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