The Prosper Lender Rebellion, and the US Credit/Borrowing Black Hole

By samrose, published at 16 August 2007 - 8:55pm, last updated 6 years 48 weeks ago.

(via P2P-Kredite)

The P2P Lending enabler-site http://prosper.com is experiencing a rebellion by it's lenders, mostly found on it's forums:

See: ”FLASH:Prosper bans $100.000 lender“, “Prosper Mng. Living Under a Rock“, “Shooting the Messenger“, “What happens if Prosper goes under?“, “I am done lending on Prosper“, “Hello Prosper Moderator“, “Lender’s WHO are DONE with Prosper“, “My letter to Prosper” and ”Open letter to John Witchel“.

Apparently, the problem lies in Prosper's reported un-responsiveness to their lender community. The lenders have raised issues about Prosper's lack of effective collections on deliquent loans, and Prosper's reported past inaction on preventing "blenders" (people who are both borrowers and lenders, or group leaders who are also borrowers) from lending money when they are deliquent on their own Prosper loan payments. Apparently Prosper.com has since announced that it will take action on deliquent "blenders".
My own analysis is that some of these problems appear to be inevitable given the conditions on Prosper.com's loan marketplace:

  • Many unsecured loans are bid down to a very low interest rate, making ROI (return on investment) more difficult for lenders
  • Unsecured loans are of course, very easy to default on. There is really no immediate consequence for the person who defaults.
  • Prosper lacks the resources to collect on the apparent high volume of defaulted loans. The centralized, profit-focused nature of Prosper as a system and company pushes them to focus on short term profits for the company at the expense of working on behalf of their communities to make their system sustainable.
  • Although pretty much anyone can lend money on Prosper, there is no easy way for the lender to judge whether the person they are lending to is already over-extended, which is a very common problem in the US

It is my theory that many people are likely defaulting on their Prosper loans because they are over-extended in credit. Because of the huge problem in the US with people being over-extended on their credit, Prosper is affected by the same factor as any unsecured credit lending entity. When people find out that they have a chance to obtain unsecured credit, whether they are over-extended or not, they are flocking to Prosper, and they are getting money, and they are not paying it back.

This actually reflects a deeper problem with the economy in America (and possibly elsewhere): for a huge amount of individuals, borrowing money is the only way to raise capital in the immediate future. roughly 6 in 10 US citizens are in Debt. Especially given economy slowdowns in many areas across the US over the past 8+ years, this also means things like getting a raise from your employer, or changing employers to increase wages is less likely of an option for a huge amount of people. So, people are turning to borrowing money.For the last 8+ years, there has also been an explosion in US subprime lending. This led to a mortgage bubble that is now collapsing in the US. In my opinion, our total societal system is broken when companies respond to economic downturns by stepping in to tempt people with quick money that the companies know many of them will not be able to pay back. In the case of mortgages, this means that finance companies acquire property when borrowers default.

For a system like Prosper to work in the long term, lenders and borrowers need literacies and knowledge to know when to borrow, and when to lend. Otherwise, Prosper will end up becoming part of the problem.

And, in general, there is a greater need now more than ever, for people to have other ways to invest in one another, and for individuals to raise capital, and to have the knowledge and personal infrstructure to use the capital in sustainable ways, that increase the chances that investors see ROI.

We've been discussing these ideas at http://barcampbank.com, and at http://www.aboutus.org/RiskSharingPassiveReturn, and Open Business Models Wiki Hive. These ideas have also been discussed at http://solari.com
The idea is to create a P2P investing marketplace, that is tied to a fast-growing knowledge commons, and that is coupled with a effort to help people seek and use investment on a personal level wisely. People need open access to data about their local and regional conditions, and ways to pool their money without going into debt. Borrowing money is a great option, but only if you can pay it back. Otherwise, people need a way to leverage their abilities and resources to attract investment, and use it to grow wealth for themselves and investors in ways that can be sustained. Right now, the law makes little or no provision for this type of investment.

Thanks for the links, and

Thanks for the links, and the background on the term of art.

You know, I don't know of an

You know, I don't know of an actual FAQ, but that is a good idea. In the mean time, check out:

http://p2pfoundation.net/P2P_Lending
http://www.wikiservice.at/fractal/wikidev.cgi?EN/BarCampBank/BankAndFina...
and keep an eye on http://bfwatch.flexrun.com/ (will soon be at http://bfwatch.p2pventure.org)

Bull in a china shop is a tag that fellow CoCo blogger Jim Benson coined to talk about an entity that is breaking cooperation by being careless, or getting out of control.

Sam Rose
http://socialsynergyweb.com/services
http://blog.socialsynergyweb.com

Sam, I think P2P lending may

Sam,

I think P2P lending may well be the most revolutionary concept I've yet encountered, and look forward to your updates here. Is there a simple, introductory faq style document you can poitn folks to? And may I request an explanation of the "Bull in a China Shop" tag?