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132 Locavesting
early eBay backer Benchmark Capital, and other blue- chip Silicon
Valley investors.
Borrowers can list loan requests for up to $25,000 on the
site, along with the interest rate they are willing to pay. Their
credit scores, ratings, payment history, and personal story are
also posted, as well as any affi liations or endorsements. (The
actual identity of the borrower and sensitive data are not publicly
revealed.) Many Prosper borrowers are looking to consolidate
high- interest bank loans, while others are raising money for college
or for business purposes. Investors can browse the requests
and make loans to individuals in increments as low as $25.
Borrowers with excellent credit can get loans with APRs as low as
6 percent, while higher risk borrowers pay an average 16 percent,
still far below what they would pay to a bank.
Prosper relies on credit scores to screen borrowers, whose
loans are unsecured by collateral. To spread their risk, many lenders
make a number of small loans—say, $25 or $50—to a large
number of borrowers, perhaps of varying credit levels. So, a $5,000
investment could be spread among 100 loans of $50 each. That
way, if a few loans default, an investor’s losses are minimized.
Lenders can also buy and sell loan notes from one another, aiding
in liquidity.
Prosper makes its money by charging borrowers a fee, ranging
from .5 percent to 3 percent of the loan amount, depending
on their credit rating. Lenders pay an annual servicing fee of
1 percent of the outstanding principle balance of their loans.
Chris Larsen, Prosper’s founder and CEO, calls it a “third way
of banking”—something between the Wall Street model of securitizing
loans and spinning them off, and the banking model, where
customers earn low interest on their savings while the bank profi ts
handsomely by lending their money out at double- digit rates.
Prosper had been operating for two and a half years, with
$174 million in loans initiated and 650,000 members, when in
2008 the SEC took a sudden interest. Prosper, the SEC charged,
was selling unregistered securities to the public.
Larsen says he was taken by surprise. Before launching the site,
his company hired top lawyers to engage the SEC to make sure