Given all of the threads about Collections on the Forum, I asked Doug Fuller, Prosper?s new Vice President of Operations, to answer some questions so I could post his answers here.

Shira


Doug Fuller, background:
For over two decades Doug Fuller has been a leader in data driven operations management and process optimization with a specialty in collections and risk-management.

Most recently he served as Chief Research Officer at Credigy, a provider of receivables management services focused on the purchase and servicing of distressed receivables. Prior to Credigy, Dr. Fuller served as a principal consultant for Priority Perspective, where his clients included Credigy, GE Card Systems, Ontario Systems, and Thornton Capital Advisors. Prior to his consultancy, he served as Senior Vice President at First Select Corporation/Providian Financial where he led the development and implementation of collection and recovery management systems. In addition, he led Providian?s fraud management activities including detection and prevention of transactional fraud and identity theft.

Dr. Fuller has served as an advisor for the Visa International Fraud Executive Committee, TransUnion Risk Management Panel, Ontario Systems ? Artiva Advisory Group, Intelligent Results ? Predigy Advisory Group, and Royal Media ? Collection Technology Summit. He holds a Ph.D. in Systems Engineering from the University of Virginia and a B.I.E. with highest honors from the Georgia Institute of Technology.

Doug views his role as a steward for Prosper lenders and the integrity of the marketplace. He believes that it is necessary to be as aggressive as regulations permit and to prosecute the most egregious debtors to the full extent of the law.
Doug is methodical in his approach to collections. Drawing on his decades of experience, Doug has already begun an intensive quantitative and qualitative examination of Prosper and its third party collection agencies? payment recovery techniques and performance. Based on his initial findings, he is confident that there are some short-term solutions that will have a positive near-term impact on Prosper?s recovery rate. In addition, he has developed a laundry list of longer-term strategies aimed at earning Prosper a reputation as one of the leading payment recovery operations in the industry.


Q: Doug, what?s the best way to evaluate your experience in risk management?
A: In my opinion, in order to really evaluate the breadth and depth of somebody?s experience, it is important to look at such things as ?span of control?, size of budget and/or P&L and the number of people that a person has hired or fired. In my case, the largest number of people that I?ve had reporting to me was 342 (Providian Fraud). In my most recent job (Chief Research Officer of Credigy); I headed an organization of 72. In terms of P&L experience, my experience was in the small business environment ? the maximum P&L that I was responsible for was $22 million. In terms of budget, while head of Fraud at Providian, I controlled an expense line of more than $110 million.

Q: What kind of experience do you have related to unsecured lending risk?
A: My first experience with unsecured lending risk was when I consulted for Capital One while working on my PhD at the University of Virginia. My PhD advisor and I were brought in by Rich Fairbanks, the founding CEO of Cap One, to look at how well, or even if, they were applying their ?Information Based Strategy? to the world of Risk Operations. The resulting report served has the blueprint for a complete overhaul of their Risk organization ? including the creation of a new SVP position heading Risk Analytics.

Q: What came next?
A: In the course of doing the ?Systems Analysis? for Cap One, it became apparent that they had no analytic talent looking at their credit card authorization subsystem. The problem statement that I was given was ?Increase our authorization approval rate without increasing our risk.? The resulting ?soft credit limit analysis? system was credited with an $8 million impact to Cap One?s bottom line in the first 12 months of operation.

Q: That?s interesting, but is it relevant to Prosper?s business?
A: It depends on how you look at it ? I believe that the combination of quantitative and process analytics can improve virtually any business situation ? be it optimizing test coverages to maximize the capacity of a semiconductor module line, revising block scheduling procedures to triple patient capacity in an out-patient endoscopy lab or revising the call sequencing strategy to more than double the number of ?right party connects? in a collections call shop.

Q: That last one sounds like its directly relevant, will you tell us more?
A: When I arrived at First Select (charged-off debt buying and collections subsidiary of Providian Financial), the first thing that I looked at was our dialer strategy. It was painfully bad ? we had an example of an account where 49 calls had been placed to the same phone number in the course of three weeks ? all 49 calls covered a span of less than 90 minutes of the day. We had another case where we made 61 calls to the same disconnected number. The first step was to ?stop the bleeding? ? quit doing the really, really dumb stuff. The second step was to implement a well designed call coverage and rotation strategy. The first step bought us more than 20% improvement. The second step took about 4 months to accomplish, but doubled our results.

Q: Can you do the same thing with Prosper?s collections calls?
A: Actually, for the month of September, we?ve seen greater than a 40% increase in the contact rates at our primary collection agency.

Q: To what do you attribute the improvement?
A: The squeaky wheel gets the grease. Seriously, the problem that we have is that we have very low volume. At our current primary agency, we represent about 2.5 full time employees of a workforce in a 700+ collector organization. It turns out that on a lot of days, our dialer job was started at about the same time (of day) ? not the way to maximize your contacts.

Q: How will you bring about the rest of the improvements you discussed?
A: If the agency is willing to work with me, I?m confident that we can improve. If not, I?m going to find a different agency ? or possibly just bring it in-house.

Q: What else are you thinking about for Prosper collections?
A: We have to have a legal strategy. I listened to hours-worth of calls with delinquent Prosper borrowers. One of the things that we emphasize in the call is that the delinquent borrower is not hurting some faceless corporation, they are impacting the 20, 50, 200 ?ordinary Joes? that funded their loan. Based on the calls that I?ve listened to, this is a clear advantage in some portion of early delinquency calls ? there is a personal connection that motivates the borrower to pay. At some point, this advantage flips ? the ?debtor? (and I use that term with intent) says to themselves that Citibank and American Express are going to sue me ? GMAC going to repossess my car -- what?s Prosper going to do to me? Even though debtors could face lawsuits from the debt buyers of Prosper?s defaulted loans, if debtors don?t think they will be sued, this is a perception we have to change.

Q: Do you have experience with suing people?
A: Oh yes. Between First Select and Credigy, I have been responsible for making the decision to sue more than 150,000 people. There are a lot of lawyers that can?t claim that number of suits in a lifetime.

Q: Well why don?t we just sue everybody?
A: The phrase ?blood from a turnip? comes to mind. One of the ways that you can go broke in a big way is by suing people that will never be able to pay you at all. Simple math, it costs a lot of money to sue people.

Q: Okay, so you need to decide who to sue, then what?
A: Put quite simply, my philosophy is this ? if you won?t pay, but can (or will in the future) be able to pay, I?m going to sue you. If I sue you I?m going to win.

Q: That sounds kind of arrogant, can you back it up?
A: Courts in seven states have recognized me as an expert at consumer debt litigation. At Credigy, if a case got really nasty, I would go testify live. I refuse to lose.

Q: Really? What?s your win/lose record?
A: In my last 18 months at Credigy, I testified live at 42 trials. My record was 41-1. By the way, I fired the law firm where we lost.

Q: What?s the toughest aspect of this type of lawsuit?
A: By and large, judges are comfortable if you can show them a signature on a piece of paper. The vast majority of judges grew up long before the internet and the passage of the ?e-signature? bill during the Clinton administration. Sometimes you?ve got to spend a lot of time educating them.

Q: How do you do this?
A: I have been qualified as an ?expert witness? in seven states on the subject of the electronic records of consumer lending transactions. There was a judge in Texas that had me on the stand for more than three hours ? the majority of the time, the judge was quizzing me. Other than I missed the last flight home, I thought it was time well spent ? he never questioned any of our requests for default judgment after that.


Q: Doug, thank you. With all of your plans, I?m going to stop the questions and let you get to work on improving Collections at Prosper.
A: Thank you.

Thanks for your feedback.
This thread has been unlocked. Feel free to post your questions here.

Shira

Doug,

Welcome.

Are you willing to share the call stats from the collection agencies?

Maybe you can post in a .pdf version for all lenders to see.

When you talk about transperancy, how transperant are you willing to go?

Can you show more info the the collection statistics currently given to us? Possibly find a way to link loan numbers with actual collection efforts.

I think this would be a great step forward. There shouldn't be any PII involved in this info. Maybe a window popup when a lender clicks on the "In Collections" wording on the loan info.

Thanks,

...Gulp

Hi Doug,

Notwithstanding whatever Shira has probably told you, most of the active forum participants want Prosper to succeed, and are highly motivated, intelligent, and diligent. There are people here who are lawyers (myself and xraider, both licensed in California), accountants, bankers, and even a few with experience in collections. We can be very helpful to you and Prosper. You should read the forums, and participate as well.

Please review this thread by prinen entitled Collections phone calls not happening, and post your thoughts?

Also, please review Fred93's Open Letter #2 - Collections is Broken and respond. There is much food for thought contained therein.

Your posts and sigs tend to imply otherwise...

Hiya,

Para 8 of the Promissory Note reads:

Will there be any changes to the legal agreements with lenders and/or the promissory notes with borrowers that allow for expedited acceleration in order to pursue meaningful collection activity before the notes are sold off for a percentage (avg 10% of principle)?

Currently, when notes reach the acceleration point, 120+ late, the process flow defined in the legal agreements with lenders necessitates that the loans be sold to debt buyers. So, while we hold delinquent notes, they are unaccelerated, and both Prosper and the outsourced CA's are only empowered to attempt recovery of the number of payments necessary to bring the loan current. Almost as soon as we sell the notes, these options, denied to Prosper lenders, are immediately available to the debt buyers who have purchased the notes from us (ie, Prosper lenders are out of the beneficial economic picture). This seems like an inefficiency - one that hamstrings both "timely" and "aggressive" collection activity, as well as any potential pursuit of settlement from which the original lenders (us) might benefit (beyond the average 10% or so of principle offered by the JDB's).

Thanks.

-t

Let's use this thread for questions for Doug.

;)

...Gulp

Q: Mr. Fuller, when will you begin lending on Prosper?

Doug, thank you for your willingness to enter into a dialogue with lenders about the abysmal collection results and how they will be addressed.

My questions:

How will we know when the collections process is more transparent? (This is not a trick question, or a joke. While your stated goal is to make collections more transparent, what I've seen in my nine months as a lender has been a move away from transparency. Will you or Prosper post changes in collection procedures, and what they mean in terms of lenders' bottom lines?)

When will the collections process be more transparent?

Will Prosper change its promissory note to permit acceleration at 30 days?

Will Prosper change its TOS to include suits against delinquent borrowers as an option? Right now the TOS says junk debt sales at 4+ months.

Will there be more regular junk debt sales?

Will lenders be permitted to purchase bad loans? Some may want to do so.

Hi Doug,

Do you have an especially dark corner in your heart for delinquent borrowers who are also active Prosper lenders?

Welcome to Prosper.

Urbi

Again, Welcome,
I know we are primarily focused on collections here, but I wonder if you might also implement something to close the barn door before the horse gets out? If we could head off a lot of the questionable loan request, it would help.
I feel a lot of the lenders were helping each other out by endorsing loans they honestly thought were good risks and warning about loans they had serious questions about. They did this through simple PII that Prosper has removed from us. The ultimate decision to lend always remained up to us, the individual lender, but it was made with much more confidence.

After tackling the more crucial issues of (1) false identity usage , (2) other factual misrepresentational fraud and (3)collection inefficiencies can you foresee using your skills to provide tools /information for lenders to be guided to more prudent loans or somehow flagging / removing the "to avoid" loans to better match up the average skills of lenders such that better loans are funded to begin with?

The reason for the last of these questions is there is some concern that the smaller lenders may be jettisoned to make way for industrial lenders although I feel with more confidence in the collections environment you would see held back money reappearing as well as amounts larger than the trial balloons attempted to date by many. Your actions can be a huge financial asset to Prosper.

MMM

If you do bring collections in-house (I hope you can), how long would it take you to get a team up and running?

Will you convince the Prosper powers that be to provide other ways for borrowers to make payments?

FYI, here is a link to a borrower post where the borrower states that she is nearly 120 days past due but has only received 2 phone calls and one letter from collections.

Good luck to you, I hope you can help us.

This same borrower states here the following:

The information provided by Traveler that the borrower referenced in the above quote was Penncro's phone number and the fact that they take credit cards for late payments. Maybe you should see that Prosper CS employees are trained to provide this information (rather than just letting loans slide into default and sale to the JDB for pennies on the dollar).

Mr Fuller,

Would you be willing to list what you have seen wrong with prosper collections at this point and if said weak areas will be corrected.

http://www.sopranoland.com/episodes/ep02/a...-ts-serious.wav

I wonder if anyone has thought to give prosper customer service the ability to look at accounts AND take payments over the phone?

Seems to me a lot of this nonsense could be nipped in the bud if we thought ahead (Pro-active). All we have now is reactive (attempted) solutions.

I would not even let customer service transfer callers to the collections department. I hate to be put on hold and a lot of time I just hang up and find someone else to do business with.

Hello,

In response to the numerous follow-up questions to Doug Fuller?s Q & A, we culled what appeared to be the ?Top 20? questions from this forum and this one. Some questions have been combined by similar theme, such as transparency and increased information sharing. Hopefully, we captured the gist of most of your questions below.

Thanks,
Shira


1. Would you be willing to list what you have seen wrong with Prosper collections at this point and if said weak areas will be corrected?

The two biggest weaknesses in our collections process have been ?Agency Management? and the lack of legal (court) collection actions. The problem with Agency Management stems from the realities of a start-up. People are wearing lots of different hats to get the job done. Prior to my arrival, the person who ran the agency relationship is really a ?credit and underwriting? expert with little collections experience.

As to the lack of a legal option, there are a number of novel challenges in implementing a legal option for Prosper, but it is clear that we need one and so I?m working through those issues as quickly as I can. I?m going to talk about the legal option in a later section of this Q & A.


2. When you talk about transparency, how transparent are you willing to go? When will the collections process be more transparent? How will we know when the collections process is more transparent? (This is not a trick question, or a joke. While your stated goal is to make collections more transparent, what I've seen in my nine months as a lender has been a move away from transparency. Will you or Prosper post changes in collection procedures, and what they mean in terms of lenders' bottom lines?)

As the first person-to-person credit marketplace, Prosper has to set up a system that is collection-aggressive, but is in compliance with the Fair Debt Collection Practices Act, which protects delinquent borrowers from things like publishing ?deadbeat lists.? Collection transparency is more appropriate using aggregate information as opposed to loan level info.

When I talk about transparency, I mean that I am going to be very upfront with the lender community about the steps I am taking to improve collections, the reasons for taking those steps, when the change will be implemented, and when I expect to see results. I also intend to create additional reporting to help people understand what?s happening with collections ? the information currently on the site is all ?snapshot? data. I also want to create monthly summaries so it is possible to look back and see how many accounts were in collections at the end of August vs. the end of September, etc.

Here are the things I am working on right now:

A. Increased agency oversight ? I have already visited both locations of PennCro and have implemented a bi-monthly strategy call. I?m expecting an increase in collections simply from the increased focus on our current agency.
B. I plan to implement a ?pilot? legal program during the month of October (meaning first law suits should be filed in November).
C. I am looking to augment current phone channel collection efforts with some off-line collection letters.
D. I have been interviewing agencies as potential replacements to our current agencies, focusing on smaller agencies that I believe will give us more attention.
E. I am evaluating the pros and cons of bringing the collections activities in house. I expect to reach a decision on this by the end of November.

By the end of the year, I would hope to see a significant increase in the number of delinquent dollars collected.


3. Are you willing to share the call stats from the collection agencies? Can you show more information than the collection statistics currently given to us? Possibly find a way to link loan numbers with actual collection efforts?

As I said above, I am working on what I consider to be better monthly reports for loans in aggregate. At the end of the day, regardless what happens to collections overall, no lender is going to be happy unless their loans are the ones that get paid---I can?t guarantee that.

There is a thread on the forum that gives the loan numbers of some delinquent borrowers who say that they have never received a call. I?ve pulled the call logs on each of those accounts, and determined that in every case there were multiple calls per day logged against the account?s phone numbers.

In general, ?debtors? as a population generally don?t answer their phones. I?ve seen very well designed and executed calling strategies where less than 4% of the phone calls result in a ?Right Party Connect? (which means actually talking to the person you want to). That being said, the good thing about phone channel collections is the short time delay between making an improvement and seeing the results.


4. Mr. Fuller, when will you begin lending on Prosper?

I was a registered lender on Prosper several months before I got the call about a job.


5. Will Prosper change its promissory note to permit acceleration at 30 days?

I don?t think so. From my experience, I don?t see the advantage making the whole amount due at day 30. I envision a process where an initial suit decision is made in the 30 ? 45 day range and a letter sent informing the account holder that we are planning to take legal action.


6. Will Prosper change its TOS to include suits against delinquent borrowers as an option? Right now the TOS says junk debt sales at 4+ months.

In order to change our current agreements to allow for lawsuits, a number of challenges need to be met. I want Prosper account holders to know that we will sue them and if we sue, we will win. There are some challenges in this. These include:

A. It is not cheap to sue people. While they vary by state, filing and service fees average something over $200 per law suit across the country.
B. Additionally, given our size and novelty of our asset, no law firm is going to take our business on a contingency basis. At least initially you can assume that legal fees on going to be in the neighborhood of $1500 for a NONCONTESTED suit. If the defendant files an answer, that number goes up. A really nasty case could be $15K to $20K in legal fees.
C. There are so many new aspects to how Prosper works that there will have to be a ?custom development? to create the pleadings for a Prosper lawsuit.

What I?m doing at this point is putting together a pilot legal program. I have identified a group of loans which have already defaulted or are on the verge of default. These loans will be included in our next debt sale. In order to gain the legal standing needed, I?m proposing that Prosper buy these loans for the same amount that the debt buyer would and use these as an initial test.

My thought is to do this with a group of loans from borrowers who are all in California, so we only have to deal with one state?s court system. I have a meeting scheduled for Wednesday with the managing partner of what I consider to be the best collections law firm in California. My hope is that we can formally place these loans with the law firm this month and have the first suits filed in November.


7. So how much in legal fees should Prosper incur to sue the borrower of a defaulted $5,000 loan? Would you think it worthwhile to end up losing more money in legal fees than the loan is worth?

Excellent question. To some degree I have discussed it above. The key aspect of the initial legal program is to ?build a brand? ? create the expectation of serious consequences. So while a purely economic analysis might say never spend more than you can make, there may be cases where do spend more than a loan is worth. I believe this will pay off in terms of reducing defaults (if they don?t default, we don?t have to sue them). Additionally, we will track the results closely so we can come up with a model to designate who we want to sue and who we do not.


8. Will there be more regular bad debt sales?

The problem with debt sales is one of simple math. We have to accumulate enough sellable accounts to make reasonable packages. As our volume increases, the frequency of sales will also. This brings up an interesting question. In looking at how we conduct debt sales, two extremes can be considered. At one end is the concept of a ?forward flow? agreement. This would involve finding a buyer that will commit to pay a given price (by credit grade and other attributes) for every loan that defaults for some period of time (usually six months to a year). This has the advantage of predictability; a lender will know what he is going to get paid when for any loan that is defaulting.

At the other end of the spectrum, there are debt sale auction sites (e.g., CreditMax) where buyers bid on individual accounts. This has the advantage of complete transparency ? lenders could go on the site and see exactly how many bids their loan received and the price received.

Jumping ahead to the next set of natural questions, a lender who wanted to buy our existing loans could sign up on the auction site and bid on any loans that they desired. I have a funny feeling that if we chose either of these approaches we?d hear complaints ? for the forward flow, that we weren?t maximizing the price and for the auction site, that there was no certainty about the recovery (and there is a chance that some accounts won?t sell at all). I?d be really curious what the community thinks is the right approach on these choices.

9. Will lenders be permitted to purchase bad loans? Some may want to do so.

I think the possibility for lenders to be able to sell delinquent loans to other lenders will come with the secondary market that Prosper is working on. But lenders will not be able to purchase bad loans to collect them themselves. There still has to be a unified collection structure, albeit a more effective one.


10. Do you have an especially dark corner in your heart for delinquent borrowers who are also active Prosper lenders?

Yes. I know we are now putting borrower-lender accounts on hold on a monthly basis and I hear we owe the community a thank you for bringing this problem forward.


11. What can you do about the ?Amazing Cell Phone Loophole? and the Auto-dialer problems in collections?

Here?s what I have done: I have asked that we include an item in our borrower registration agreement where borrower gives us the expressed right to call them at any number that they provide to us. Then, we can call someone on a cell phone with a dialer, because they have granted us permission to do so.


12. After tackling the more crucial issues of (1) false identity usage, (2) other factual misrepresentation fraud and (3) collection inefficiencies can you foresee using your skills to provide tools /information for lenders to be guided to more prudent loans or somehow flagging / removing the "to avoid" loans to better match up the average skills of lenders such that better loans are funded to begin with? The reason for the last of these questions is there is some concern that the smaller lenders may be jettisoned to make way for industrial lenders although I feel with more confidence in the collections environment you would see held back money reappearing as well as amounts larger than the trial balloons attempted to date by many. Your actions can be a huge financial asset to Prosper.

There are a lot of people at Prosper looking to improve the tools available for lenders to identify attractive loans. The Prosper finance team is actively working to make it easier for lenders to identify loans likely to perform well. As we improve the collections process, we create a better baseline to model against.


13. If you do bring collections in-house (I hope you can), how long would it take you to get a team up and running?

In addition to the ?team? there are some technology/infrastructure and compliance considerations. As I said above, I?m looking to make a decision about in-house collections by the end of the year. If we do it, we would probably start up in the first quarter.


14. Will you convince the Prosper powers that be to provide other ways for borrowers to make payments?

Yes. The next site update will have a much simpler entry of new bank accounts for borrowers. I?m also working on the ability to take a credit card payment.


15. What percentage of defaults is Prosper getting that would you put in the 'blood from a turnip' category?

Truth be told?over two-thirds. When you?re looking at suing people, you want to consider credit score, income and assets. ?Public Records? are huge red flags ? the probability to getting a payment drops significantly if you?re not the first judgment in line.


16. What's Doug Fuller going to do about collections at Prosper? As far as I can tell, these are the items (after sifting through the hyperbole etc): widen the time span of collection calls, stop calling disconnected numbers, call more often, tell callers they're hurting "average Joes", scare late borrowers with lawsuits, find a different collection agency or bring the operation in-house if the above items aren't accomplished.

That?s a pretty good summary of my plan.

17. Providian has run into legal trouble in the past, and had to pay hundreds of millions due to unfair late fee charges and manipulating customers into buying 'credit insurance' that they didn't want. Was Doug involved in any of that and if so, to what extent?

I was not part of this piece of Providian history. My work at Providian dealt with ?Recovery? (meaning post charge-off ? either Providian originated accounts or First Select Purchased accounts) and with Fraud. The problems with Providian were driven by the marketing and account management groups.


18. Can you give us a vision statement and a proposal on how/when we will be seeing changes?

I think question 16 gives a pretty good summary of the ?hows.? As to the when these changes will commence, they have already started. If they don?t translate into increased collections this month, we will be moving to a different collection agency.

19. Do you think it will inspire lender confidence once the default/delinquent rates improve?

I would hope so.


20. Will you please keep us informed about the changes Doug makes and the results that occur as a result?

I would like to update the Prosper community quarterly. To do that, I need to get back to work.

Wow. If you intend to "walk the talk," then you're probably well-positioned for some free drinks at PD08.

Thank you!!!

Thank you very, very much! I look forward to seeing some results in my portfolio!

Not a biggie, but I don't think question 4 was answered directly. I think the questioner was asking about lending actual $$$ to borrowers, not just going thru the Prosper lender registration process.

Anyway, the above answers give me optimism for Prosper in 9-12 months time. And I hope that contrary to recent history, the plan to keep the community updated doesn't fall by the wayside.

We know which delinquent accounts will get first legal action...lol :lol:

Welcome aboard Doug, good to have ya.

this [naughty contraction removed per prosper's request] better be in that pilot lawsuit program
http://www.prosper.com/lend/listing.aspx?listingID=40479

ETA: n/m .. it looks like it was already sold off

is this doug?
http://forums.prosper.com/index.php?showto...ndpost&p=367730

that post continues to stick out in my mind, and I seem some similarities

Thank You.

BTW, I heard about the pilot program about 6-9 months ago. Hopefully you can get it implemented.

...Gulp

Excuse me but ... You're going to buy the loans from lenders, for the same pennies we get now, and then you're going to sue the borrowers and get a bunch of money from them, and then you're going to keep the money?

Don't you see a little conflict of interests here?

You are my loan servicing agent. You have a duty to service the loans for my benefit.

You have a fiduciary responsibility to the lenders who own the loans.

I think you need to review this plan from the view of ethics and fiduciary responsibility.

The reason he asked about acceleration is that this would lead to your ability to sue for the entire balance while the loans were still owned by the lenders, and the lenders could therefore benefit from your actions.

Please reread the more detailed discussion of these points in the Fred93 open letter #2.

I was thinking the same thing as I read that statement. Seems to me that Prosper should buy these loans back for the full dollar value, then use them as their test subject. That is the only "fair" and "ethical" thing to do. And would fit best in with thier stated servicing policy. They can buy them back at current value anytime, buying for pennies on the dollar is not a proper choice.

ETA: Besides that woould give them some skin in it and make them want to succeed for themselves.

Why does Prosper need to own the loan to gain legal standing? Didn't we grant them the right to service the loan on our behalf already? Doesn't this include the right to litigate on our behalf? Can they be given a "better" standing through a simple modification to the Promissory Note?

pninen,

Personally, I don't see a conflict of interest... yet. He's clearly talking about doing that as a pilot program, and suing the borrowers costs money. Prosper shouldn't have to take those costs in the shorts. However, if suing the borrowers becomes worth the while, I would expect that the lender agreements be changed to allow us to benefit from the lawsuits.

How will this initial legal program "build a brand ? create the expectation of serious consequences"? Are you going to advertise in some manner who is getting sued?

Your approach seems a bit extreme to me. I would certainly be satisfied if they paid me face value, but it doesn't seem entirely reasonable.

There's middle ground. They could buy some loans as Doug described, but then turn over any monies they eventually squeeze out of the defaulted borrowers, above their purchase price, to the original lenders.

For me, the important point is that we have to get Doug to understand the importance of doing it sooner, so that lenders can benefit. From his description it seems that the benefit he is trying to achieve is "building brand", which aims for an impact on borrower's attitudes long in the future, rather than helping lenders with today's loans.

Extreme maybe, but the only out that appears to be honest and fair based on the agreements. It would apppear to be a small price to pay I would think for a proper Prosper test case.

Otherwise why wouldn't they just do that with all the future defaulting loans too? Buy them from us for pennies on the dollar, then collect full price on them? When they have a fiduciary responsibility to the lender they need to make sure they bend over backwards to satisfy that responsibility and take the upper road to avoid all semblence of a conflict of interest.

Yes I am glad to see potential action on these defaults as well, just want to see that it is done to the benefit of all parties. Not just one side or the other. There is no transperancy here so there is no way for a lender to know which loans Prosper purchased much less which ones they have collected on.

IMHO

I would even be satisfied with some sort of "partnership" arrangement, in which Prosper AND the lenders SHARE in the recovery from deadbeats. Perhaps Prosper could purchase the loans on which they plan to sue for the midpoint between what the JDB would pay and full value. Or, perhaps Prosper could purchase the loans for the JDB amount, and then split any recovery above that amount from the borrower with the lenders on the loan 50/50%. But I do NOT think that Prosper should be buying our defaulted loans for a pittance and then suing for their own (possibly very substantial) benefit. This seems like a serious (and probably actionable) conflict of interest to me.

One problem with any of the above options (including Prosper's plan to repurchase the loans at JDB prices) is that the Lending Agreement does not provide for any of these options. I am not sure how Prosper would get around that, short of trying to obtain consent from every lender on the loan. Even its own plan sounds problematic to me, because Paragraph 6(f) of the Lending Agreement specifically states that defaulted loans "are written off as uncollectible, and sold to a debt buyer authorized and willing to purchase consumer loans." Even if Prosper is "authorized and willing to purchase consumer loans," I don't think this provision would likely be interpreted to include Prosper's purchase of these loans for its own benefit. As others have stated, Prosper is obligated to service these loans for OUR benefit -- not for its own benefit. If push came to shove, I think a judge or jury would look very unfavorably on Prosper profiting on our defaulted loans. That kind of self-dealing usually leaves the finder of fact holding its nose and often results in large punitive damage awards.

Unfortunately, I don't know what a good solution is. I strongly agree (and have often posted before) that legal actions are absolutely vital. But I think that Prosper is between a rock and a hard place because IMHO its legal agreements were not drafted with sufficient foresight. I think the best answer would be to change the acceleration provision to allow (but not require) acceleration of late loans much sooner in the process (probably a notice of intent to accelerate after 30 days late, with acceleration possible on day 60), to facilitate Prosper suing on late loans (on our behalf) before the loans are defaulted. Also, Prosper should retain discretion to not sell loans to the JDB when 4 months late if the loan is being sued upon.

I want to add a post I made on .ORG (responding to some comments by Traveler505) here as well, for review (and hopefully consideration and comment by Doug).

In California, the filing fee (and I'm pretty sure the cost of service as well) IS indeed a cost that is awarded to the prevailing party. So Prosper would recover this (assuming Prosper can successfully collect on the judgment, of course).

In California, attorneys' fees ARE recoverable in a suit on a contract IF the contract so provides. I can't recall (and am too lazy at the moment to check) if the prommissory note contains an attorneys' fees provision, but if not, it probably should. One thing Prosper would have to consider is that in California, if there is an attorneys' fees provision in a contract, it is applied bilaterally (whichever party prevails recovers their attorneys' fees, even if the attorneys' fees provision is expressly written to only give attorneys' fees to a prevailing plaintiff, for example, or a prevailing creditor). Thus, if Prosper added an attorneys' fees provision, it would have to pay the borrower's attorneys' fees if the borrower prevailed.

Because Prosper (like other businesses) has money and many borrowers (like consumers in general) often don't, the prevailing wisdom is that it is often better for businesses NOT to include an attorneys' fees provision in their contracts (because when they lose, they have to pay up, but when they win, they might not be able to collect). However, it seems to me that this probably is not applicable here. These collections cases should be no-brainer easy victories for Prosper, so the likelihood of losing many (if any) of these cases seems very slim. And Prosper will be selecting the cases on which to sue based on the likelihood they will actually be able to collect on a judgment, so adding attorneys' fees to the prommissory note would seem to be a good idea.

I am not sure if that would run into any regulatory issues (i.e., I'm not sure if any states have specific rules about attorneys' fees provisions in prommissory notes for creditors of Prosper's type), but I think this is definitely something Prosper should look into. And if the regulatory question was too difficult to promptly untangle, since Prosper is planning on starting by suing California deadbeats, it seems to me that Prosper should immediately consider if there were any California regulatory issues regarding attorneys' fees for California borrowers. If not, Prosper could have a California specific prommissory note that had an attorneys' fees provision.

I also agree with this. Prosper loans money to borrowers who sometimes default. Nothing unique about that. Sure there are a few complications, but nothing that immediately jumps out at me as being sui generis. Although there are actually fill in the blank form complaints drafted by the Judicial Conference in California that could be used, probably Prosper would draft up its own complaint, which would have a few paragraphs explaining the nature of Prosper and how it works. But once a standard complaint was drafted, it would become a fill in the blanks model, since every lawsuit in California would basically be identical except for the borrower's name, city, date, rate and amount of loan, and repayment history. So even if Prosper spent $10K on the first complaint, each additional one would cost around $1.95 (give or take :D ).

It seems to me that the liability issue in these cases would be virtually cut and dried. Here's the prommissory note, here's the repayment history, the borrower is in default, owes this much money, now pay me my money down. The only real question IMHO is whether a judgment would be collectable. And collections attorneys' are quite good at figuring that out. Thus, I don't see why there wouldn't be attorneys who would take these cases on some sort of contingency.

I don't believe there will be much money from sued borrowers after accounting for legal fees, court costs, and the uncollected and noncollectable judgments.

The proper action is to not sell the loans, but instead designate them for special collections, and inform lenders the loan is in litigation.

I am, quite frankly, shocked at the ethics on the part of Prosper management and this appears to be no exception. Common sense tells someone this; there is no excuse. Furthermore, this position could only be arrived at by having a willful disregard for the lenders position.

:angry:

Doug, after thinking about your answers, several bother me.

Why not? What would Prosper lose by permitting (but not mandating) acceleration at 30 days? Isn't a 30 day acceleration clause fairly standard? Also, what does Prosper lose by increasing its flexibility in dealing with late payers? I think this should be reconsidered.

Why doesn't the promissory note include recovery of legal fees? That's a change that should be implemented immediately. Certain costs, at least in California (including ALL filing fees, process server fees, deposition fees etc) are awarded to the prevailing party. If attorneys' fees are awarded by contract, they are no longer as big of an issue.

As far as fees and costs go, too, if you're working with the biggest collection law firm in California, I'm sure they have a complaint they can readily revise for Prosper's use, or use a form complaint where they check boxes. I can't see why, to this top collection firm, that there would be much difference between a deadbeat who defaults on (unsecured) medical bills, or a deadbeat who defaults on (unsecured) credit card debt, or someone who defaults on his (unsecured) Prosper loan. If firms would take credit card or medical deadbeats on contingency, why wouldn't they take defaulted Prosper borrowers on contingency?



And, I'm with the others on thinking that Prosper should not buy the choice defaulted loans from junk debt buyers, sue, and keep the proceeds for itself. Prosper should be collecting on the choice loans, through lawsuits if necessary, and distributing the proceeds to lenders.

ETA: Ira's right; the Civil Code makes attorney fee provisions reciprocal (I believe it's Civil Code section 1717 but I'm too lazy to look it up) but, as Ira says, what will the defenses be? I would expect that the collection firm would get a number of judgments then would need to collect by filing abstracts, till taps, garnishing wages, judgment debtor exams etc. None of these are horribly expensive. I've done some (generally collecting costs against plaintiffs who filed bs lawsuits against my clients), and my husband has done several. I would be pleased to comment further, or via phone or email.

The way I remember this described to me months ago was that Prosper was going to purchase the loan for the original investment amount-any payments made. From there then Prosper would sue the borrower for the full loan value and keep the proceeds.

This way the lenders received their original investment back ($50 or whatever) and Prosper keeps the proceeds to cover the expense of the litigation.

At least this is how I remember it, although things could have changed.

...Gulp

ETA: Any one remember Franklin??

This post has been edited by BigGulp on Oct-9-2007 08:04 AM

But we lenders should take it in the shorts?

OK, Now ask why I am not transferring in any more money.

I see some real positive change here. I hope it really happens.

Thanks for your responses Doug. I hope that things can be modified to allow for eventual suits where the lenders can be the ones recouping their investments with borrowers paying the court fees and attorney costs. Even if it can't be done for current borrowers, modifying the terms and agreements should allow it to be done in the future.

Who pays the litigation costs for those outstanding balances that are not collected?

Since Prosper will choose the loans on which to litigate based upon the likelihood of successful collection (as I've said before, all of the loans should be virtually guaranteed winners on liability, so collectability is the only real question mark), there shouldn't be too many uncollected judgments. And the costs of those that there are should be seen as a cost of doing business for Prosper. After all, they do collect a servicing fee from us. This is part of servicing the loans.

That said, I wouldn't be opposed to a type of cost sharing between lenders and Prosper, although this would need to be included in the Lending