During the end of 2006 and the beginning of 2007, there was a brand new crazy hitting the world of personal finance. Consumers would lend money to one-another and completely bypass the financial system. Lenders would get a great interest rate on the money they put out and borrowers who might not otherwise be able to qualify for a loan through traditional means would be able to get a loan. The service was an entirely new take on consumer credit. Unfortunately, because of low loan performance legal issues with the Securities & Exchange commission, it seems that Prosper.com has lost a lot of its prosperity.
For a while, Prosper.com was quite the buzz in the personal finance community on the internet. Many investors thought they were being financially savvy and would make a better interest rate by investing money into Prosper loans. As it turns out, Prosper.com loans performed much more poorly than investors had hoped. It turned out that 18.5% of all loans made between February of 2006 and June 2008 had some form of delinquency. There was also a 35% delinquency rate for loans made between February 2007 and June 2008. Who would have thought that consumers that couldn’t get a loan at a bank might not pay off their loans?
The knockout hit when the Securities & Exchange Commission filed a cease and desist order on Prosper.com for being in violation of the Securities Act of 1933. The SEC contended that the loans Prosper.com were making are considered securities, and since the securities were not properly registered, they were in violation of Federal Law. Eventually, the government reached a $1 million settlement with Prosper.com.
Under the terms of the settlement, Prosper.com agreed not to sell any securities in any state until it becomes compliant with that state’s securities registration laws. They also agreed to pay a $1 million fine to the various states. In doing so, the government agreed to stop the investigation the sale of all unregistered securities before November 24th, 2008 made by Prosper.com
Prosper.com is currently not allowing new loans to be made. They have a statement on their website that they are starting the registration process with all appropriate securities authorities. The statement also says that they cannot make new loans, expand existing commitments from borrowers or even post loans on their website until the registration process is complete.
Whether or not Prosper.com will ever make a comeback and be the revolution in consumer borrowing that it had intended to be remains to be seen. For now, Prosper.com isn’t even accepting press inquiries. They state that the process can take several months (it’s already been four), so we’ll see what happens.