Prosper Marketplace Auctioning Debt

The Baltimore Sun is reporting the Prosper Settlement.

A settlement for $1 million dollars paid to 20 different states was announced today, with Prosper Marketplace agreeing to the payout after complaints poured in claiming that the peer-to-peer lending service was selling securities that were unregistered.

Prosper Marketplace is a business model that matches up those who want to borrow money with those willing to lend it to them. It’s very much like an auction with the potential lenders bidding on the right to loan money to the loan-seekers. A list of people with the loan amounts they’re looking for appears on the site, and people who would like to make the loan and profit from the interest that the borrower will have to pay back actually bid on the loans. The lowest bidders’ monies are used to fund them, with Prosper Marketplace actually issuing promissory notes to the lenders and managing the transactions.

But unlike some websites that take the information offered by people who want a loan and present it to legitimate lending institutions who bid for the business with the best interest rates and terms, this service allowed anyone to bid in hopes of providing money for the loan. The state regulators that make up the North American Securities Administrators Association decided that the company in essence holds an online auction to find people to fund notes that aren’t secured in any way. Because the loans amount to unsecured promissory notes, regulators say they’re securities that haven’t been properly registered, and so the practice must stop immediately.

Each state must put its stamp of approval on the settlement for the entire penalty to go through, with an agreement that the settlement is valid also including the agreement to stop investigating any prior transactions that Prosper took part in before the investigation began.

It was only a week ago that the Securities and Exchange Commission ordered Prosper Marketplace to stop selling unregistered securities. The spokeswoman for Prosper, Tiffany Fox, indicated that the company is eager to settle the matter. They plan to register with the SEC so that they can continue with their business model. In the meantime, they’re not playing middleman for any new borrowers and investors, but the agreements that were made before the SEC cease and desist order, they make clear on their website, are still valid.

Prosper has announced on its website that lenders can still expect to have their monies paid back, they can still keep an eye on all of their loans, and they can still access the money currently in their Prosper Marketplace account. They also point out to borrowers that they are still expected to honor any agreements they’ve already entered into, and that their plan to register with the SEC, which could take several months to complete, won’t affect current loans.

They also point out on their website that a borrower looking for a loan can still create a new listing for the hoped-for loan, and they’ll do their best to find an alternative way to find a lender.

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Prosper in Quiet Period?

I though Prosper had already done this: http://www.rateladder.com/2007/10/30/prosper-files-s1-with-sec/

From Prosper This morning:  http://blog.prosper.com/2008/10/15/prosper-filing-registration-statement-enters-quiet-period/

Prosper has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future.The registration filing is a necessary step toward making the secondary lending market available to the community. This is something many of you have been asking for, and we believe the liquidity of a secondary market will make Prosper even more vibrant.

Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

If you’re a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process. If you’re a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.

A successful registration can take several months, but we assure you we will do our best to move forward as quickly as possible. Until this process is complete, we’re required to be in a quiet period and will be unable to respond to press, blogger or other inquiries about Prosper or the registration filing until it becomes effective.

We apologize for any inconvenience this may cause, and want to thank you in advance for your understanding and support.

Prosper Update Enhances the Legal Enforceability of Promissory Notes

There was a Prosper update last night.   Nothing that was completely unexpected… The one thing that struck me as interesting was that borrower’s are now required to sign the promissory notes themselves…  Before the process had been that Prosper was authorized to sign on their behalf…  The part that struck me as interesting was the final paragraph…

Although this new process may add some additional time before loan funding, we expect that this change will reduce immediate loan payoffs and enhance the legal enforceability of Prosper promissory notes.

The bold part caught my attention (I added the bold for emphasis) as I am on the loans that are part of the legal test.  Related or just coincidental use of the root legal?  More info please.  Update: Ed Giedgowd Chief Compliance Officer and General Consul of Prosper provided an update on borrower sign loans.

Here the highlights from blog post:

  • Portfolio Plan Bids can now be adjust as an average of all the bids in the plan
  • Self employed and non verifiable income borrowers will now have DTI displayed as Not Calculated
  • Income Range changed to Stated Income and now show regardless of whether it is verifiable or not
  • More bankruptcy data is now being shown including chapter and filing date
  • There is a messaging change for those lenders that wish to bid on negative ROI listings.
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