Thursday, March 27, 2008

Prosper - unsafe at any speed?

"Unsafe at Any Speed" - that's how Ralph Nader characterized the auto industry in his 1965 book.

Recent developments brought to light at (registration as a lender required) seems to hint that the same warning should be applied to lenders.

MtnChick, a top-500 lender at, recently communicated with Prosper regarding a late loan that was not in collections.

Here is her original email to support:

Can someone tell me why this account isn't in collections - and hasn't been ever from what I can tell? Thank you:

Prosper's reply? Enough to raise the hair on the back of my neck and send a cold shiver down my spine. No lender is safe if this is what Prosper's response is going to be:

Loan 1681 was in collections from 10/5/07 to 11/12/07. On 11/12/07, we received a full Cease & Desist/Validation of Debt/Attorney Representation notice on this account. Once a full C&D is received, the only recourse that we have is a final communication stating that we are going to proceed with legal action. Given that we are not suing in Texas at this point – nor would we sue on a $2500 loan, we have no recourse.

(Highlighting is mine)
Are they serious?

Not only, according to Traveler505 and others who opinioned on the thread at, is Prosper wrong that they have no other recourse, but to decline to proceed with legal action on those two grounds means that lenders are completely out of options on small loans to borrowers and even more so if the borrower resides in Texas and presumably other states where Prosper is not suing.

This clearly indicates that lenders have to strongly reconsider whether they can continue to lend money at Prosper. Firstly, it would seem that Prosper will roll over and play dead if they get a Cease-and-Desist letter from a borrower, not even bothering to reaffirm the debt.

Moreover, they won't pursue legal action to recover small loans. So all small loans are now risky since the borrower has an easy method to halt payment, collections and legal proceedings. Prosper simply seems unwilling to go after small borrowers.

Finally, even for larger loans, it seems unsafe to lend, since Prosper will only sue in select states. I don't recall Prosper saying anything about selective enforcement in my many lender agreements, but before I put another penny into Prosper, you can be damn sure I will ask them what states they will take legal action in and what the minimum loan amount is for which they will sue.

I really, really hope that someone at Prosper still reads this blog and will let me know that Customer Service is mistaken and that Prosper will take the requisite legal action to affirm and enforce a loan that they have sold to lenders and are servicing.

Prosper has a strong fiduciary duty towards lenders and this does not seem to be the way to execute that duty.

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