From the archive, originally posted by: [ spectre ]

Top 10 Lessons From a Microlending Pioneer
Chaddus Bruce  /  05.09.07

Considering lending out your hard-earned money via a microlending site
like Prosper? If it all seems a bit new, you’re not alone. “We are all
novices,” says Greg Bequette, one of Prosper’s largest lenders. “We
only have being doing this for a year. (But) our collective
intelligence is improving.” Jane Boon, who has lent around $125,000 to
over 800 people on Prosper, offers 10 tips to help you improve your
own lending intelligence.

1. It’s OK to be First
Many lenders search for loans that are close to being filled. But
don’t be afraid to be among the first bidders. “If you don’t bid, the
listing may wind up being overlooked, despite its merits,” says Boon.

2. Focus on the Numbers
“Don’t get sucked into storytelling,” says Boon. “You will see very
interesting things, but ultimately you will have to make rational
choices based on the numbers.”

3. Go Beyond Credit Reports
Ask for relevant information if it’s not already in the borrower’s
profile. For example, if someone has an eBay store, and wants capital
to buy more xBox 360s, ask for their eBay ID and check their seller

4. Good Intentions Don’t Count for Much
“The best intentioned people can face financial difficulties,” says
Boon, and you shouldn’t necessarily loan money to them. “Some of my
disappointing loans, I sent the person e-mails. I felt really
confident they were authentic and well-intentioned, but that didn’t
necessary mean that they could pay.”

5. Review, Assess, Repeat
“I review my successes and failures month to month,” says Boon. “Then
I explore to see if I have common experiences.” As a result of these
monthly reviews, Boon curtailed making loans to borrowers with lower
credit ratings (HR or E-level) — loans which had performed poorly for

6. Know Your Comfort Level
“If you will freak out if somebody defaults on $200, then only lend
$100 amounts,” says Boon. Just like in Vegas, know your limits,
otherwise emotion will get the better of reason.

7. Network With Other Lenders
“We send each other tips,” says Boon. “We trade ideas on lending
strategies.” She was reassured to find a large number of financial
whizzes on the website, many of whom were happy to help her.

8. Let It Go
Once you’ve made a loan, let it be. Prosper’s rules forbid lenders
from independently pressuring borrowers who are not paying. Prosper
hires professional collection agencies to do this, so let them do
their job.

9. Group Loans Don’t Eliminate Risk
Groups of borrowers can spread out the risk, helping to ensure that
you get your money back, but they don’t eliminate risk. Groups, like
individuals, vary. Look into groups just as closely as you’d examine
individual loans.

10. Use Filters and Third-Party Sites
What would the payoff look like if you loaned to people with a B-grade
credit but only one delinquency? Use Prosper’s filters to help
determine your tactics and test out different scenarios. There’s also
an impressive list of third-party sites that use Prosper’s API to do
even more sophisticated slicing and dicing of the data.

Got Cash? You Can Loan Money Like a Big-Time Banker
Chaddus Bruce  /  05.09.07

Jane Boon wants to see you stripped down to your financial undies.
Boon, an engineer whose husband is former Time Inc. Editor-in-Chief
Norman Pearlstine, is a new kind of loan officer, but she is not
affiliated with a bank.

Boon is one of 30 or so wealthy individuals who have lent out more
than $100,000 apiece through Prosper, a 15-month-old venture that
combines social networking with online auctions in an attempt to
create a lucrative new marketplace for loans.

Using Prosper, lenders like Boon are rerouting money from banks,
mutual funds or other assets to thousands of U.S. residents, who are
borrowing the money for myriad reasons, from consolidating credit-card
debt to expanding an existing small business.

“We’re imposing Web 2.0 concepts on a very old-guard business,” says
John Witchel, chief technology officer and co-founder of Prosper.

Prosper’s marketplace is a blend of eBay-like bidding auctions and
social networking, and is conceptually related to the emerging world
of microcredit.

But unlike microcredit ventures such as Grameen and Kiva, Prosper is
aimed at U.S. borrowers, not the developing world.

Wannabe borrowers give Prosper permission to verify their identity and
allow the company to access their financial data as collected by
Experian, one of the three big credit-scoring agencies.

Prosper then gives the borrower a credit rating and helps match his or
her loan request with a number of lenders. A $5,000 loan, for
instance, might be funded by 50 people who each lend $100.

Lenders use borrowers’ credit scores and other financial data to set
interest rates that balance risk and return, while borrowers assemble
their loans piecemeal from lenders’ offers, giving preference to the
lowest interest rates offered to them.

Borrowers have been attracted to Prosper because its auction model
offers the possibility of getting lower fixed rates, particularly as
part of a group of borrowers, and loans can be funded quickly —
sometimes just days after you’ve applied. Also, Prosper makes it
easier to get loans for certain kinds of businesses, like eBay
storefronts, that are difficult to fund through traditional bank

Prosper is a chance for lenders to invest in an arena formerly off-
limits to all but the biggest corporations: consumer debt. Prosper CEO
Chris Larsen says the traditional money market is a paternalistic
system where access to information is restricted and an elite few
decide how it plays out, whereas Prosper is open to anyone willing to
put in their money.

“It is the first time this large market has been opened up to the
average investor,” says Larsen, who sold his previous online lending
business, E-Loan, for $300 million in 2005.

The ability to invest in a lucrative market formerly restricted to
money managers is what attracted Boon. After an initial $2,000
investment to test the waters, she went all in. “The potential returns
seemed great so I transferred more money,” says Boon. To date, she has
loaned a total of $125,000 to more than 800 people. (See related
story, “Top 10 Lessons From a Microlending Pioneer.”)

Greg Bequette made a similar calculation when deciding to lend using
Prosper. “I was afraid that I would miss the opportunity,” says
Bequette, an accountant for the University of California system.
Moving to lock in loans early, he transferred half a million dollars
within the first two moths after joining Prosper, making him the
second-largest lender in the system.

Behind the scenes, lender profiles and activities are public, making
it easy to track who’s a successful investor — and what they’re doing
right. That troubles some, such as Jonathan Hoenig of Capitalistpig
Asset Management in Chicago. “I manage money for other people,” he
says. “I like to keep my cards closer to the vest.” He has loaned
around $150,000 to nearly 1,500 people.

Additionally, the number of loans that have gone bad is higher than
what was initially predicted. Because of this, Bequette, Boon and
Hoenig are holding off investing fresh money.

Bequette, who expected an 18-percent return, is now concerned he won’t
beat the 11 percent he had with his mutual funds. His guess is that as
a new market, Prosper has attracted people who couldn’t find loans
anywhere else, thus driving up the default rate and hurting overall

Hoenig says Prosper’s interest-rate caps of 30 percent aren’t high
enough to compensate for the dangers of lending to high-risk

To keep bad loans from poisoning the well, Prosper blocks borrowers
who have defaulted on their loans. Over half the company’s engineers
work on antifraud measures, according to Witchel, and Prosper insures
lenders against money lost due to identity theft. Working with federal
law enforcement, the company had its first arrest a few months ago.
“Criminal communities tend to chat about who is weak,” says Larsen.
“We think it is very important to put a line in the sand early on.”

At the end of the day, as with all new markets, there is a learning
curve for early adopters. “They key thing for us is not stepping in
and saying what people should do, otherwise it is just what banks are
doing at the end of the day,” says Larsen.