Prosper, Curiously Flat

I haven’t looked at Prosper for a while, so I decided to check in and see what was going on. 460,000 members and $95MM in loans seems pretty good, but when I went to the Marketplace Performance page and looked at the results, I was pretty surprised by the ROI estimates. The returns ranged from 9.27% to 10.69% going from Credit Grade A to E. Well that’s pretty flat. Which is intriguing in itself.

Now if you hit the reset button, which eliminates two very important conditions auto-set by Prosper when you first go to the Market Performance page, and set the date range the same, you get a VERY different result. The expected ROI now ranged from 8.54% for AA to -10.56% for Credit Grade E. Holy Hallucination Batman.

Taking these results at face value, this suggests from a practical perspective either one of two semi-contradictory conclusions. Either (A) You should never, eVeR, EVER lend to anyone who doesn’t have a AA credit grade or (B) you should only lend to people with Credit Grade E (on a very diversified basis!) who meet the criteria used by Propser (no current delinquencies and credit inquiries between 0 and 2) on the assumption that at worst you’ll get the same return as the AA’s but hey, who knows maybe the actual default rates will be lower and you’ll make some extra money. Of course they could be higher.

Option B doesn’t really appeal to me since it feels like the risk for each percent interest is too skewed. Of course, you could always use groups to screen loans and shoot for higher returns, but there’s something deeply unsatisfying if these results really indicate what it seems they do – that the credit card companies are underwriting risk appropriately in the first place.

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