Prosper.com Shutdown by SEC
by Mark Ontkush, Boston, Massachusetts, USA 
on 11.27.08
Image from Netbanker
You might have heard of prosper.com, a site where borrowers and lenders can get together in the absence of a legitimate bank and do business. It's an intriguing idea; lend your money directly to your planetary neighbor without some middleman taking a cut, who indubitably must fund their indoor Hamptonian pool on your dollar. As the lender, you take all the risk and get the all the interest; as the borrower, you get access to cash that a regular bank might not let you borrow, maybe because your credit rating is bad or you have no collateral. Sounds like a security, doesn't it? Obviously, Prosper is running the 'trust your brethren, help each other' model in full swing, something the Green Glow can relate to. But the scheme has two minor problems... it's illegal, and doesn't work - the Securities and Exchange Commission has shut them down.
The deal: Prosper wanted to be a tech play which killed the middleman and took a small slice off each transaction. This required them to take on a lot of bank-like aspects, such as investigating borrowers and collecting on deadbeats. Prosper tried to move this responsibility to the lending peers, then they realized that this would be very, very illegal. The SEC realized this too, and shut them down; fueled by the economic downturn, it seems as if some lenders were one step away from hiring Rocky-bum-legbreakers to go after their bad debtholders. You shouldda planned ahead!
The second issue concerns the published rates of returns - from above, 8 to 12 percent! But this is not the average - this is only for the grade A loans, the highest 'tranch' in the system. And since you have no way of consistently knowing who these grade A borrowers are, it comes down nearly to luck, and your personal vetting skills based on the limited information that is provided to the lender.
Prosper is planning to get registered with the SEC blah blah blah, but it will take months and almost surely end in disaster - there's a class action lawsuit pending.
I like Prosper, I really do - the feel-good-helpy thing, the make-money aspect and the efficiency of eliminating the middle guy. But it's turning out to be just another magic-wand wave, a tried-but-fail where the premise that the poor would get richer and the richer more generous doesn't hold water... again. One could applaud the attempt to alter the existing 'dirty commerce' system, except that they fell prey to their own ills, massaging the rates of return like Kobe beef. La la la, another fairy castle crashes. Techcrunch
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Would micro-credit be illegal too? After all it helped thousands of poor in Bangladesh make a first move towards financial stability.
Let's hope the SEC doesn't decide that Kiva is competing with the IMF and try to close it down.
[they are next mjo]
there is a few problems with your article:
1) they do have a program to collect on people that don't pay. after so many days like 30 or 60 days of non payment it gets sold to a collection agency. so you never totally lose all your money if someone doesn't pay.
[wrong mjo]
2) no one is going to go after someone who doesn't pay like a loan shark would or something. the idea is if you have $5000 to loan, you loan 100 people $50, not 1 person $5000. no one is going to go after someone for not pay $50 or $100.
[in fact, they are mjo]
3) there is a way to know what grade each borrow is. when you apply for loan proper checks your credit score and give you a credit grade.
[there is some info available mjo]
also i'm sure proper can, and will, file an appeal.
The article said:
"a tried-but-fail where the premise that the poor would get richer and the richer more generous doesn't hold water... again."
You have your head stuck in the clouds.
[not me, not me mjo]
Credit does not make the poor richer, it makes the poor slaves to the rich. See also: company towns where the company in question owns the general store.
The only time that rule doesn't count is when the poor actually wisely use that money to invest and actually get returns on their investment. But in case you haven't noticed with the consumer insanity pre-collapse, that doesn't happen 95% of the time.
[I've noticed mjo]
As a long-time Prosper lender, I congratulate the author on on being more informed about the realities of Prosper than 99% of the so-called journalists who do lille but regurgitate press releases. The author is also correct in how he corrects the misrepresentations in the comments above mine.
Lending Club recently raised its minimum borrower FICO score to 660, as well as increased interest rates. We are committed to making the peer lending experience positive for the borrower and profitable for the lender.
We recently (in Oct.) finished our registration process the SEC and are open in most US states.
Peer lending can work. It just need to be executed in a legal and efficient manner, which is what we are achieving at Lending Club.
Don't give up on social lending just yet!
Regards,
dk
Product Ambassador
lendingclub.com
I'm a proper borrower and dreamed of one day being a lender. It has worked out very well for me, I didn't get funded the first time, the whole process really made me do my homework and get realistic but once I did, I got funded, the money helped pay off some bad debts which helped my credit, then the automated payment has ever since steadily made a positive mark on my credit, all the while good people who had faith in me are getting paid something like 22% interest. this is a true win/win. if its illegal then I think we need to change some laws