Prosper Relaunches in California Without SEC Approval
It has been a little over six months since Prosper shut down its social lending marketplace under threat (and later consummation) of a cease and desist action from the SEC. Early this morning, the site was reopened after a weekend-long outage, with some expected differences but also many unexpected changes.
Regulatory Issues with SEC
Although Prosper will be open to borrowers from any state in the US (including South Dakota, which was previously closed), lenders are restricted to California residents only. According to a blog post by Prosper CEO Chris Larsen, it seems that Prosper has only been able to get clearance from the California Department of Corporations to issue securities to California investors.
Larsen doesn’t go into a lot of detail in his post, but his strongly-worded message includes the following screed that hints at what Prosper must be running up against with the SEC:
We remain hopeful that the SEC, which until now has effectively hamstrung the growth of the peer-to-peer and micro-lending industries in the U.S. will start applying the same common sense approach as California’s regulators. California has recognized that Internet auctions, just like the Google IPO, are the most efficient means of price discovery; that loan level transparency is better than the opaque loan pooling that brought the financial system to its knees; and that requiring regulatory filings every other day of web site transactions that are already visible in real time, is redundant and cost prohibitive.
There are three specific comments in there: 1) Prosper wants prices set by auction, 2) Prosper is opposed to loan pooling, and 3) Prosper is opposed to daily regulatory filings. Regarding auction pricing, Lending Club has always had a fixed-price model, so that is not an issue for them. And Lending Club has also submitted to daily regulatory filings (although, as Larsen says, they are redundant). Regarding loan pooling vs. loan-level transparency, it’s unclear what Prosper is arguing against.
Perhaps in an effort to frame its as yet unapproved bid to the SEC, Prosper is positioning the new site as a response to the global financial crisis. A press release issued this morning is entitled “Prosper Expands P2P Loans Marketplace in Response to Financial Crisis“, and the company has launched a site at FixTheCreditCrisis.org which encourages investors to contact their state legislators and help push through SEC approval for Prosper. It also includes this low-quality video featuring Larsen:
New brand: Prosper Loans Marketplace
Possibly one of the most visible (and puzzling) changes on the new Prosper site is a re-branding towards the name “Prosper Loans Marketplace”. The name is used in the site’s new logo and in a few other places, although the name of the company remains (according to the copyright) “Prosper Marketplace, Inc.” Few companies have been known to lengthen their company’s name, but Prosper seems to think that the Google juice earned by adding the word “loans” to their name will be worth the semantic confusion of having a plural noun sandwiched between two singular ones.
Open Market Loans
The biggest change on Prosper’s new site is the addition of what are called “open market loans”. According to Prosper, the open market is the lending market that takes place off-Prosper (i.e., loans that are underwritten and originated by traditional lenders). With the changes released today, these traditional lenders can start offering already-issued loans as securitized notes at auction to Prosper lenders (individuals).
At the moment, there are only open market loans available from CPS, an auto lending company. On an open market listing, in addition to the borrower’s Prosper Rating (more below) and credit profile, the loan’s payment history to date can be seen. This kind of professional underwriting and payment history data may attract a new kind of lender to P2P lending.
Secondary Market Still Pending Approval
Although it was the original stated reason for their shutdown, Prosper’s secondary market is not yet available, pending SEC approval. We know from their SEC filing that the marketplace will be operated by Folio Investing, but few other details are available.
Credit Grades are now Prosper Ratings
Before shutdown, the Prosper site scored borrowers by making a direct translation from their Experian credit score to his or her credit grade (e.g., a 700 credit score was a B credit grade). On the new site, a borrower’s “Prosper rating” is a combination of his or her credit score and a proprietary Prosper risk score that is based on historical performance. Although Prosper provides a help page on the Prosper score, they don’t actually publish the formula for determining a borrower’s Prosper score.
Prosper has also raised the minimum borrower credit score from 520 to 640, effectively blocking what were previously D, E, and HR credit grades from borrowing. Confusingly, the Prosper ratings look the same as the old Prosper credit grades. So although many high risk borrowers are cut out of the picture, their old labels (D, E, and HR) will be taken up by new, less-risky borrowers.
- Borrower loan closing fees raised from 2-3% to 3% across the board.
- Performance pages no longer include Estimated ROI, but rather emphasize the improved quality of borrowers with credit scores above 640.
- Collections statistics (which were removed before shutdown) are still not available.
- Some borrower listings appear to be 14-day listings. This may be a temporary change to allow the lower number of California lenders to bid on more listings, or a permanent change.
- Prosper has made changes to the lender account section that takes a more note-centered approach. Lenders can now see failed payment details, although other details have been removed at the note level.
This is an interesting and unexpected move on Prosper’s part. They are obviously unhappy with their treatment by the SEC, and rather than submitting to the SEC’s whim, they’re calling the SEC out, and hoping that the power of their constituency (the Prosper lenders) will persuade the SEC to approve their filing.
It will be interesting to see how this situation develops. Will Prosper take a state-by-state approach to investor regulation (the same way they approached borrower regulation pre-WebBank)? Or will the “Fix the Credit Crisis” mini-site eventually move the SEC to approve Prosper’s desired model?