Shutdown by SEC

prosper lending

Image from Netbanker

You might have heard of, 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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