When the peer-to-peer lending site Prosper.com launched in 2006, it cast itself as the place for borrowers to go if they had been turned away by a bank. It has struggled since then to live up to that image.
Over the past five years, the website's parent company, Prosper Marketplace Inc., has reined in, rethought and revamped its open-door policy on a number of occasions. Just a few months ago, Prosper decided to once again drop its high-risk category of borrowers, only to bring it back one month later.
Turns out, the investors who fund loans on the site wanted the option of taking on a little extra risk, which hasn't always been the case.
"There is a lender demand for them. It made sense to bring it back," Prosper Marketplace Chief Executive Chris Larsen said in an interview Tuesday.
As the peer-to-peer lending space has matured, Prosper has tried to figure out exactly where it stands and what it wants to be. Its evolution says as much about the growing pains of the social lending industry as it does the current credit environment.
Not long after it came online, Prosper found that lenders were reluctant to take a chance on the riskiest borrowers and that it was too expensive for the company to maintain listings for loans that never got funded. So it instituted a minimum credit score requirement (previously consumers didn't even need a credit score to list) and tightened its requirements for riskier borrowers.
In July 2009, after a nine-month quiet period imposed by the Securities and Exchange Commission during which the company stopped facilitating new loans while it sought registration approval, Prosper revised its underwriting policies again. It raised the minimum credit score borrowers needed to list and incorporated a new proprietary rating system based on previous performance of loans.
At the start of this year, Prosper further narrowed borrower eligibility on its site by eliminating the category for the lowest tier of its credit spectrum. But citing lender demand, Prosper brought those loans back in February — and they have been on the rise ever since.
Experts cited a number of factors behind the demand for riskier loans. For one, fewer traditional lenders are willing to make loans to this segment, leaving more high-risk borrowers in need of funds.
"You used to have plenty of providers willing to lend money to anyone," said Gwenn Bezard, research director at Aite Group LLC. "A lot of companies have moved up-market and have retreated from the subprime market, so it has created a very large niche to be filled."
Secondly, with benchmark interest rates hovering near zero, there are not many places investors can go for high yields.
But Mark Schwanhausser, a senior analyst at Javelin Strategy and Research in Pleasanton, Calif., said Prosper may be overestimating demand.
"Prosper is basically saying it feels there's a hunger for another flavor of ice cream," Schwanhausser said. "My overarching concern is that P-to-P lenders still have a long way to go before ice cream will become part of the average investor's idea of a well-rounded, nutritional portfolio."
Larsen conceded that "listings have been growing faster than liquidity," and that his current focus is on bringing more investors to the site, particularly institutional investors with deep pockets.
But that is becoming easier to do, Larsen said, as he is able to show that loans to riskier consumers have actually been holding up much better than Prosper had forecast.
