Monday, April 7, 2008

Deep under the covers

The concept of Prosper is relatively simple, don't you think?

A borrower posts a listing, lenders bid on the listing and if enough lenders bid on the listing to fully fund the listing, it turns into a loan (subject to Prosper post-funding verification) and a month later the borrower starts repayment of the loan.

If only. The concept is as outlined above, but the mechanics required to legally make this all work is somewhat more convoluted.

In fact, the borrower engages in one or more mini-loans, each one for the bid amount by a single "lender" (that term to be examined in a moment). The loans are originally made by Prosper, who incidentally, from the Borrower Registration Agreement, have the following right:


(Capitalization in original agreement)

Get this straight. The guy who loans you the money is the guy who signs (on your behalf) the promissory notes in favor of lenders.

But who are lenders? Remember that Prosper's Lender Registration Agreement says:
Your role as a Prosper "Lender" is that of a loan purchaser, and your rights and obligations as a purchaser or prospective purchaser of Prosper loans are set forth below. Although you are referred to in this Agreement and on the Prosper website as a "Lender," you are not actually lending your money directly to Prosper borrowers, but are, instead, making loan purchase commitments and purchasing promissory notes representing loans made by Prosper to borrowers. All loans originated through Prosper are made to borrowers by Prosper Marketplace, Inc. from its own funds, and then sold and assigned by Prosper to the winning bidder or bidders on the listing without recourse to Prosper. Prosper is the originating lender for licensing and regulatory reasons and is licensed in all states where licensing is required given Prosper's current lending criteria, which may change from time to time in its discretion. Prosper uses the term "Lender" instead of "loan purchaser" for the sake of brevity and simplicity.

Very confusing. Prosper makes the loan, sells the notes to us, but the borrower signed the notes as if the lender actually lent the money to the borrower?

I mentioned the FDCPA act previously. In there is a section about validating the debt. Legalese, but read it, it's not too dense:
§ 809. Validation of debts

  1. Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing—

    1. the amount of the debt;

    2. the name of the creditor to whom the debt is owed;

    3. a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;

    4. a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the
      consumer by the debt collector; and

    5. a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.


But what does this mean? If the loan runs late, and Prosper or the collection agency that Prosper assigns after 30 days contacts the borrower, do they have to send the consumer the written notice as outlined above? There's no provision in the original act for email communications and I didn't see the part in the Legal agreement where the borrower agreed to waive written communication in favor of email communication (if such a waiver is at all legal).

And whose name will be supplied to the consumer (borrower)? Prosper's? They don't own the loan and if I understand the language correctly, the borrower might never have signed a promissory note in favor of Prosper, even though Prosper issued the loan to the borrower. Does that mean that Prosper has to send written notice to the borrower of the names and addresses of all the "lenders" that bid on the loan and holds the promissory notes?

When in court, things are going to get very confusing to explain to the judge that you authorized Prosper to sign promissory notes on your behalf in favor of other people so that Prosper would issue you with a loan and that Prosper is now suing you on behalf of those people.

Oh, I forgot. There's nothing in the language of any agreement that Prosper will sue borrowers for non-payment. Perhaps this is one reason why.

Next episode, there's more about debt validation in the act.

1 comment:

Mema said...

Thank you very concise and informative, I've noticed that Prosper has had to register with the SEC, hey maybe they can get in on the bail out?