Crunch! Data Analysis Bruises Peer-to-Peer Lending; Prosper Gives the Criticism a Critique
There's a critical discussion of peer-to-peer lending in the blogosphere that's definitely worth a read. In a scathing article for The Big Money last week, Mark Gimein called Prosper Marketplace Inc.'s advertised returns misleading. Taking defaults into account, he wrote, the majority of investors who have lent $188 million through Prosper's online exchange have actually lost money.
Prosper demanded a retraction. The company doesn't dispute any of the figures in Gimein's story, but it says he uses them "out of context."
For example, Gimein points to data on Prosper's Web site showing a default rate of 39% on all loans that have reached the end of their three-year term. In an open letter to The Big Money posted on Prosper's blog, the company said Gimein errs in discussing its loans "in the context only of cumulative ... default rates rather than in terms of the average annual returns lenders have earned." Prosper says the annual yield on loans that have reached the end of their three-year term was 16% and the annual loss suffered by lenders was 20%, resulting in an annual average return of negative 4%.
"Although this return is negative, put in the context of the largest recession in generations, and the performance of other asset classes during the same time period, this paints a very different and more accurate picture of how lenders have fared on Prosper."
Gimein also cites numbers he says he crunched on another blogger's Web site showing that more than half of Prosper loans with interest rates of 18% and up have defaulted. Proper says this gives "the impression that lenders on these loans have lost over half of the funds that they lent, and that losses ran roughly three times the interest rate on loans." Rather, the company says, "lenders on these loans lost 10% on an annual basis, and while not positive, it's a far cry from the 54% loss that Mr. Gimein's flawed analysis leads the reader to believe."
Because Gimein doesn't provide any actual returns data, he leaves "the false impression that lenders have lost 39% to 54% on their Prosper lending," the company says. Instead, "the median return across all Prosper lenders was negative 3.2%." It added that "39% of lenders have made money on their Prosper investment."
Instead of undermining the case for its lending model, the company argues, "a low single digit loss for Prosper lenders in the context of the worst recession since the Great Depression shows great promise for peer-to-peer lending as an alternative asset class."
It's a valid point that Gimein's analysis would have benefited from actual return data, but the returns Prosper provides aren't exactly enticing. And they don't detract from Gimein's argument that Prosper's advertising is misleading. The company's home page touts three "portfolio plans," which let you automatically bid on loans matching certain criteria, with "estimated" returns of between 6% and 14%.
And, as Gimein points out in his article, the "marketplace performance" charts on Prosper.com indicate that loans in the AA to E categories were profitable, at least between July 15 and Dec. …