At Prosper, the Model Changes and So Do Perceptions

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Prosper Marketplace Inc., which once presented itself as the consumer advocate of the lending space, is now being cast as a stain on the resume of an adviser with the Consumer Financial Protection Bureau.

The loan facilitator has changed a lot since its founding in 2006. It was originally structured as the eBay Inc. of the lending space — just as eBay allows anyone to become a merchant, Prosper would allow anyone to become a lender, and borrowers would pitch themselves in an auction-style process.

This model began to reshape itself fast, as even though Prosper said it would open its doors to any borrower who had been turned away from a bank, its lenders refused to take a chance on many of the people banks turned away. Its biggest change came in 2008, when the Securities and Exchange Commission cracked down on the peer-to-peer lending space, and after a quiet period during which Prosper stopped facilitating new loans altogether, its lenders were recast as investors.

Since then Prosper has made less noise, but it came to prominence suddenly this week for its association with Raj Date, a senior adviser consulting Elizabeth Warren at the CFPB. Date was a director at Prosper until just a few weeks ago.

An article this week in The New York Times spotlighted Date's association with Prosper, which the paper said has tried to influence financial reform through its hiring of a lobbyist.

Chris Larsen, a Prosper co-founder and its chief executive, disagreed that the San Francisco company was a bad association for anyone to have. However, in discussing the story's characterization of Prosper as just another lender, he conceded that the changes it went through in recent years made it "maybe … a little less sexy" than it once was.

"Those first couple of years, there's definitely the anything-is-possible period," Larsen said. Over time, "you go through a more stable, kind of conservative, if you will" stage as the company comes to grips with what regulators and customers want.

Larsen described the current version of Prosper as "evolved" and "firmly part of the mainstream financial industry," with "all the regulatory checks and balances."

Christine Pratt, a senior analyst with Aite Group LLC, said Prosper tried to be a maverick, but "it's seen as a financial institution by the people in charge of regulating financial institutions … and I think that's got to be, partly, a reason why this type of lending doesn't flourish in the U.S. environment."

Prosper became less vocal after the SEC forced it to stop facilitating new loans while it reshaped its business. The company tried to emerge once under state regulations, but was abruptly quieted again before it fully worked out its issues with the SEC.

Prosper was not the only one hit by the SEC crackdown. Its biggest rival, Lending Club Corp., went through similar changes under the SEC's supervision.

The two companies continue to operate today, and occasionally announce changes such as the addition of new loan terms that Prosper unveiled this month, but nothing reaching the market-shattering ambitions the companies first had.

Larsen previously headed E-Loan Inc., another company that promoted transparency in the lending process. In 2004 Larsen came up with a way to let consumers choose whether their loan applications would be processed within the U.S. or offshore. The advantage of sending an application overseas was that it could be processed faster due to the time-zone differences, and many E-Loan applicants chose that option.

At Prosper, the original idea was that anyone could be a borrower or a lender of three-year unsecured loans. Borrowers were invited to apply on Prosper's platform to get the funds needed to start a new business, for example. The site was able to highlight affiliations such as where borrowers and lenders attended college, so that it could promote the concept of lending to one's peers.

A large number of loans instead went to debt consolidation — borrowers troubled by their debts on multiple credit cards hoped to wipe out the card debt and instead pay back a single three-year loan to Prosper lenders at a lower rate.

Prosper's model resembled at first that of Zopa Ltd., a U.K. company. When Zopa entered the United States it decided against the peer-lending concept. Instead it paired borrowers and depositors with credit unions.

Though Zopa eventually folded its U.S. operations, Pratt said Zopa's approach may have been more sustainable than Prosper's original take, since the peer-lending concept is a simplified version of how credit unions operate.

"They were sort of trying to be an online credit union," she said, "but not really understanding or complying with the laws."

Date joined the CFPB from the Cambridge Winter Center, where he had been an executive director since September. Before joining the center he has had a career in financial services as a managing director in the financial institutions group at Deutsche Bank Securities and senior vice president for corporate strategy and development at Capital One, where he focused on mergers and acquisitions.

At the CFPB he is a senior adviser consulting Warren on policy for financial product markets including student lending and credit cards. He is helping to set up the bureau, including senior-level recruiting.

Larsen said Date is "the most ethical guy I have ever known." Date would not comment for this story.

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