Prosper Marketplace Inc. has already demonstrated that it can attract a large customer base, and its plan to create a secondary market for its person-to-person lending service will test whether its users are willing to engage in more sophisticated transactions.
The San Francisco company registered with the Securities and Exchange Commission Tuesday to develop a system enabling people to resell the loans originated through its Web site, a move that some watchers had previously identified as a logical next step that could broaden the range of customers it attracts.
Edward Woods, a senior analyst for the market research firm Celent LLC, said in an interview Thursday that a secondary market is a strong sign of maturity "for not just Prosper, but for this new market. It's basically validating it in another way."
Prosper's Web site, which facilitates loans between individual borrowers and lenders, went live in early 2006, but Mr. Woods said that offering this resale capability would have been impossible then.
"These guys had a basically insurmountable hurdle," he said. "They had to create a market."
Before developing a secondary market, Prosper needed a thriving primary market, with solid demand from both borrowers and lenders, Mr. Woods said. "You need longevity, you need that credit history, you need scale."
A Prosper spokeswoman said executives could not comment because of the SEC registration, nor would she explain why it filed the registration at all.
Some observers had anticipated the creation of a resale market, which would let lenders recover their money faster.
Dan Schatt, a former senior analyst with Celent, said in February that the growing loan volume showed that Prosper was "definitely headed toward a secondary market," which in turn would "create a bigger market opportunity" for the company. (Mr. Schatt took a job with eBay Inc.'s PayPal Inc. in July.)
Craig Focardi, the research area director for the retail banking practice at TowerGroup Inc., an independent research unit of MasterCard Inc., said that enabling individuals to trade loans makes Prosper more like conventional lending companies. "Having the ability to sell a loan off after three months puts individuals in the position of a traditional consumer or mortgage lender," he said.
Prosper's Web site lets borrowers request loans and lets individual lenders fund all or part of those loans; most loans that are granted are broken up into smaller pieces and funded by many lenders, which reduces the risk.
The company said last month that since going live it had attracted more than 437,000 users, who had funded more than $90 million of loans. In September the site carried an average of 2,300 loan requests a day, versus 780 in September 2006.
As use of the Prosper service has increased, the way people have used it has evolved as well. Some people request loans saying they plan to invest the money by lending it out on Prosper, in effect seeking wholesale lenders to back them so they can offer loans to others at higher rates.
Prosper's draw for lenders is that the interest rates paid on these loans are generally higher than people can get from standard deposit accounts. However, unless the loans are paid early, the lenders are stuck with them for the entire term, generally three years. (Loans in default can be sold to a collections agency.)
Buyers would pay a flat fee for loans purchased on the secondary market, with the fee determined by an online auction-style process. Sellers would have to sell their entire share of an individual loan to a single buyer, rather than dividing it into smaller chunks.
According to the filing, the new system would allow lenders to resell their loans to other Prosper users three months after they are originated. After a loan has been resold, subsequent buyers could sell the notes again at any time.
Christine Barry, a research director at Aite Group LLC of Boston, said that many current Prosper users are attracted by their connection to individual borrowers. People who purchase on the secondary market would come from "a totally different group of buyers," who are more interested in turning a profit than in feeling that they are helping individual borrowers. "It opens it up to all kinds of investors," she said.
Mr. Woods said that Prosper's secondary market is unlikely to appeal to financial institutions.
The secondary market for traditional loans consists of portfolios, not individual loans, he noted. If Prosper wants to appeal to financial companies, it will "have to create some sort of aggregation capability," he said.
