of scale. Of course, we need to see this drop <1 to be profitable, and they need to do it before their $30MM cash stack disappears.

This supports Peter's assertion that LC might have a profitable final quarter–or at least close. I'm optimistic, especially in light of the extended depressed lending and interest rate environment from the Fed through 2013.

Dan B January 11, 2012 at 11:46 am

Bryce M……….I’m not sure if it’s possible, but it’d be interesting to know how the expenses you refer to are broken down. In other words, the breakdown of what is spent to attract new borrowers & what is spent to attract new money &/or new investors. Any thoughts?

Bryce M January 12, 2012 at 1:33 am

Dan B. All you need do is look at the cash flow portion of the quarterly statement. Expenses are broken down into sales/marketing, computer engineering, and management. Sales/marketing is the money that goes into the promotions and advertising etc., and it is the component that has risen substantially over the last couple years. They do not break down their operations any further than that, so I cannot comment on the portion spent attracting new investors vs. borrowers.

Glenn G. Millar January 12, 2012 at 12:29 pm

@ Dan B. – Since you are currently a regular Prosper investor and lucky enough to be local, we would like to invite you to come to Prosper’s offices in San Francisco and meet with some key people. During this time you may ask any questions you like about Prosper, our statistics, how we predict defaults, how we calculate ROI, or any questions you so desire. After that meeting you are welcome to write about the meeting – both the good and the bad, as you see fit.

We look forward to seeing you and providing you with any facts you need to accurately report on Prosper.

You may contact me at GMillar at Prosper.

Glenn G. Millar
Prosper Employee

Peter Renton January 12, 2012 at 11:35 pm

@Roy, You raise a good point here. There is no one ROI number that is relevant to all investors unless you invest in all notes which no one obviously does. It is more of a measuring stick and should only be used as such. I will also be keeping an eye on the batch of loans that are projected to return a 10.69% ROI.

@Dan, I have thought a lot about that December 2010 change because it was a fundamental change in the way loans were funded. I am just not sure how much the auction model changed the interest rates – did a 20% loan become a 12% because of the auction model alone? This is something I will endeavor to explore in coming weeks.

Also, one could argue that if Prosper included all the Prosper 1.0 numbers it could be misleading investors in a negative way. You only need to look at the Lendstats home page to see how dramatically things changed in 2009 from an ROI perspective.

@Bryce, Thanks for chiming in. Your point is exactly why I have made the prediction of a breakeven quarter this year. Lending Club is already getting economies of scale and this will only accelerate as volume increases.

Dan B January 13, 2012 at 12:05 am

Peter…………It is not ethical to use “results” to determine a line of demarcation. As I’ve said many times, I’m opposed to any lines of demarcation, but if one decides to use them, then one should use them based on consistent criteria. The consistent criteria in Prosper’s case is a significant change in who gets a loan & how much that person pays in interest. Prosper used the auction model from the first day they were in business & for the next 4 years before changing over to the current model 13 months ago. They obviously made the change with the expectation that it would change interest rates for borrowers, otherwise why do it.

The official answer may be that the change was intended to make things more equitable or efficient………….which suggests that the previous model was not. Therefore a change in how rates are set is the way to correct the situation This change affected every single new borrower to the platform. It affected which loans got fully funded & which didn’t fund at all. It likely affected a significant number of borrowers as to whether they even went through with applying for the loan in the first place. In other words, whether they became Prosper borrowers in the first place. These changes therefore excluded some borrowers just like the tightening of standards in 2009. If these are not significant changes then you’re going to have a real hard time convincing a thinking person that the 2009 changes were.

Peter Renton January 13, 2012 at 12:38 am

@Dan, I agree that this was a big change, what I don’t know is how big. The official line is that it made things more efficient for investors and I agree. I found the old auction model clunky and inefficient when compared to Lending Club. But what impact did it have for investors?

Looking at Lendstats it certainly seems to have had an impact. If you compare the first six months of 2011 with the first six months of 2010 you see a 2% difference in ROI. This is certainly something to keep an eye on.

Dan B January 13, 2012 at 1:08 am

Peter……….The reason why one should not allow “results” to be used as a line of demarcation is illustrated by the following example:

Imagine I’m a football handicapper. I have a terrible year in 2010 & my picks have a record of 10 wins & 30 losses for the season. In 2011 I rebound & have a great year. My picks come through with 25 wins & 15 losses. I tell my subscribers that after my horrible 2010 results I revamped my entire methodology of how to predict winners & that’s why I had such a great 2011 season. I expand on this by providing everyone with charts & algorithms that support my claim. I also tell my subscribers that they should expect 2012 to be successful as well since I’m now using this improved system.

Now you Peter, imagine that you run a neutral watchdog site which monitors football handicappers like myself. (There’s actually no such thing as a “neutral” watchdog site in the real world, but like I said, imagine) What do you do? Do you allow me to use 2011 as a line of demarcation because results have improved dramatically? Or do you tell your readers to look at my cumulative losing record over the 2 years before spending their money on my services? What is the ethical thing to do? The answer seems pretty obvious. And that is the reason why an improvement in results should not be used as a factor to determine lines of demarcation.

Dan B January 13, 2012 at 1:26 am

And on the off chance that someone reading this is familiar with the world of pay sports handicapping services…………..yes I’m aware that 99% of those services are outright scams. And yes I’m also more than well aware that 99%+ of sports handicappers cannot consistently pick winners & that the remaining under 1% that can do it don’t put up websites &/or sell picks to the public.

Glenn G. Millar January 13, 2012 at 10:28 am

@Dan – I have to disagree with your analogy. Handicappers, the stock market and other “prognosticators” of the future all change their future projections when major changes occur to “the product”. Using your example, odds for a season change when a new coach comes in or a quarterback breaks a leg.

Now what you really have to ask is, “Is the change significant enough to change the future?”. Prosper would argue that, yes, the changes we made before July 2009, (Bringing in a new EVP of risk, raising our minimum credit score from the low 500′s to 640, increasing interest rates significantly on certain credit bands, etc) had significant impact and our lender returns since July 2009 shows this. On the other hand, I know that you would argue the converse. Time will prove one of us right and one of us wrong.

As far as our model change in Dec 2010 where we went from auction to fixed-rate: We have not seen any change to default rates based on that model change. Accurately predicting default rates, of course, allows us to deliver returns at or better than expected. The major benefit of the model change was an increase in borrowers, partially because it was easier to explain the model to potential borrowers, and of course you can see this in our tremendous growth in originations.

By the way, the invitation to come visit us and ask any question you like, and write about it is still open. Would you like to join us?

Glenn G. Millar
Prosper Employee
Notes Offered by Prospectus

Dan B January 13, 2012 at 4:15 pm

Peter…………..I’m still waiting for your answer.

Glenn……….. You know 2 weeks ago I went bowling for the first time in my life. Hard to believe but true. I bowled a 76 my first round & a 134 in my second. That’s a substantial increase…………but it’s hardly something I’d brag about considering how low both 76 & 134 are in the grander scheme of things. Similarly, what tremendous growth in originations are you referring to? Compared to what low level? Last time I checked Prosper’s best month both in originations & in volume was back in May 2008 under the auction model.

Besides, it is not up to you or Prosper to decide what the significant factors should be & what is significant…………….It is up to to outside neutral observers, impartial observers to make that determination.

Thank you for the invitation. I’m not sure what would be the point for such a visit at this time given our, shall we say, contentious history. But I will consider it further. If I decide to accept I will of course give you plenty of notice so that your team can familiarize yourselves with the protocol for visiting dignitaries etc.

Bryce M January 13, 2012 at 4:21 pm

Dignitaries? Dan B. is Lord of Lending! President of Principal, Mayor of Money, and Earl of Earnings! *chuckle*

Dan B January 13, 2012 at 4:43 pm

Bryce……..Hey I’m just trying to be as “transparent” as possible in communicating my expectations.
It goes without saying that if the event does take place I’ll be sure to grab a commemorative pen for you. :)

Bryce M January 13, 2012 at 4:45 pm

Glad this board has a sense of humor. I like rollerballs pens.

Glenn G. Millar January 13, 2012 at 5:03 pm

@ Dan – The invitation is still open. Since you are a current and ongoing investor, and you clearly like writing about Prosper, we thought you might want to have the most up to date factual information so you can present an accurate picture. Thus, the offer to allow you to ask any question you want and write about it later.

In addition, by visiting us, you would certainly be considered more of an expert on P2P lending to people who follow your comments.

Glenn G. Millar
Prosper Employee

Peter Renton January 15, 2012 at 9:03 pm

@Dan, It probably doesn’t surprise you but I am with Glenn on this one. I think the changes in July 2009 were so marked, and the results since then have been so different, that it would be irresponsible of me to give them an equal weighting when talking about historical returns on Prosper.

I would rather keep all analogies to investing so I would equate the July 2009 differently Let’s say a mutual fund company had launched a new fund that underperformed for several years. The fund company didn’t close down the fund but it brought in new management for the fund, overhauled the strategy and investors then watched to see how the returns went. The average return before this change was somewhere around -5%, but in the two and half years since then this fund has returned between 7 and 10%. The returns have been consistent and predictable. I would say the old returns are far less relevant today now there is a decent track record. Of course, the old numbers would be included in the 5-year and 10-year return figures but savvy investors would know that the change in July 2009 have made the early numbers less relevant.

Having said all that, this is what I will do. I will do some research and write a post looking at the Prosper 1.0 returns and try to provide some insights for investors today.

Dan B January 17, 2012 at 9:22 pm

In many circles equating a mere 2 1/2 yrs worth of INTERIM results (no less) with the term “track record”, would insure that no one serious would ever take anything you said seriously again.

Peter Renton January 17, 2012 at 10:11 pm

@Dan, Well, you are entitled to your opinion but I will continue to provide serious analysis here. It is up to the reader to decide whether to take my analysis seriously or not.

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