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Tight Credit Aids People-to-People Private Lending Market
By Alton Gary Simpson
SAN FRANCISCO-Online people-to-people lending marketplace Prosper has released its September People-to-People Lending Market Survey, which provides key statistics and also market commentary by Chris Larsen, Prosper's chief executive officer and co-founder. Like eBay, people list and bid on loans using Prosper's online auction platform. People who register as lenders set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. In addition to criteria commonly used by institutional lenders, such as credit scores and histories, Prosper lenders can consider borrowers' personal stories and group affiliations.
Mr. Larsen is best known in the mortgage industry as the founder of e-Loan.
People who want to borrow on Prosper create loan listings for up to $25,000 and set the maximum rate they are willing to pay a lender, then lenders bid down the interest rate in an online auction. At the auction's end, Prosper takes the bids with the lowest rates and combines them into one simple loan to the borrower. The company handles all ongoing loan administration tasks including loan repayment and collections on behalf of the matched borrowers and lenders.
According to September People-to-People Lending Market Survey, the average loan size in September 2007 was $7,175, an increase of 40% from the $5,175 average loan size the year before. Funded loans for the month totaled $5.4 million, up 74% from September 2006 when the monthly total of funded loans was $3.1 million. Year-to-date -- January 1, 2007 to September 30, 2007 -- the average loan size is up 47% to $6,986 from $4,740 during the same period last year. Year-to-date loan fundings skyrocketed nearly 270% from $16.8 million last year to $62.1 million. Prosper's membership consists of more than 440,000 people from across the country and more than $90 million in loans have been funded in the online marketplace since its inception.
The state with the lowest default rate was Minnesota with zero percent. Minnesota was followed by Ohio -- 0.65%; New Jersey -- 0.99%; Colorado -- 1.4%; and New York -- 1.56%. The occupation with the lowest default rate was computer programmer at 0.96%. After computer programmers, in order of increasing defaults by occupation were: civil service -- 1.48%; analyst -- 1.63%; mechanical engineer -- 1.67%; and electrical engineer -- 1.85%.
Mr. Larson noted in his commentary that people often expect mortgage rates to drop following a Fed interest rate cut, but that mortgage markets typically anticipate rather than react to moves by the Fed. On the other hand, the variable credit card and savings rate markets react sometime after the Fed moves.
"Many might assume that the Prosper marketplace would act less like the mortgage markets and more like the credit card and savings rate markets given that the latter compete with Prosper. Nevertheless, the month over month drop in average borrower rates indicates that the Prosper marketplace may have anticipated the Fed cut," he said. "In September, the average borrower rates for all prime and near prime loans funded in the Prosper marketplace were 12.29% and 18.22%, respectively; down 0.37% and 0.28%, respectively, from August."
Mr. Larson added that the percentage drops are close to what was anticipated to be a quarter-point reduction instead of the surprise half-point reduction by the Fed. "However, what remains to be seen is whether the market will continue to push rates down further in line with the Fed's surprise move," he concluded.
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