Prosper’s Latest SEC Filing Excludes Open Market
Prosper recently filed a fourth amendment to its regulatory filing with the SEC. This new revision of the peer lender’s S-1 has removed the concept of “Open Market Loans” entirely, and seems to focus Prosper back on track to simply being a loan originator with a secondary market. See coverage of past filings here.
Prosper re-launched briefly as a California-only operation on April 28th, then shut down again on May 9th. Apparently the SEC was not amused by Prosper’s aggressive moves (ignoring the SEC and launching under California State authority), because Prosper closed down lending on prosper.com, closed down their FixTheCreditCrisis.org site and video, and removed CEO Chris Larsen’s combative post from the Prosper blog.
In the post, Larsen had three specific complaints against the SEC. The first regarded auction pricing, which doesn’t look like it has changed in this revision. Either the SEC got comfortable with Prosper’s pricing model, or the issue related to the secondary market, known as the “Note Trader Platform” in the S-1 (although the description of that platform continues to include auction pricing).
Larsen’s second complaint was about loan pooling vs. investor visibility on a loan-by-loan basis. Presumably this was the issue that forced Prosper to remove the open market from its offering. One of Prosper’s arguments in their FixTheCreditCrisis.org site was that the old model of bulk-securitization and investment opacity was to blame for the credit crisis. The open market offered a new path forward, offering full visibility to debt purchasers because loans were sold individually and with full transparency to its underlying fundamentals, Prosper argued.
Prosper’s third complaint dealt with the listing and sales reports that the SEC had already required of Lending Club (whose filing was approved in October 2008), saying “requiring regulatory filings every other day of web site transactions that are already visible in real time, is redundant and cost prohibitive”. The SEC apparently did not agree, because the reports are included in their latest filing.
My only commentary is that it’s unfortunate that the SEC forced Prosper to remove the open market feature from their filing. It was an innovative concept that would have moved P2P lending ahead and opened up more business opportunities for Prosper and other peer to peer lenders. I wasn’t enamored with Prosper’s first open market partner, sub-prime auto lender CPS, but being able to launch with 100 loans from an actual 3rd party lender showed that there was interest from the marketplace, and interest from lenders (who placed plenty of bids before the listings were removed).
At this point it’s anyone’s guess how much longer Prosper will sit in quiet mode. Now that items are being removed from the S-1, however, it seems that SEC approval is near.
Related posts:
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A few more items of interest:
The SCP Prosper Forum, Prosper “Quiet” Diary notes text in the section “Security Interest” is altered. Prosper tried various methods to protect lenders by segregating borrower notes from other assets and liabilities. Apparently nothing worked. References to unique lender protection have been dropped.
Forum members at Prosper and Lending Club Loan Discussions note a “floor” on borrower interest rates is introduced. The auction model for setting rates is not entirely abandoned but Prosper now proposes both top and bottom thresholds, apparently an element important to the SEC.
And the gang at the Pro$pers.org forum offer a plethora of opinion including laments about too much government intervention — the frustrated Chris Larson’s point exactly.
Thanks for the additional details, Investar. The floor on borrower interest rates is quite interesting. Maybe they are trying to protect lenders from rates that are too low? (Although it’s hard to imagine a AA loan going below 2.89%.)
As with all things regulatory, it is not so much what will happen but what could happen. Without a “floor” over-eager lenders could bid their investment to a zero return (negative even, after servicing fees). We recently witnessed a near-occurance of just that phenomenon in the US Treasury markets. The Prosper reality is that limits proposed for highest rated AA and A borrowers will be essentially irrelevant. But funding history on mid-grade borrowers says a “floor” there will interfere with exuberance during the bidding process on occasion. Bear in mind, Prosper’s “Credit Grade” letter has been abandoned in favor of a “Credit Rating” letter. Certain borrowers formerly classed as grade B and C are now rated D, E, or HR. Some mid-grade loans easily achieved the 12% to 17% range.
Understand the difference between the old “Credit Grade” letters and the new “Prosper Rating” letters. SCP Prosper Forum discussion: Prosper Credit Grade vs Prosper Rating vs Prosper Score.