I liked the previous rgf post so much I went and looked up another of his posts…  This one is on Prosper Lender Due Diligence.  The forum thread is here.  Enjoy:

Those that have followed my posts know that I lend money for a bank for a living (an underwriter). I’ve stated also in previous posts that I believe the variance in default rates at banks (i.e. the expected default rates) and at prosper (which are much higher) is due to the fact that the lenders here are simply not as sophisticated as bank underwriters, therefore the default rate is higher mostly because people are getting funded here that would not get funded at a bank. I don’t believe it’s because “borrowers don’t take prosper seriously” or because the collections is sub-par (I think it is sub-par but it’s a small factor overall).

Most also know my posts are long, so if you have attention deficit disorder I recommend you go to a thread about “lending to cute girls” or “why is this an AA?”.

That stated, I hope this doesn’t come across as patronizing, that’s not my intent. My intent is to try to give lenders that want to learn some ideas on how to look at an application beyond the credit score to see if it makes sense.

Debt ratio. Prosper calculates debt ratio as total debts, including the prosper loan, but excluding housing (mortgage or rent) divided into gross monthly income. So, they exclude housing, and that’s normally everyone’s biggest payment? Note that debt ratio only includes credit bureau debt, it does not include ongoing monthly obligations not associated with debt, such as cable, cell phone, car insurance, etc.

So what is the applicant’s true debt ratio, as a bank would calculate it? Well, this takes a little work, but it can be done.

Let’s take this posting:

https://www.prosper.com/lend/listing.aspx?referrer=RateLadder_com&listingID=169957

To get his true debt ratio, like the banks do, you first need to get his gross monthly income. He gives his net income as $4,933. To get gross income (pre-tax), you could estimate it by multiplying it by around 1.2x, or around $5900 (this is an estimate, it all depends on deductions). You can simply divide his monthly mortgage or rent into his monthly income, and add that percent to his prosper debt ratio. His monthly housing is $1200, divided by the $5900 we calculated, and housing is 20%. Add that to his Prosper debt ratio (39%) and his debt ratio is 59%. For unsecured lending, most banks will not go over 50% debt ratio, and would strongly prefer people be under 40%.

Let’s see if his stated budget makes sense. His prosper debt ratio is 39%, meaning the prosper loan plus non-mortgage debt is around $2300 a month (.39 x $5900). Look at his budget, he shows car expenses $198 and credit cards and other loans as $240, or a total debtload of $438. The prosper payment is around $717. (here’s a free calculator for payments, http://www.vlender.com/cgi-bin/calc/simple.cgi). So, he can account for $1155 of debt service in his budget plus prosper payment but we know it’s around $2300. Something doesn’t add up here, we’re $1145 short. That’s a red flag. Note you wouldn’t expect it to work out perfectly, but you want it to be reasonably close. Note also that does not mean this person is lying, he may have debt on his bureau that he does not consider to be his, for example he may have cosigned for a kid’s car that the kid pays, or he may have business debt paid by the business showing on his personal bureau. But as a lender, you assume the worst, that it is his debt.

Here’s a loan someone was whining on another thread that first payment defaulted.

https://www.prosper.com/lend/listing.aspx?referrer=RateLadder_com&listingID=140191

His stated monthly income is $2000 net, so x 1.2 is 2400 gross. His prosper debt ratio is 56%. His shows a $700 housing expense, or 29%, plus the 56% prosper is 85% debt ratio. Yuck! Another way to look at it is he states $1190 montly expenses (which includes only $50 for food and entertainment). The prosper payment is $1034. That’s $2,224 monthly obligations. He states his monthly net income as $2,000. Wonder why he defaulted? Also note that he states his income will be increasing later. A loan decision is made at a moment in time, like a snapshot. You should not consider future events, it has to make sense TODAY. No wonder this person defaulted.

Here’s one I like:

https://www.prosper.com/lend/listing.aspx?referrer=RateLadder_com&listingID=170595

Monthly net income is 3800, x 1.2 is $4560 gross. Housing $650 is 14%, plus prosper debt ratio of 21% is total debt ratio 35%. She’s in Georgia so the low housing cost is possible. Note the purpose is consolidation so if she does consolidate it will be lower than 35%. The 21% prosper debt ratio should show $957 debt. The prosper payment is $172, so we should see $785 in other payments. She shows $571 in ($271 car and $300 credit cards) so we’re $214 off. She lists a few hundred of debts she’s consolidating, so it all makes sense to me.

• Programmer and Blogger Seeks Credit Score Improvment Loan My Prosper Group is proud to present our 3rd listing (2nd endorsed listing)... This listing is attempting to put the social in social capital. The Penny Saved has been a known blogroll buddy of RateLadder for sometime. He asked me about this loan strategy about 2 months ago. This is......
• Prosper.com Lenders Unite: Where is our Interest? First of all, I love Prosper.com.  It is a great idea (person-to-person lending, breaking the loan apart into smaller chucks to diversify, credit checks, etc.)...  BUT, that fact that a lenders money doesn't earn interest is ridiculous. Once money (it takes 4 business days) is in Prosper.com account interest is not earned. ......
• Using 1 Month or Worse Curves with Exponential Decay For Predictive Analysis on Prosper The 1 month or worse curves that I published over the weekend have many potential uses in determining the interest rate required to make a certain return.  When the curves are complete we can simply solve the Markov Model since the vehicle is a fairly straight forward 3 year fully......
• Prime Borrowing on Prosper Hits Record Levels -- Febuary Marketplace Survey SAN FRANCISCO--(BUSINESS WIRE)--March 11, 2008--Spurred by the credit crunch, attractive rates, and lender demand for conservative assets, Prosper (www.prosper.com), America's largest people-to-people lending marketplace with over 600,000 members and $120 million in funded loans, reported that the number of prime borrowers (720+ credit scores) creating listings and obtaining loans continues......
• Lending Club Partners With Alumni Associations The Lending Club blog has posted news that the alumni associations of Michigan, Kansas State and Georgia Tech have partnered with Lending Club to use the LC platform to make or take loans.  I think this is a great idea.  I would gladly make loans to alumni of my alma matter......

• How to Find Financial Stability in Unstable Markets Right now, the only news about the economy seems to be bad news, and it may take a few months if not years to improve. The dollar is weak, oil prices are still up and the cost of living has skyrocketed this year. These are unstable times, but that doesn’t......
• Ruin Your Credit Fast, pt1 Granted, there are a wide variety of different ways that you can ruin your credit over time, but do you want to know what the quickest and most dangerous ways are? Here are five ways that you can quickly and effectively destroy your credit. 1 - Break your budget. Sure......
• Restore Your FICO Score – Part Three In the previous parts of this article we discussed how FICO score can impact your financial status as well as the initial steps that you can take to begin restoring your FICO score. We covered handling collections first since they do have a big impact on your overall score, but......
• New Prosperity Paradigm: God Will Pay Your Debts Debt is a contradiction of the universal equilibrium, and there is no such thing as lack of equilibrium in all the universe.  Therefore, in Spirit and in Truth, there is no debt.  However, men hold on to a thought of debt, and this thought is responsible for a great......
• How Much House Can I Afford? One of the biggest mistakes you can make in the world of real estate is biting off more than you can chew.  That is, buying more house than you can afford.  While determining how much house you can afford is not an exact science, there are some guidelines to keep......

• Credit, Charge Cards Trading Cards Collectibles
• Military Payment Paper Money: US Coins & Paper Money
• Us Weather Bureau Rain Gauges Garden Decor Yard, Garden & Outdoor Living
• Other Makes Hybrid Cars & Trucks
• Bank of Canada Canada North, Central America Paper Money: World Coins & Paper Money

Prosper.com, Strategy

azerbaijan, mozambique