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Prosper.com helps regular folks become a bank and make loans

The Baltimore Sun

Elena Patrice, a single parent in Virginia, is eager to get rid of nearly $20,000 in credit card debt that she's rolled up since her divorce four years ago.

So last month, the 38-year-old appealed to online strangers to lend her $20,000 at an interest rate that's about half of what she's now paying.

"Once my debt has been consolidated, I will be terminating any credit cards and strictly using cash or my debit card," she promised.

Patrice made her appeal on Prosper.com, a site that matches people in need with regular folks willing to bid on the opportunity to lend them $50, $100 or so. With people becoming their own publisher by blogging, or creating their own videos and political commercials on YouTube, it was just a matter of time before they became their own banks.

Lenders say Prosper gives them a chance to earn a better return than some other investments. And maybe do a little good.

"It's a person-to-person lending marketplace," says Prosper's founder Chris Larsen in San Francisco. "What we try to do is create an eBay for money."

Prosper recently celebrated its first anniversary.

It has handled nearly $50 million in loans and has nearly 240,000 registered users (borrowers outnumber lenders 2 to 1).

Banking experts say Prosper is an interesting concept, but it's too early to know if it will have an impact on lending as eBay did with auctions. Still, experts agree, Prosper could be an attractive alternative to high-rate credit cards and an escape hatch for those trapped in revolving payday loans.

Prosper cobbles all the small loans that people are willing to make into a fixed-rate, three-year loan for each borrower. It collects the monthly payments and forwards them to lenders' accounts.

Loans can't exceed $25,000, with the typical borrower receiving $5,000 to $6,000, Larsen says. Prosper collects an upfront fee from borrowers of 1 percent to 2 percent - depending on their credit rating - and charges lenders an annual servicing fee of 0.5 percent to 1 percent of the outstanding balance.

To become a borrower, you must have a bank account, Social Security number and a credit score of at least 520, says Larsen, who also co-founded online lender E-Loan. Prosper undertakes a credit check and assigns one of seven credit grades, from the top rating of AA to HR for high risk.

Lenders can view other information about borrowers, including their number of credit lines, debt-to-income ratio, bill-paying history or any bankruptcy filing.

Borrowers tell lenders how high an interest rate they are willing to pay.

Lenders have up to 10 days to bid on a loan proposal. Once they make a bid, they can't withdraw it. If the loan is not fully funded by the deadline, the borrower walks away empty-handed.

But if the loan is fully funded with time remaining, the bidding gets more interesting. Lenders then can only place a bid if they offer the borrower a lower-interest rate, essentially knocking out a higher bidder.

Prosper conducts an identity check of borrowers and lenders. (It guarantees to repurchase a loan if it falls into default due to identity theft.)

Lenders and borrowers remain anonymous online unless they choose to identify themselves. Borrowers frequently reveal a lot about their situation, something that Prosper encourages to engage lenders' interest. People describe how they plan to use the money, how they got into financial trouble and usually post a picture of themselves, their babies or pets.

Often borrowers want money to pay off high-rate credit cards. Other recent pitches include: A man in New York state seeks $3,000 to buy a reliable used car for work. A Philadelphia grandmother needs $2,000 for dental work. An Illinois couple want $8,000 for a May wedding. A California man asks for $7,500 to pay his taxes and restore a 1951 Chevy truck. And a Texas couple desire $5,000 for European travel.

Patrice, the Virginia borrower, runs a publishing company with her sister. With a AA credit rating, she initially requested a $20,000 loan at a rate of no more than 9.5 percent. By the time her posting expired, she received 32 bids, but they only amounted to 14 percent of her goal.

She turned to other borrowers for advice and resubmitted her proposal. This time, she bumped the rate up to 11 percent, fine-tuned her pitch, and added a playful photo of herself wearing a chef's hat. "I figure I have to be fun, nothing too serious," she says.

Lenders have their strategies.

Jon Ruttenberg, a Baltimore physical therapist, has been a Prosper lender for about six months. He looks for borrowers with top credit ratings and willing to pay a rate of 11.5 percent or more. He likes homeowners and borrowers who seek money to expand their business. He shies away from debt consolidators or those wanting money so they can become a Prosper lender.

He has eight outstanding loans averaging 10 percent and considers this part of his investment portfolio. "A great side benefit of Prosper is you get to get in on the whole micro-loan trend where you get to do some good for people," he adds.

Some lenders seek out riskier borrowers. Larsen, who has made 300 loans, says for many lenders the "sweet spot" is the middle: Borrowers who don't have the best credit rating, but not the worst, either. These loans carry a higher interest rate, but aren't at the greatest risk of default.

Interest rates can't exceed state law where a borrower resides. In Maryland, the top rate is 24 percent.

Peter Kollar, a real estate investor in Naples, Fla., bids on loans in the "sweet spot."

"You always have to worry about default, but you try to calculate the overall performance," says Kollar, who has made about 60 loans in the past two months for about $200 each. Personal pitches don't sway Kollar, who set up an automated system to bid on loans fitting his criteria. "It's quite burdensome to look at hundreds of loan proposals," he says.

For borrowers, the risk is not getting enough bids. Lenders run the risk of defaults.

Prosper advises lenders to make small loans and spread them out over many borrowers to lessen the impact if a borrower defaults. Prosper charges late fees after 15 days. A collection agency is called in after 30 days. Larsen says the default rate - payments 120 days past due - is about 0.50 percent. But that will likely climb as the three-year loans mature, he says.

Steven Brobeck, executive director of Consumer Federation of America, hasn't seen Prosper. But he's concerned that consumers won't investigate other low-cost borrowing options first, such as credit unions.

"There may be a niche for this product, but do we need another source of easy credit?" he says.

Others familiar with Prosper are big fans. "It's a great concept," says Steve Zuckerman, managing director of the California office of Self-Help, a nonprofit lender.

Zuckerman's group is looking at whether Prosper might work for borrowers needing a loan to break out of the cycle of payday loans, where the effective interest rate can be several hundred percent.

"What they are doing is great," says Jim Bruene, editor of Online Banking Report. "But do I think it will overtake banking? No."

Prosper will soon have more competition when Zopa, from the United Kingdom, enters the U.S. market.

Patrice's loan proposal was set to expire Wednesday. She frequently checked the site for bidding updates, even running to her computer during TV commercials. "It's addictive," she says.

Two days before her proposal was to expire, 195 lenders came forward to lend $20,000. Patrice could have stopped the process then. Instead, she let the bidding continue. By deadline, 485 bids poured in. Latecomers bid her interest rate down from 11 percent to 10 percent.

"It's inspiring," says Patrice about the response of lenders. "I would want to do that for somebody someday."

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@ baltsun.com.

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