Friday, April 06, 2007

New ball game

The internet is (of course) amazing. This morning's WSJ describes, a sort of eBay for borrowing and lending. Writer Jonathan Last desribes it all in playful tones but as the web undercuts middlemen and gatekeepers everywhere, who better to do it to than loan officers -- and the guys in the silk hats?

The latter may have survived socialists and anarchists but this really is a new ball game.

Usury for Beginners

Of all the wonders that the Internet has brought us, none
is as special as Web 2.0. The next generation of Internet empowers you, me --
some might say We, the People -- to click our way to self-actualization. We're
an Army of Davids, taking the world back from the corporate Goliaths, one Web
site at a time. The new Internet lets us be who we've always wanted to

Yes, we all have lofty goals, like helping the infirm,
reaching out to shut-ins or starting a catering service. But what we've always
wanted to be may seem, to some, a bit less commendable. For instance, I've
always wanted to be a loan shark. There's something luridly poetic about outlaw
lending: Getting the juice ticking at 30% on some hard-luck mope; making profits
off of the backs of the union guy who lost it all at the race track or the stock
broker with the expensive drug habit; sending minions like "Bobby Bats" out to
do collections. It's like being a banker, only cooler.

Thanks to, my dream has come true, sort of.
Prosper was launched in February 2006 by Chris Larsen and John Witchel, two
Silicon Valley entrepreneurs. Mr. Witchel was the brain behind FlashMob
computing, a process that links personal computers, allowing them to function as
one supercomputer. Mr. Larsen was the founder and CEO of E-Loan. They wanted to
merge the fundamental principles of Web 2.0 with the trendy economic theory of
microcredit. I wasn't daunted by the fancy, Nobel Prize-winning idea though. I
was sure Prosper would help me find some sweet action.

The idea behind the site is that people can serve one
another's financial interests better than banks can. So if you need a small loan
-- between $1,000 and $25,000 -- you can go to, register and explain
why you need the money. Prosper does a credit check on prospective borrowers,
assigns them a credit grade and then publishes their loan request with the
amount they want to borrow and the maximum interest rate they're willing to pay.

Prospective lenders sort through these pitches to find attractive loans, on
which they bid. Lenders propose an amount they want to give at an interest rate
they are willing to charge. They can fund as little as $50 or as much as the
full loan. As more lenders bid on the loan, the interest rate drops, until it
reaches a floor, beneath which no lenders are willing to go.

The typical loan is for a three-year term. Prosper gets its
beak wet by charging a 1% transaction fee to each borrower when the loan begins
and an annual 0.5% servicing fee to lenders. So far, the company has processed
8,845 loans worth more than $47 million. ...

... There are, however, two small holes in this tapestry of
virtual virtue. The first is, as Prosper's FAQ puts it, "No one guarantees the
loans at Prosper." If a borrower defaults, Prosper will "ding" his credit score
and send a collection agency after him. But if the borrower's credit was already
wrecked, that's not much disincentive. After all, collection agencies don't do
kneecaps anymore. To desperate or unscrupulous borrowers with ruined credit
scores, Prosper might look like free money. The other niggling concern is about
unscrupulous lenders: would-be loan sharks who view Prosper as a way to leach
26% interest from poor, struggling borrowers looking for a

I set off into Prosper territory armed with a couple hundred
bucks, hoping for the frisson that my real career has never given me. After
going through the verification process, I chose a screen name -- "LoanBruce,"
after the mechanical star of Jaws -- which is the only piece of identification
Prosper users see about each other.

A substantial number of the listings are from people wanting
loans to pay off their credit cards. Just the kind of desperate fish I was
looking for. For instance, one prospective borrower requested $16,000 (at 20%)
to pay off her credit cards and boost her soy candle business. Her pitch was:
"Since my bankruptcy in 2002, I have not been late or delinquent on a single

Some of the businesses sound rather suspicious. "AliDixon,"
for example, claimed to be a private investigator in California who wanted
$10,000 to expand his operations. In the course of detailing his financial
situation, AliDixon explained why he owed money on two cars: "Vehicle #1 is a
luxury car, used to entertain millionaire and celebrity clients who expect
high-class treatment from their private investigator. Vehicle #2 is a common
SUV, used for surveillance operations in an attempt to remain covert." Clearly a
scammer; I was too wise to fall for that routine.

Even shadier was a supposed Cornell alum, "Barry1964," who
sought a $7,500 loan for the express purpose of re-lending the money out at
higher rates to other Prosper borrowers. A man after my own

In the end, I purchased three loans, all of which went to the
type of high-risk borrowers that normally resort to getting in hock to
degenerates like me. The first was to someone named "Shannon" who said he (or
she) was starting a small-town newspaper. The second was to a Yahoo! employee
who runs a side business selling refurbished electronics equipment.

The third was to a down-on-her-luck single mom who had no
assets and needed cash to get out of credit card debt. She has an ex-husband who
did her wrong, and the picture of her 5-year-old son was awfully cute. This
cold-blooded loan-sharking racket is harder than it looks. I could imagine
myself being tough on the first two borrowers because, deep down, I thought that
there was a chance that they could make good. But the single mom seemed
hopeless. I gave her the loan anyway. All told, the average interest rate I was
getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make
me feel pleasantly evil.

After making my loans, I talked with Prosper's communications
director, Tiffany Fox. Turns out, I'm just a piker with my three baby loans:
While Prosper doesn't release many statistics about lenders, Ms. Fox told me
that "there are more than a few who have more than $100,000 out on the
platform." My career as a bad-boy money-lender was deflated even further when I
received my first payments, which totaled $4.60 ($4.55, once Prosper took their
cut). All three borrowers made their first collection. I didn't even get to have
anyone roughed up. Not that I could have afforded it -- even Bobby Bats must
make more than $5 an hour.