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Sunday
May032009

Prosper is Back...with an Innovative Vengeance! 

Earlier this week, the sleeping beauty of P2P lending – Prosper – was brought back to life by the California state government. After the SEC asked Prosper to pause its lending operations for six months, California’s Department of Corporations decided on April 28th to allow the P2P lender to resume lending for all lenders located in California and borrowers throughout the nation.

 

And Prosper is coming back on the scene with a new model to add to it P2P lending platform.  The Open Market Initiative is an attempt to create a secondary markets for loans by allowing institutional lenders to sell their existing loans, such as car, consumer, and small-business loans to Prosper member-lenders in California.

 

The idea here is that this secondary market provides liquidity for the institutional investors as well as a diverse and patriotic investment option for local Prosper lenders. In his Welcome Back letter, founder Chris Larsen, explains how the social focus and dedication to transparency that serve as Prosper’s cornerstones have been applied to the Open Market Initiative.

 

"In addition, Open Market brings the same social lending possibilities to securitization that we have always seen in the Prosper Loans Marketplace. For example, auto loans listed on the Open Market will show in which auto plant and city the car was made. That way fellow Americans who put a value on American jobs might make loans to cars made in Ohio, for example, at a better rate than loans to cars made in Germany. This could never be done with traditional securitizations because investors never had that level of transparency."

 

While Prosper’s secondary market is not the first in P2P lending, (LendingClub gives members the option to trade notes amongst each other) it is certainly one of the most creative and extensive. However, as Mr. Larsen himself points out, “creative financing” does not carry a positive connotation nor a sense of patriotic pride these days.

 

An additional problem brought up in a recent Economist article is that the difficulty today with selling institutional investor’s loans is the pricing and not the liquidity. Thus, the extent to which Prosper’s creative secondary-market model is able to truly align incentives and truly scale remains to be seen.

 

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