The San Francisco peer-to-peer lender was expected to resume facilitating loans between individuals last night, and also to unveil a secondary market for those debts.
But Prosper's innovative proposal to let banks resell their loans to its users remains in mothballs, and that could hinder its plans to become an important link between financial companies looking for liquidity and consumer investors' potentially vast pool of cash.
Prosper was the first mover in the U.S. peer-lending market and remains one of the largest players, even though it has been largely shuttered since October. Observers said the company's re-entry could provide a significant boost to the emerging sector, and that offering a secondary market could attract more users.
Prosper said the poor economy and the ongoing credit crunch are driving up demand for its lending services, and its still-in-development open market proposal, which would help banks offload loans and increase liquidity, was a key part of its long-term strategy.
Chris Larsen, Prosper's founder and chief executive, said that the open market differs from traditional secondary markets for bank loans because it would enable lenders to sell debt one loan at a time instead of packaging them into securities, the latter approach cited by many as a key contributor to the mortgage crisis.
Selling individual loans "is exactly what policymakers are calling for," Larsen said. "It is absolutely the right course."
Prosper was forced to pull the pull the plug on an early rollout of the open market system in May, and it remains unclear when, or if, it would become available. In April, Prosper had announced that lenders in California could sell some of their debts to consumers through its Web site, but it shut down the service after 10 days before any pending sales could be completed.
Larsen said that he originally wanted to introduce the service in just California after securing approval from state regulators; having its open market for banks and other lenders up and running there, he hoped, would persuade the Securities and Exchange Commission to quickly issue its approval for Prosper to expand it to other states.
Larsen said the SEC was aware of what Prosper was planning in California, and "the intent was to show them what it is and give them comfort." Instead, "it looked like it was going to be a distraction" that would slow the approval process "rather than speed it up."
In April there were four nonbank lenders that had committed to using Prosper's system to resell their loans, Larsen said. He anticipates even more demand if the system gets SEC approval.
"I can't tell you the amount of interest in that product we had, on both sides of the equation, lenders and investors," he said. Lenders are particularly interested because it would provide them with some liquidity in uncertain times.
"You just have to get the regulators to get comfortable with it," he said. But "that takes longer than the economy collapsing."
Larsen said he could not estimate when the SEC would approve the open market proposal; one issue is that it is being evaluated by the SEC's policy arm, while the lending services and the secondary market that went live yesterday were vetted through a securities registration filing.
