P2P Loan IQ

Prosper’s Resale Platform–The Future of Peer-to-Peer Lending

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Prediction: Prosper’s planned resale platform will revitalize peer-to-peer lending. With the falling interest rates offered on saving accounts, many people have turned to P2P lending on sites like Prosper to invest their money. Like all P2P lending sites, however, there is a major limitation with Prosper. Once you lend money to a borrower, you can’t withdrawal your money. Instead, it comes back to you with interest over three years as the borrower makes the required monthly payments. If you’re in a pinch and need the money immediately, you’re out of luck. Enter Prosper’s resale platform.

The obvious solution to this problem is to allow lenders to sell some or all of their loans. Currently, that’s not permitted, but Prosper is hard at work building what it calls a “Resale Platform.” The Resale Platform is described in an S-1 Registration Statement that Prosper filed with the SEC back in October 2007. If you want, you can thumb back to page 31 of the S-1 to read about Prosper’s Resale Platform, or you can just keep reading.

Prosper’s Resale Platform—How it will work?

Prosper’s Resale Platform will work much like Ebay. A lender who wants to sell one or more loans can list the loans on the Resale Platform for bidding. Selling lenders will be able to specify a listing duration of three, five or seven days. They can also add an “automatic sale” feature to their resale listing that would allow bidders to immediately buy the loan for a fixed price set by the seller. This is very similar to Ebay’s “Buy It Now” option.

The selling lender must designate a minimum sale price he or she is willing to accept for the Note. The minimum sale price cannot be below $0.50 or above the sum of (1) the total of all remaining monthly payments of principal and interest on the Note, plus (2) accrued but unpaid late charges.

Registered lenders can then bid on the Note. Prosper intends to use a proxy bidding system that, like Ebay, enables bidding Lenders to place a bid higher than the then current bid, and have bids continually applied against a resale listing, up to a specified maximum bid amount. The maximum bid amount is hidden from view until competing bids push the current sale price higher than the maximum bid.

Lenders may place bids until the end of the auction period specified in the resale listing. This opens up the opportunity for last minute bidders to “steal” the bid much like they do on Ebay.

What will Prosper’s Resale Platform cost?

Listing Notes on Prosper’s Resale Platform is expensive. Prosper intends to charge a non-refundable fee of $0.25 to list a Note. It also plans to charge an additional $0.25 per Note if you use its “automatic sale” feature. That may not seem like much, but remember that most Notes held by a Lender are for $25 or $50. By the time the Note is listed for Resale, the principal balance could be much lower. But even on a $50 Note, a listing fee of $0.50 represents 1%. On top of the listing fee, Prosper plans to charge the listing Lender an additional 1% of the winning bid. On a $50 Note that sells for $50 using the “automatic sale” feature, the listing Lender will be out 2%.

Prosper has not disclosed an intention to levy fees against the winning bidder.

How to determine the value of a noted listed on the Resale Platfrom

This is where the fun begins. It’s also where, in my opinion, you can really profit from Prosper or really lose your shirt. Consider the following hypothetical: Assume that a Note is 6 months old and the borrower has made all payments on time so far. The remaining balance on the note is $100, the borrower is paying 12% interest, has a Prosper Credit Grade of A, a debt-to-income ratio of 20%, and the total amount originally borrowed was $9,000. How much would you bid on this Note, and why?

We are building peer-to-peer lending tools to answer this very question. But give some thought to how you would evaluate the value of a such a note on Prosper’s resale platform, and I’ll be posting a follow up article to describe how we would go about valuing such a note.

Tags: peer-to-peer lending tools, Prosper, Prosper's Resale Platform