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I just heard about a new website called prosper.com. The site is a sort of clearinghouse for person-to-person money lending. It's an interesting concept, but I'm curious if anyone has used, or even read up about it. Surely there's some benefits over traditional banks, but I can also imagine there's quite a few pitfalls. What's everyone's opinions? Is this going to be the 'next big thing?'
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I heard Clark Howard mention this. But beware, this is NOT "Online Banking" (not criticizing your post, just making the point). This is money that is at risk. This is not a place for an efund or short term savings.

You'd do yourself well by considering this as risky as your market money. It has to be money you are willing to lose and do not need, in order to try to produce higher returns.
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Yah, that's one of the things that concerns me.. they don't protect you in any way from defaults. You can see a credit score and debt/credit ratio before choosing to lend to someone so you aren't going in to it totally blind, but it's definitely still a risky proposition.

It's really kind of interesting in looking at the loans that are currently being funded - the people with a good credit history and manageable debt load are getting rates around 5-6%, while the high risk borrowers are seeing 20-25% and/or not having their loans funded at all. It's interesting to see the market at work like this.
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The site is a sort of clearinghouse for person-to-person money lending.

Can I pull the other person's credit report? How do I know they are going to repay the debt? It's a scam. I wonder where the attorney general is on this thing?

jk
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You can't pull their full report, but they give them a 'credit grade' that's based on their experian FICO score. You can also see their Debt/Income ratio (though I can only assume they derive the income number from the user's own statement.)

Their FAQ mentions some of the regulations they comply with, and one of their board members is a founder of eBay, and their CEO was also a founder of E-Loan - it's certainly NOT a scam.

"At the federal level, Prosper is regulated by the Federal Trade Commission insofar as it must conform to the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act. "
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Their FAQ mentions some of the regulations they comply with, and one of their board members is a founder of eBay, and their CEO was also a founder of E-Loan - it's certainly NOT a scam.

They need something more convincing. Can I put a lien on the people that do not pay me back?

jk
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They need something more convincing. Can I put a lien on the people that do not pay me back?

They say they report it on their credit reports. But I don't know beyond that. I wonder if you could sell the debt to a Collection Agency too ;)
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You're basically buying a junk bond, but one that pays a tiny tiny rate of interest.

Yes they run a credit report, but how can you be sure that it's not a scammer having bought someone's SSN committing identity theft?
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They need something more convincing. Can I put a lien on the people that do not pay me back?

They say they report it on their credit reports. But I don't know beyond that. I wonder if you could sell the debt to a Collection Agency too ;)


They say that they hire a collection agency, but the result of that is you get whatever the collection agency collects less their fee (which is often 50%-80% of what they collect).

You have no way of finding out the borrower's actual identity (so you can't hire a bunch of goons to "lay hands on" them)
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You're basically buying a junk bond, but one that pays a tiny tiny rate of interest.

Tiny? I agree with your characterization about you essentially buying people-junk-bonds instead of corporate junk bonds, but why tiny? Surely the 10, 15% you can get on there is reasonably comparible if not better than those of many junk bonds.

Now that is *not* to say that the risk is the same, your expected yield in the same, etc, etc... but I don't see how the interest rate is tiny.

On the plus side, I would assume the payments include principal, like a credit card, and you're not waiting until the end to get your principal back, like with corporate bonds.


Yes they run a credit report, but how can you be sure that it's not a scammer having bought someone's SSN committing identity theft?

A darn good point. By doing this you are taking on all the risks of a lender. Including default, late payments, and identity theft. With about your only recourse being a collection agency who will probably not collect much and take much of that in fees.
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The problem is that we don't know the correlation between the "credit grade" assigned by Prosper, and the actual risk. At least with corporate bonds you have some research and history as to how to turn the bond rating into a probability of default.

That's why I assume everyone on the site is a junk bond.

When I looked, the only 10%-15% returns came from people who I would view as much riskier than junk-bond corporates paying more than 15%. Not tiny on an absolute basis, but tiny on a relative basis.
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I'll bet a dime to a doughnut the IRS is monitoring this already.

If they can't get you one way, they sure as hell will catch you on tax evasion. It looks like that is the *real* motivation behind this scheme....If I may politely call it that. Bartering isn't a favorite transaction by Uncle Sam. So they may jump on this pretty fast if it begins to swell into a major issue.

I can just imagine every lender reporting PERSONAL PROFIT on their taxes and complying with all the rules and regs and paying their BUSINESS tax. Yeah, right.

Does this activity fall in under running a business? You're making money on loans. To me that's a business.

Heaven help the lender....this doesn't seem legit. Two names mentioned from other banks, and the mention of a board of directors, so may I assume the are incorporated? Maybe in the Bahamas. :0)
How do lender and borrower connect....over the internet?

I find this hard to believe! Like to see the paper work on this one. Any lawyers caught on yet? About the time someone doesn't get paid a lawyer will involved and remember the O.J. trial....anything can happen. I can even imagine a class action suit if it goes on very long and enough people lose enough money. Wait till CNN gets wind of this!

I just cannot believe it. Soooo many loopholes.
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If they can't get you one way, they sure as hell will catch you on tax evasion.

Prosper says they issue the lender a 1099-INT, and report same to the IRS. The only way you'll avoid taxes is if you stole someone's identity and SSN.

The only "business" is Prosper. Lending money via Prosper is no more a "business" than putting money in a bank. You're not carrying on any business activity (advertising, recordkeeping, etc.) -- Prosper is.

The lender and borrower never connect. Prosper always serves as the middleman.

Yes, this thing is loaded with loopholes but please read the site before making sweeping pronouncements.
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O.K. jrr7 I accept your comments graciously. I visited the site Prosper.com but was not able to find any reference to the governing board, its members, their qualifications or where this business is incorporated. Also, at first glance, it appeared similar to the pyramid club of the past(an opinion). I did not join to get possible answers.

So that I can see the transparency in this "legitimate business", Please help me find the info I am looking for so that I am able to make an honest assessment for myself. I am not a lemming.

Brooks
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I accept your comments graciously. I visited the site Prosper.com but was not able to find any reference to the governing board, its members, their qualifications or where this business is incorporated.

Well there's no board because they're not a public company, but there's certainly executives

http://www.prosper.com/public/about/default.aspx
http://www.prosper.com/public/about/management_team.aspx


There are people formerly of E-loan, Citibank, and JPMorgan running this company. Potential problems? Certainly. Pyramid scheme? No.

(Btw, a NY Times article which is now only available in archive also talked about the qualifications of the management, mentioning those companies)
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I visited the site Prosper.com but was not able to find any reference to the governing board, its members, their qualifications or where this business is incorporated.

http://www.prosper.com/public/about/management_team.aspx
http://www.prosper.com/public/about/contact_us.aspx

Try clicking on "About Us" or "Help" for lots more info.

John
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I visited the site Prosper.com but was not able to find any reference to the governing board, its members, their qualifications or where this business is incorporated.

That is indeed a big issue, but the company is private, and you do business with a lot of other private companies without knowing this information.

I'm actually opposed to Prosper, but there are plenty of legitimate reasons to oppose it without having to make stuff up.
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I read "About Us" and scanned "help".

I shall bow out of this discussion, for as you can plainly see I cannot see this as a good investment for anyone...risk taker or not. I only hope those individuals who invest know the market well.

One remaining request if anyone knows: Since it is not a public company are there any requirements written in their policies for a quarterly and an annual report to investors? Anyone know this?
Salaries, financial statements etc. All the info normally found on an SEC report. Transparency???

Brooks
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Since it is not a public company are there any requirements written in their policies for a quarterly and an annual report to investors?

You're not lending money to, nor buying stock in, Prosper. You could't do that even if you wanted to.

Preparing 10-q and 10-k reports costs time and money.

I'd be interested in knowing what happens if prosper goes broke -- now who owes whom? Supposedly the borrower owes the lender(s) but Prosper hasn't given out any info for them to be able to find each other.

My guess is that the assets of Prosper, namely the right to service the loans, will be purchased by another company, which will unilaterally increase fees. A lot of borrowers will default rather than pay the increased monthly payments.
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jjarmoc,

You wrote, I just heard about a new website called prosper.com. The site is a sort of clearinghouse for person-to-person money lending. It's an interesting concept, but I'm curious if anyone has used, or even read up about it. Surely there's some benefits over traditional banks, but I can also imagine there's quite a few pitfalls. What's everyone's opinions? Is this going to be the 'next big thing?'

I seriously doubt it. I also don't see how this benefits the lender in any significant way. It doesn't seem to increase his yield that much; but it does increase his risk.

Right now you can go to a broker and buy asset-backed bonds or other securities. For instance, lots of people buy mortgage-backed securities. The original lender tends to bundle together a group of mortgages and then re-finance those mortgages through the sell of bonds that are backed by them. The bank or mortgage company acts as an intermediary and they serve to originate the loans, service the loans, assess the risk and spread that risk out across multiple loans.

Similar products exist in many areas of commercial and retail lending, so I don't see what prosper.com buys me except for: 1) added risk, and 2) novelty.

- Joel
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"I don't see what prosper.com buys me except for: 1) added risk, and 2) novelty."

Prosper adds simplicity and accessability. A lender can begin with as small as a $50 loan - no inactivity fees. All of Prosper's fees are on one page.

I was going to link to the page, but the site is under maintenance. The borrower pays a one-time 1% of loan principal fee to prosper (which prosper keeps and doesn't pass to lenders), and lenders pay a 0.5% annual loan maintenance fee.

There is another fee for the borrower if the borrower doesn't use ACH for the monthly payments.

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