10-K 1 prosper10k123109.htm 10-K prosper10k123109.htm
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
(Mark One)
     
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
or
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File Number: 333-147019
 
 
Prosper Marketplace, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
73-1733867
(I.R.S. Employer  Identification No.)
   
111 Sutter Street, 22nd Floor
San Francisco, CA  94104
(Address of principal executive offices)
 
94104
(Zip Code)
 
(415) 593-5400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
None
 
None
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company þ
       
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
As of March 31, 2010 there were 4,457,067 shares of the registrant’s common stock outstanding.




 

PROSPER MARKETPLACE, INC.
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S-1
         
       
         
         
Exhibit 3.1        
Exhibit 31.1        
Exhbit 31.2        
Exhibit 32.1        
         


 
 
     This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
·  
the performance of the Notes, which are special, limited obligations that are not secured, guaranteed or insured;
 
·  
our ability to make payments on the Notes, including in the event that borrowers fail to make payments on the Notes;
 
·  
the reliability of the information about borrowers that is supplied by borrowers;
 
·  
our ability to service the loans, and the ability of Prosper or a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
 
·  
credit risks posed by the credit worthiness of borrowers, the lack of a maximum debt-to-income ratio for borrowers, and the effectiveness of Prosper’s credit rating systems;
 
·  
actions by some borrowers to defraud lender members and risks associated with identity theft;
 
·  
our limited operational history and lack of significant historical performance data about borrower performance;
 
·  
the impact of current economic conditions on the performance of the Notes and loss rates of the Notes;
 
·  
payments by borrowers on the loans in light of the facts that the loans do not impose restrictions on borrowers, and that the interest rates on the loans are determined by an auction process and not directly by the creditworthiness of the borrower or prevailing interest rates;
 
·  
our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
 
·  
the application of federal and state bankruptcy and insolvency laws to borrowers and to Prosper;
 
·  
the impact of borrower defaults and prepayments on the return on the Notes;
 
·  
the lack of a public trading market for the Notes and the ability to resell the Notes on the Note Trader platform;
 
·  
the federal income tax treatment of an investment in the Notes;
 
·  
the resolution of pending litigation involving Prosper, including any state or federal securities litigation; and
 
·  
our ability to compete successfully in the peer-to-peer and consumer lending industry.
 
       There may be other factors that may cause our actual results to differ materially from the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

     All forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.


 
 
ABOUT THE PLATFORM
 
Overview
 
Our platform enables our borrower members to borrow money and our lender members to purchase Notes issued by Prosper, the proceeds of which facilitate the funding of specific loans made to borrowers.  Our platform also allows for the formation of community groups and allows our borrower members to participate on our platform as a member of a group.  Prosper borrower members do not need to join a group in order to request borrower loans on our platform.
 
Online peer-to-peer lending is a new approach to consumer finance.  Peer-to-peer lending uses an Internet-based network to connect borrower and lender members.  Our platform generally provides transactional services for the online network, including screening borrowers for borrowing eligibility and facilitating payments.  Our platform allows borrower members and lender members to connect with each other using a combination of financial and social criteria.  Online peer-to-peer lending also entails significantly lower operating costs compared to traditional banking and commercial finance institutions because there are no physical branches and related infrastructure.
 
As an early participant in the development of online peer-to-peer lending, Prosper views consumer finance delivered through an online peer-to-peer platform as an important new market opportunity, as well as a method of providing much needed transparency and liquidity in the consumer lending and capital markets.  Key drivers of peer-to-peer lending include the following:
 
·the possibility of lower interest rates for borrower members;
 
·the possibility of attractive interest rates and yield percentages for lender members;
 
·the possibility for lender members and borrower members to help each other by participating in our platform to their mutual benefit;
 
·tightening consumer credit markets, particularly among traditional banking institutions; and
 
·growing acceptance of the Internet as an efficient and convenient forum for consumer transactions.
 
How the Platform Operates
 
Our platform is an online auction-style marketplace that permits our lender members to bid on listings and purchase promissory notes from Prosper, or “Notes,” that are dependent for payment on payments we receive on the corresponding borrower loans described in the listing.  All listings on our platform are posted by individual consumer members of Prosper requesting individual consumer loans, which we refer to as “borrower listings” or “listings” and “borrower loans,” respectively.  We refer to the persons obligated to make payments under the borrower loans as “borrowers” or “borrower members.”
 
Our platform operates online only and is available to Prosper borrower members in all states except Iowa, Maine and North Dakota.  Prosper is available to lender members in the following states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming, subject to state suitability requirements.   Our registration, processing and payment systems are automated and electronic.  We have no physical branches, no deposit-taking and interest payment activities and extremely limited loan underwriting activities.  Our website provides detailed information about our platform, including detailed fee information, the full text of our member legal agreements, help pages and white papers.  In addition to the customer support materials available on our website, we make additional customer support available to members by email and phone.  Our customer support team is currently located at our headquarters in San Francisco, California.
 


We attract lender members and borrowers to our website, www.prosper.com, through a variety of sources.  We drive traffic through referrals from other parties (which include online communities, social networks and marketers), through search engine results and through online and offline advertising.  We are not dependent on any one source of traffic to our website.  As of December 31, 2009, our website was receiving an average of approximately 196,000 unique visitors per month.
 
We generate revenue by charging lender members ongoing servicing fees on the Notes they have purchased, and from transaction fees paid by borrower members on borrower loans.  For the fiscal year ended December 31, 2009, we originated $8,886,296 of loans. Because we collect small fees and other revenue from thousands of borrowers, no single borrower has accounted for more than 1.0% of our revenue during our fiscal year ended December 31, 2009.
 
Platform Participants, Registration Requirements and Minimum Credit Criteria
 
All platform participants must register with Prosper and agree to our platform rules and terms of use, including consent to receipt of disclosures electronically.  At the time of registration, individuals or authorized institutional agents must provide their name, address and an email address.  After responding to an email verification, registrants must agree to the terms and conditions (including the applicable registration agreement) for the specific role for which they are registering.
 
Borrower Members
 
A borrower member may be any natural person at least 18 years of age who is a U.S. resident in a state where loans through the platform are available, with a bank account and a social security number.  After passing Prosper’s anti-fraud and identity verification process, borrower members can request unsecured borrower loans at interest rates which are determined by an auction process.  We allow borrower members to post listings on our platform regardless of their income, although we reserve the right to restrict access to our platform by setting minimum credit or other guidelines for borrower members.
 
When a borrower member requests a borrower loan, we evaluate whether the borrower meets the underwriting criteria we established with our origination partner, WebBank.  WebBank makes loans to borrower members and then sells and assigns the promissory notes evidencing those loans to us.  The underwriting criteria apply for all borrower loans originated through our platform and may not be changed without WebBank’s consent.  The underwriting criteria requires that borrowers have a minimum credit score of a specified threshold amount (currently 640, except that the minimum is 600 for borrower members who (1) had previously obtained a borrower loan and paid off the loan in full, or (2) are seeking a second loan and are otherwise eligible for a second loan), and no prior charge-offs on borrower loans originated through our platform. In addition, Prosper has established a methodology that sets a minimum interest rate for a particular loan listing, which is based on the Prosper Rating assigned to the listing.  The minimum interest rate applicable to each listing will be the interest rate that corresponds to the yield percentage calculated by adding the national average certificate of deposit rate that matches the term of the borrower loan, as published by BankRate.com, to the minimum estimated loss rate associated with the Prosper Rating assigned to the listing, which estimated loss rate is based on the historical performance of similar Prosper borrower loans.  For listings with AA Prosper Ratings, an estimated loss rate of 1.0%, which represents the middle of the estimated loss rate range, is added to the national average certificate of deposit rate to determine the minimum yield percentage. In connection with our identity and anti-fraud verification of borrower members, we verify the deposit account into which the loan proceeds will be deposited, to determine that the borrower member is a holder of record of the account.  Even if a listing receives bids in the total amount requested, Prosper will cancel the listing without funding the requested borrower loan if we are unable to verify the borrower member’s account.  While we attempt to authenticate each platform participant’s identity, our fraud checks could fail to detect identity theft, fraud and inaccuracies.  See “Risk Factors—Risks Related to Borrower Default” for more information.
 
Borrower members may have up to two borrower loans outstanding at any one time, provided that the aggregate outstanding principal balance of both borrower loans does not exceed the then-current maximum allowable loan amount for borrower loans (currently $25,000).  Currently, to be eligible to obtain a second borrower loan while an existing loan is outstanding:
 


·Borrower members must be current on their existing borrower loan, and must not have been more than fifteen days past due in making their most recent monthly borrower loan payments for a specified number of months (between six and twelve, depending on the borrower’s credit score range);
 
·Borrower members may not post a listing for a second borrower loan within six to twelve months (depending on the borrower’s credit score range) following the date of origination of their existing borrower loan; and
 
·the borrower member’s credit score must be 600 or more, and must not drop more than a specified number of points (currently twenty to forty points, depending on the borrower’s credit score range at time the existing loan was obtained) below the borrower member’s credit score at the time its existing borrower loan was obtained.
 
Our underwriting requirements for borrower loans, including eligibility requirements for second loans, are subject to change from time to time.
 
Lender Members
 
Our lender members are individuals and institutions that have the opportunity to buy our Notes.  Lender members must register on our website.  During lender registration, potential lender members must agree to a credit profile authorization statement for identification purposes, a tax withholding statement and the terms and conditions of our website.  Lender members must also enter into a lender registration agreement with us, which agreement governs all sales of our Notes to the lender members.  Lender members are not required to give credit information to the same extent as borrower members.  An individual lender member must be a natural person at least 18 years of age and a U.S. resident, must provide his or her social security number and may provide his or her state driver’s license or state identification card number.  Institutions must provide their taxpayer identification numbers to us.  At the time a lender member registers with Prosper, the lender member must agree to the rules, limitations, processes and procedures established by Prosper for originating, servicing and collecting borrower loans, and for purchasing Notes from Prosper through our platform.  In addition, the lender member must satisfy any minimum financial suitability standards and maximum investment limits established for the platform or the Note Trader platform, as then in effect, by the state in which the lender member resides.  Prior to bidding on a listing, lender members must transfer funds to an account maintained on our platform, which we refer to as a “funding account.” The funding account holds all funds supporting a lender member’s bids and all Note payments payable to the lender member are deposited in the funding account.
 
Groups and Group Leaders
 
Borrower and lender members may choose to belong to certain groups of people with common interests.  Groups can be any formal or informal collection of people with common interests, including social, cultural, ethnic, professional, education-based, geographical, athletic, religious or any other official or unofficial affiliation.  Groups may consist of borrowers, lender members or registered Prosper users who have not taken a role, or any combination of the above.  Groups allow people to join together for the common goal of borrowing money at desirable interest rates and give borrowers an additional incentive—the borrower’s reputation within the group—to meet their obligation to repay a borrower loan.
 
Groups are headed by group leaders who display their groups on the Prosper website and may invite prospective borrowers to our platform.  Group leaders are individuals who serve as the head of a group.  An individual must be registered as a borrower member or a lender member on our platform in order to register as a group leader.  Group leaders are able to condition membership on personal facts and characteristics that may not be available to other members generally.  Group leaders also have the ability, if they so choose, to review and approve their group members’ listings before they are posted on our platform for bidding.  Group leaders may only act as a leader of one group and do not guarantee payments on any borrower loan or Note.
 
Borrower members who are not already members of a group may request membership in a group in order to be eligible to post listings on our platform as part of a group.  Borrower members’ group membership requests are forwarded by Prosper to the applicable group leader, who determines and communicates whether the borrower has been accepted into the group.  A borrower member may only belong to one group at a time.  Once accepted into a group, borrowers are eligible to post listings on our platform as part of the group.  Borrower listings identify the group, if any, to which the borrower belongs.  We believe that a borrower’s identification with a group may attract bids from lender members with similar interests, resulting in borrower loans with potentially lower interest rates for the group’s borrowers, or a greater likelihood of loan funding.
 
 
 
WebBank
 
WebBank is an FDIC-insured Utah-chartered industrial bank and direct lender that makes loans to borrower members and sells and assigns the promissory notes evidencing borrower loans to Prosper.
 
Borrower Financial Information Is Generally Not Verified by Prosper
 
We reserve the right in our member agreements to verify the accuracy of all statements and information provided by Prosper borrower members, lender members and group leaders in connection with listings, bids and borrower loans.  We may conduct our review at any time—before, during or after the posting of a listing, or before or after the funding of a borrower loan.  If we are unable to verify material information with respect to a Prosper borrower member, listing or bid, we may cancel or refuse to post a listing, or cancel any or all bids against a listing.  We may also delay funding of a borrower loan in order to enable us to verify the accuracy of information provided by a Prosper borrower member, a lender member or a group leader in connection with the listing or bids, and to determine whether there are any irregularities with respect to the listing or bids.  We may also cancel the funding of a borrower loan, even if the listing garners a sufficient amount of purchase commitments for Notes to otherwise support the funding of the corresponding borrower loan, if material misstatements or inaccuracies are found in the listing or in other information provided by the Prosper borrower member.
 
Prosper Borrower Listings
 
In most instances, we do not verify the income, employment and occupation or any other information provided by borrower members in listings.  Lender members should not rely on unverified information provided by Prosper borrower members.  The borrower member’s income, employment and occupation is self-reported, and we derive the borrower member’s debt-to-income ratio, or “DTI,” from a combination of the borrower member’s self-reported income and information from the borrower member’s credit report.  The credit data that appears in listings is taken directly from a credit report obtained on the borrower member from a consumer reporting agency, without any review or verification by Prosper.  We do not verify any statements by borrower members as to how borrower loan proceeds are to be used and we do not confirm that the loan proceeds were used in the intended manner after funding.  Although Prosper borrower members may provide proof of homeownership to establish homeownership status, in most instances homeownership status is derived from the borrower member’s credit report.  We do not verify this information, however.  For example, if the credit report reflects an active mortgage loan, the borrower member is presumed to be a homeowner.  Similarly, the information in the borrower’s answers to questions posted by lenders, the information in any recommendations from the borrower’s Prosper friends, and statements by the borrower concerning why the loan is being requested, and of the borrower’s financial situation, are displayed in the listing without having been verified by Prosper.
 
If the borrower members fail to provide satisfactory information in response to an income or employment verification inquiry, we may request additional information from the borrower member or cancel the borrower member’s listing or refuse to proceed with the funding of the borrower loan.  In addition, where we choose to verify the income, employment and occupation or other information provided by Prosper borrower members in listings, the verification is normally done after the listing has been already been created and bidding is substantially completed.  In such cases, the results of Prosper’s verification are not reflected in the listings themselves.  When a listing fails verification, Prosper cancels the listing with the appropriate reason code.  This automatically triggers a notice to the borrower and the winning bidding lender members that the listing was cancelled, and an adverse action message is sent to the borrower (indicating the reasons for cancellation). The Lender member’s funds for the cancelled listing are then made immediately available for further bidding within the lender member’s Prosper account.
 
We conduct income and employment verification entirely at our discretion as an additional credit and fraud screening mechanism, which may be useful in certain circumstances in screening our platform against exaggerated income and employment representations from Prosper borrower members.  Lender members, however, should not rely on a Prosper borrower member’s stated employment or income or on our ability to perform income and employment verifications.  We cannot assure lender members that we will continue performing income and employment verifications.  We determine whether to verify a Prosper borrower member’s income and employment information primarily based on our analysis of the following factors using a propriety algorithm and matrix:
 
·Prosper Rating;
 
·loan amount;
 
·stated income; and
 
·debt-to-income ratio.
 
 
 
Between July 14, 2009 and December 31, 2009 (based on auction start time), we verified employment and/or income on approximately 39% of borrower listings that had bids totaling 70% or more of the requested loan amount (1,099 out of 2,802).  However, these listings represented more than 70% of the aggregate dollar amount of loan requests ($9,239,691 out of $13,198,391).  In looking at the verifications by Prosper rating:
 
·  
AA, A and B Prosper ratings – 50% of the listings (612 out of 1229) and 78% of the requested dollars ($5,466,189 out of $7,056,401) received employment and/or income verification.
 
·  
C and D Prosper ratings – 37% of the listings (396 out of 1067) and 69% of the requested dollars ($3,263,992 out of $4,718,744) went through verification.
 
·  
E and HR Prosper ratings – 18% of the listings (91 of 506) and 36% of the requested dollars ($509,510 out of $1,423,246) went through verification.
 
When we perform these verifications, we contact the borrower member and/or their stated employer to request additional information.  Of the borrower members undergoing verification during this period:
 
·  
Approximately 70% of the listings (765 out of 1099) and 67% of the requested dollars ($6,224,476 out of $9,239,691) provided us with satisfactory responses and received a borrower loan;
 
·  
Approximately 16% of listings (177 out of 1099) and 17% of requested dollars ($1,541,673 out of $9,239,691) withdrew their listings, or failed to receive bids totaling the amount of their request loans.
 
·  
Approximately 8% of listings (83 out of 1099) and 8% of requested dollars ($770,345 out of $9,239,691) provided responses that were deemed unsatisfactory and their listings were cancelled.
 
·  
Approximately 7% of listings (74 out of 1099) and 8% of requested dollars ($703,197 out of $9,239,691) failed to supply the requested information and their listings were cancelled.
 
Finally, it should be noted that of the 1,703 listings and $3,958,700 of requested dollars that did not undergo income/employment verification, 182  listings (10.7%) and $395,380 in requested dollars (10.0 %) did not provide satisfactory responses, or did not respond, to information requests regarding identity, address or bank account ownership verification and their listings were cancelled.
 
We expect that the percentage of listings for which we conduct income and employment verifications, and the percentage of Prosper borrower members who ultimately have their income and employment verified, will decline as our volumes increase.  See “Risk Factors—Risks Related to Borrower Default—Information supplied by borrowers may be inaccurate or intentionally false” and “—Your recourse will be extremely limited in the event that borrower information is inaccurate for any reason” for more information.
 

 
Prosper’s Note Repurchase and Indemnification Obligations
 
Under the lender registration agreement, in the event of a material default under a series of Notes due to verifiable identity theft of the named borrower’s identity, Prosper will repurchase the Note and credit the lender members’ account with the remaining unpaid principal balance of the Note.  The determination of whether verifiable identity theft has occurred is in our sole discretion.  We generally recognize the occurrence of identity fraud upon receipt of a police report regarding the identity fraud.  This remedy for identity fraud only provides an assurance that our borrower identity verification is accurate; in no way is it a guarantee of a borrower’s self-reported information (beyond the borrower’s identity) or a borrower’s creditworthiness.  We expect the incidence of identity fraud on our platform to be low because of our identity verification process. As of December 31, 2009, we had experienced 23 cases of confirmed identity fraud affecting 36 loans since our inception.  In these cases, we received a police report and identity theft affidavit from the victim of the identity fraud, evidencing that identity fraud had occurred.
 
Prosper has the exclusive right to investigate claims of identity theft and determine, in its sole discretion, whether verifiable identity theft has occurred.  As Prosper is the sole entity with the ability to investigate and determine verifiable identity theft, which triggers its repurchase obligation, a conflict of interest exists as the denial of a claim under Prosper’s identity theft guarantee would save Prosper from its repurchase obligation. There are, however, three factors that mitigate the risk of this conflict.  Without the protection offered by this guarantee, fewer potential lenders will have the confidence to participate on the site, limiting Prosper’s growth and long term profitability.  In addition, Prosper’s relationship with WebBank includes a requirement – and accompanying audit function – to insure that claims of identity theft are thoroughly investigated and accurately reported.  Finally, California statutes include severe penalties owed to the victim of identity theft if it is shown that a claim of identity theft was not adequately investigated or frivolously dismissed.

In the event we breach any of our other representations and warranties in the lender registration agreement pertaining to the Notes, and such breach materially and adversely affects a series of Notes, we will either indemnify the lender members, repurchase the series of Notes or cure the breach.  The limited circumstances where this may occur include the failure of the corresponding borrower loan to comply at origination in material respects with applicable federal and state law or if the listing describing the Note contains a Prosper score different from the score calculated by Prosper for that listing, or Prosper incorrectly applied its formula to determine the Prosper score, resulting in a Prosper Rating different from the Prosper Rating that should have appeared in the listing.  Prosper is not, however, under any obligation to cure, indemnify or repurchase a series of Notes because of the Prosper score or Prosper Rating for any other reason.  In addition, Prosper is not obligated to repurchase a Note or indemnify the lender member that purchased the Note if the lender member’s investment is not realized in whole or in part due to fraud (other than verifiable identity theft) in connection with the listing for the underlying borrower loan, or due to false or inaccurate statements or omissions of fact in the borrower’s listing, whether in credit data, borrower’s representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the borrower loan. If Prosper repurchases a Note, only the outstanding principal balance will be returned to the lender member.
 
Prosper Rating Assigned to Listings
 
Each listing will be assigned a Prosper Rating. The Prosper Rating is a letter that indicates the level of risk associated with a listing and corresponds to an estimated average annualized loss rate range, or loss rate, for the listing. This rating system allows Prosper to maintain consistency when assigning a rating to a listing. There are currently seven Prosper Ratings, but this, as well as the loss ranges associated with each, may change over time as the marketplace dictates. We intend to regularly update the loss rates associated with the Prosper Ratings to reflect the ongoing actual performance of historical borrower loans.  The updates will occur at least annually and may be as frequently as quarterly.
 


The current Prosper Ratings and the estimated loss ranges associated with them are as follows:
 
Prosper Rating
 
Est. Avg. Annual Loss Rate
AA
 
0.00% - 1.99 %
A
 
2.00% - 3.99%
B
 
4.00% - 5.99%
C
 
6.00% - 8.99%
D
 
9.00% - 11.99%
E
 
12.00% - 14.99%
HR
 
>=15.00%
 
The loss rate is based on the historical performance of Prosper borrower loans with similar characteristics and is determined by two scores: (1) a custom Prosper score, discussed below, and (2) a credit score obtained from a credit reporting agency (currently, the Scorex PLUS score from Experian). The use of these two scores will determine an estimated loss rate for each listing, which then determines the Prosper Rating.
 
The following table provides an example of how the system works. Each of the two scores is divided into multiple segments and each cell indicates an estimated loss rate based on the intersection of the two scores. The score ranges were chosen based on loss rate differentiation.  These ranges as well as the loss rates will be updated at least annually, but no more frequently than quarterly, based on the performance history of the borrower loans. Estimated net loss rates for the cells in the chart below are based on performance of historical Prosper borrower loans as of March 31, 2009, that fall into given cells; cells are combined due to small volumes or similar behavior, or both.  For example, a borrower listing with a Prosper score of 9 and a credit agency score of 715 has an estimated loss rate of 2.1%, as shown below.  The 2.1% loss rate equates to an “A” Prosper Rating.
 
 
     
Experian Scorex PLUS Score
 
 Prosper Score/ (raw score)  
600-619
 
620-639
 
640-679
 
680-699
 
700-729
 
730-769
 
770-799
 
800+
 
 1
(35.0-100)
 
34.5
%
34.5
%
34.5
%
34.5
%
34.5
%
34.5
%
34.5
%
34.5
%
 2
(28.0-34.99)
 
25.0
%
25.0
%
25.0
%
25.0
%
25.0
%
18.0
%
18.0
%
18.0
%
 3
(22.0-27.99)
 
25.0
%
25.0
%
25.0
%
25.0
%
18.0
%
18.0
%
18.0
%
18.0
%
 4
(18.0-21.99)
 
19.0
%
19.0
%
18.0
%
18.0
%
18.0
%
18.0
%
8.5
%
6.2
%
 5
(13-17.99)
 
19.0
%
19.0
%
18.0
%
18.0
%
18.0
%
18.0
%
8.5
%
6.2
%
 6
(11.0-12.99)
 
14.7
%
14.7
%
14.0
%
14.0
%
10.0
%
10.0
%
7.0
%
1.5
%
 7
(9.0-10.99)
 
14.7
%
14.7
%
10.0
%
10.0
%
10.0
%
10.0
%
7.0
%
1.5
%
 8
(7.0-8.99)
 
14.7
%
14.7
%
10.0
%
10.0
%
8.0
%
5.0
%
2.1
%
1.5
%
 9
(4.0-6.9)
 
14.7
%
14.7
%
6.5
%
6.5
%
2.1
%
2.1
%
2.1
%
1.5
%
 10
(0.0-3.9)
 
14.7
%
14.7
%
6.5
%
6.5
%
2.1
%
0.6
%
0.6
%
0.6
%

Determining Estimated Loss Rates
 
To calculate the above estimated loss rates over the life of the loan, a loan model was developed to simulate the future performance of loans based on past performance data.
 
Average Balance. To calculate the average balance for each period, we used the amount of loan principal on loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each loan declines over time. It is assumed that borrowers that are making scheduled payments on these loans do so according to their amortization schedule.
 
When the loan is paid off early, it is no longer included in the outstanding balance for subsequent periods. Historical payoff rates were used to project the monthly payoffs and these rates were assumed to remain constant throughout the life of the loans. Similarly, once a loan has been charged-off, the principal associated with this loan is considered a credit loss and is no longer included in the outstanding periodic balance.
 
Delinquent and Charged-Off Loans.  To estimate the number of current and delinquent accounts on a monthly basis, we applied roll rates to each group of given loans. We first calculated the historical roll rates of accounts in particular cells and then applied the historical rate to the given loans. A roll rate measures the percent of loans within a particular payment status that "roll" to the next late payment status if the loan is not paid. For example, a current account that is not paid "rolls" to a new payment status defined as 1 to 30 days past due. Similarly, an account that is already 1 to 30 days past due and does not make the next payment then "rolls" to a status of 31 to 60 days past due. An account is considered to be a loss, or charged-off, when it reaches 121+ days past due. The average historical roll rates were assumed to be constant for the life of the loan term.
 
 
 
Loss Rates.  The estimated monthly dollar charge-offs are calculated by multiplying the estimated number of accounts that reach 121+ days past due in that month by the average balance of loans in that month.
 
Collection expenses and recovery payments are applied to gross losses to calculate net losses. When an account becomes more than 30 days past due, it is referred to a collection agency. Collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule. Payments collected by the collection agency reduce the amount of principal that is repaid to lenders. This expense is added to losses in the month the payment is made.
 
In addition, once an account has been charged-off, any subsequent payments received or proceeds from the sale of the loan in a debt sale are considered recoveries and reduce the amount of principal lost. Recovery assumptions are based on historical recoveries through January 2009 on accounts that were 121+ days past due as of April 2008. The recovery rate assumptions were:
 
·  
Score: 680+ = 0.75% annual recovery rate
 
·  
Score < 680 = 2.7% annual recovery rate
 
To calculate the estimated average annualized net loss rate:
 
1.      Calculate monthly net loss rate = (Net principal charge-offs in month X) / (Outstanding principal balance in month X)
 
2.      Calculate average annualized net loss rate:
 
·  
monthly net loss rate x 12
 
·  
balance-weighted average of the monthly rates over the life of the loan
 
For each group of loans, the average loan amount for charged-off accounts was compared to that for good loans; if there was a significant difference, the ratio of average charged-off loan amount to average good loan amount was applied to the expected loss rate to account for this differential.  Estimated loss rates determine the Prosper Rating.
 
Prosper Score
 
The Prosper score predicts the probability of a borrower loan going “bad,” where “bad” is the probability of going more than 60 days past due. The output of the model to Prosper users is a Prosper score which ranges from 1 to 10, with 10 being the best, or lowest risk score and 1 being the worst or highest risk score. To create the Prosper score, Prosper developed a custom risk model using historical Prosper data. The Prosper score was built specifically on the Prosper borrower population, so it incorporates behavior that is unique and inherent to this population. In contrast, the credit score obtained from a credit reporting agency is based on a much broader population, of which Prosper borrowers are just a small subset. As such, the credit reporting agency score should, and does, rank default risk on the Prosper population, but Prosper does not believe it is as discriminating as the Prosper score.  Prosper uses both the Prosper score and the credit reporting agency score together to assess the level of risk associated with a listing and determine estimated loss rates reflected by the Prosper Rating.
 
Loans booked from April 2007 through June 2007 were used to build the logistic regression model, with the performance measured through August 2009. The model was verified and results validated on an independent sample, loans booked from April 2008 through July 2008, with the performance measured through September 2009.  Potential variables available at the time of listing, including those from the credit report and listing details provided by the borrower were analyzed for potential inclusion in the final model.  Transformations such as log, square root and bounding were performed on most of the variables during the development process. Several iterations of stepwise linear regression were used to select significant variables from the pool of credit variables and listing characteristics. Variables were dropped or kept in the final model based on their significance and interaction with other variables. Many model iterations were completed and analyzed in order to determine the final model.
 
 
 
The score is calculated using the logistic function:
 
f(z) = 1/(1 + exp (-z)),
 
where z is a regression equation with the following variables and coefficients:
 
Intercept
-3.642
 
Amount Delinquent (dummy variable)
0.576
 
Trades with delinquent balance
0.198
 
Available credit on bankcards (log)
-0.547
 
Inquiries <= 6 months
0.194
 
Trades opened <= 6 months
0.15
 
Loan Amount (log)
1.557
 
Monthly Income (log)
-0.774
 
Automatic Funding
0.559

The basic logistic function returns a result in the range of zero to one.  For purposes of storage and display, this result was multiplied by 100, to arrive at a raw score indicating the likelihood of a borrower loan going more than 60 days past due.  The raw score represents a rank order of the likelihood (a log-likelihood function) of a Prosper borrower loan with similar characteristics becoming more than 60 days past due, so that a raw score of 18 would indicate a higher likelihood of the loan becoming more than 60 days past due than a raw score of 12. The higher the Prosper raw score, the more likely the loan is to become more than 60 days past due, based on observed Prosper borrower loan repayment history.  This raw score was then mapped to a Prosper score, which is displayed on each borrower listing.  The Prosper score ranges from 1 to 10, with 10 being the best, or lowest risk value.  The raw score ranges for the Prosper score are as follows, and are also shown in the table in the “Prosper Rating Assigned to Listings” section above.
 
Raw Score Range
 
Prosper Score
35.00 – 100
 
1
28.00 – 34.99
 
2
22.00 – 27.99
 
3
18.00 – 21.99
 
4
13.00 – 17.99
 
5
11.00 – 12.99
 
6
9.00 – 10.99
 
7
7.00 – 8.99
 
8
4.00 – 6.99
 
9
0 – 3.99
 
10
 
For example, a raw score of 3.29 equates to a Prosper score of 10; a raw score of 12.00 equates to a Prosper score of 6; and a raw score of 37.54 equates to a Prosper score of 1.
 
The following table shows the historical performance of the loan samples used to build and validate the Prosper score, loans booked from April 2007 through September 2007.  The cumulative average annualized dollar loss rate is shown by loan age and Prosper Rating as of December 31, 2009. The “No Rating” category includes loans with a credit score of less than 640 as well as loans for or which we could not generate a Prosper Rating because the credit variables needed to determine the rating were not available.
 
Cumulative Average Annual Loss % for Loans Originated April 1, 2007 to September 30, 2007
 
as of December 31, 2009
                         
                                                   
     
Prosper Rating
 
Age in Months:
   
AA
      A       B       C       D       E    
HR
   
No Rating
 
1       0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %
2       0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     1.05 %     0.00 %
3       0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     1.36 %     0.00 %
4       0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     1.39 %     0.00 %
5       0.00 %     0.88 %     0.00 %     0.00 %     0.38 %     0.00 %     2.69 %     2.92 %
6       0.00 %     0.78 %     0.00 %     2.57 %     0.65 %     0.00 %     4.71 %     6.32 %
7       0.00 %     0.71 %     0.00 %     2.32 %     0.91 %     0.00 %     7.14 %     11.20 %
8       0.00 %     0.65 %     0.00 %     2.33 %     0.93 %     0.79 %     9.35 %     15.16 %
9       0.00 %     0.60 %     0.00 %     2.16 %     1.51 %     4.06 %     11.82 %     18.27 %
10       0.00 %     0.56 %     0.00 %     2.02 %     1.41 %     3.79 %     13.03 %     19.03 %
11       0.00 %     1.35 %     0.00 %     1.90 %     1.32 %     5.44 %     15.10 %     20.65 %
12       0.00 %     1.28 %     0.00 %     2.11 %     1.74 %     5.15 %     17.13 %     22.02 %
13       0.00 %     1.84 %     0.97 %     2.70 %     1.82 %     10.18 %     17.73 %     23.06 %
14       0.00 %     1.76 %     0.93 %     2.60 %     2.62 %     9.77 %     18.56 %     24.30 %
15       0.00 %     1.69 %     0.89 %     2.66 %     3.21 %     9.41 %     19.84 %     24.43 %
16       0.00 %     1.63 %     0.85 %     3.67 %     3.50 %     9.09 %     20.25 %     24.96 %
17       0.00 %     1.58 %     0.82 %     3.56 %     3.54 %     9.46 %     21.39 %     25.93 %
18       0.00 %     1.54 %     0.80 %     3.60 %     3.96 %     10.78 %     21.84 %     26.13 %
19       0.00 %     1.57 %     0.78 %     5.71 %     3.99 %     11.32 %     22.11 %     26.84 %
20       0.00 %     1.54 %     3.91 %     6.17 %     4.26 %     11.08 %     23.48 %     27.11 %
21       0.00 %     1.51 %     3.83 %     6.06 %     5.37 %     10.86 %     24.27 %     27.65 %
22       0.00 %     1.48 %     3.77 %     5.96 %     5.53 %     10.91 %     24.43 %     27.82 %
23       0.00 %     1.46 %     3.71 %     5.96 %     6.10 %     10.74 %     25.04 %     27.97 %
24       0.03 %     1.44 %     3.66 %     6.31 %     6.23 %     10.58 %     25.54 %     28.10 %
25       0.02 %     1.42 %     3.62 %     6.75 %     6.75 %     10.67 %     25.82 %     28.12 %
26       0.02 %     1.41 %     3.58 %     7.15 %     6.76 %     10.55 %     26.05 %     28.20 %
27       0.02 %     1.68 %     3.98 %     8.15 %     7.12 %     10.62 %     26.35 %     28.21 %
28       0.23 %     1.67 %     3.95 %     8.32 %     7.28 %     10.78 %     26.64 %     28.42 %
29       0.23 %     1.77 %     3.93 %     8.29 %     7.29 %     10.74 %     26.76 %     28.44 %
30       0.23 %     1.77 %     3.93 %     8.27 %     7.45 %     10.72 %     26.78 %     28.56 %
 
The loss rates by Prosper Rating are generally within or lower than their associated loss rate ranges.  
 
Credit Score Range
 
In addition to the Prosper Rating, each borrower listing will also show the borrower’s numerical credit score range. The numerical credit score range is determined based on the credit score provided to Prosper by a consumer reporting agency, which is the same credit score used to determine the Prosper Rating.
 


Borrower listings will indicate the credit score range at the time of the listing. Listings on the Note Trader platform will show the score range at the time of listing, if a score is available. The numerical credit score is not displayed or disclosed to anyone (including the borrower).
 
When a borrower initiates the process of posting a borrower listing on our platform, we check to see if we have a credit score on that person. If we have a credit score on file and it is not more than thirty days old and it meets the minimum threshold (currently 640, except that the minimum is 600 for borrower members who (i) had previously obtained a Prosper loan and paid off the loan in full, or (ii) are seeking a second loan and are otherwise eligible for a second loan), the borrower may post the listing. If the credit report we have on file for such borrower is more than 30 days old, we initiate an inquiry to retrieve a credit report and credit score on the borrower to determine whether the borrower’s credit score meets the minimum threshold for posting a listing and to enable us to compute the Prosper Rating when the borrower creates the listing.
 
Borrower Loan Listings
 
Once a loan listing is completed by the borrower, the listing is posted on our website and then becomes available for bidding by lender members. A borrower listing is a request by a Prosper borrower member for a borrower loan in a specified amount, at an interest rate equal to the maximum interest rate set forth by the borrower in the listing. Borrower loans are unsecured obligations of individual borrower members with an interest rate determined in an auction format and with a specified loan term, currently set at three years, but which Prosper anticipates in the near future extending  to between three months to seven years. Prosper borrower members may currently request loans within specified minimum and maximum principal amounts (currently between $1,000 and $25,000), which are subject to change from time to time. Borrower loans may be repaid at any time by Prosper borrower members without prepayment penalty. A borrower loan will be made to a borrower member only if the borrower’s listing has received bids totaling the full amount of the requested loan.
 
In addition to the Prosper borrower’s requested loan amount and maximum interest rate, Lender members are able to view:
 
·the current interest rate, annual percentage rate and monthly payment amount on the requested borrower loan;
 
·the servicing fee lenders must pay to Prosper;
 
·the starting lender yield percentage and the current yield percentage (each, net of the servicing fee) that must be bid by lenders;
 
·the borrower’s Prosper Rating and estimated loss rate;
 
·the borrower’s Prosper score, calculated by Prosper, and numerical credit score range provided to Prosper by a credit reporting agency;
 
·the number of accounts on which the borrower is currently late on a payment, including unpaid derogatory accounts;
 
·the total past-due amount the borrower owes on all delinquent and derogatory accounts;
 
·the number of 90+ days past due delinquencies on the borrower’s credit report;
 
·the number of public records (e.g., bankruptcies, liens, and judgments) on the borrower’s credit report over the last 12 months, and over the last 10 years;
 
·the number of inquiries made by creditors to the borrower’s credit report in the last six months;
 
·the month and year the borrower’s oldest recorded credit line (e.g., revolving, installment, or mortgage credit) was opened;
 


·the total number of credit lines appearing on the borrower’s credit report, along with the number that are open and current;
 
·the total balance on all of the borrower’s open revolving credit lines;
 
·the borrower’s bankcard utilization ratio, expressed as a percentage, reflecting the ratio of the total balance used, to the aggregate credit limit on, all of the borrower’s open bankcards;
 
·whether the borrower owns a home;
 
·DTI percentage;
 
·the Prosper borrower member’s self-reported income range, occupation, employment status, and intended use of funds;
 
·the number of lender members committed to purchasing Notes that will be dependent for payment on the borrower loan;
 
·the bid rates, bid amounts, winning amounts, and dates of all lender member bids;
 
·the borrower’s Prosper friends who have committed to purchase Notes dependent for payment on that borrower loan by bidding on the listing, together with any narrative recommendation from a bidding Prosper friend;
 
·questions posted by lender members that are answered by the borrower that the borrower elects to publish;
 
·the borrower’s group affiliations, if any; and
 
·if the borrower had previously obtained one or more borrower loans through Prosper, a description of Prosper loan activity, including the number and aggregate principal borrowed on such loans, the current outstanding principal balance of any existing loan, the payment history on such loans, and the borrower’s credit score ranges as of the four most recent dates credit reports were obtained on the borrower in connection with the borrower’s listings, with an arrow indicator denoting whether the borrower’s credit score improved, declined or remained unchanged since the borrower’s most recent Prosper loan.
 
Part of a borrower’s credit profile displayed in listings is a DTI ratio. DTI is a measurement of the borrower’s ability to take on additional debt. This number takes into consideration how much debt the borrower has or will have, including the borrower loan. The DTI is expressed as a percentage and is calculated by dividing the borrower’s monthly income into his or her monthly debt payments, including the debt resulting from the borrower loan being requested. On borrower listings, debt amounts are taken from the borrower’s credit report without verification and exclude monthly housing payments, and the borrower’s income is self-reported and not verified by Prosper.
 
Borrower listings may include photos and the borrower’s narrative description of why the loan is being requested, and of the borrower’s financial situation. Although Prosper borrower members and lender members are anonymous to each other, lender members may ask Prosper borrower members questions about the loan listing and Prosper borrower members may, but are not required to, respond to such questions. Prosper borrower members who respond to a lender member’s question may respond privately, or they may elect to have the question and answer posted publicly in the listing. Lender members’ questions are not posted in the listing or displayed elsewhere on our website unless the Prosper borrower member elects to answer the question and elects to make the question and answer publicly available, in which case the question and answer appears in the listing.
 
 
 
Prosper borrower members who use our platform must identify their intended use of the loan proceeds. For loans funded between January 1, 2008 and October 16, 2008, Prosper borrower members identified their intended use of loan proceeds by unit distribution as follows:
 
·debt consolidation (approximately 42%);
 
·personal use*, such as weddings or medical expenses (approximately 21%);
 
·business use, such as financing their home-based or small businesses (approximately 16%);
 
·home improvement (approximately 5%);
 
·tuition or other education expenses (approximately 4%);
 
·financing the purchase of an automobile (approximately 3%); and
 
·other (approximately 9%).
 
For borrower loans funded between July 13, 2009 and December 31, 2009, Prosper borrower members identified their intended use of loan proceeds by unit distribution as follows:
 
·debt consolidation (approximately 46%);
 
·business use, such as financing their home-based or small businesses (approximately 11%);
 
·home improvement (approximately 9%);
 
·tuition or other education expenses (approximately 6%);
 
·financing the purchase of an automobile (approximately 6%); and
 
·other (approximately 22%).
 
_________________________
 
* - During 2009 “Personal Use” was discontinued as a use option.
 
Potential Prosper borrower members typically state the use of funds in a short sentence or clause, such as “Consolidate my credit card debt and be rid of it.”

Borrower loan listing and borrower information available on our platform will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  In addition, information set forth in borrower loan listings filed in a prospectus supplement will be subject to the liability provisions of the Securities Act.  In general, Section 10b-5 and the liability provisions of the Securities Act provide the purchaser of securities with a right to bring a claim against the issuer for damages arising from any untrue statement of material fact or failure to state a material fact necessary to make any statements made by the issuer not misleading.  In this annual report, we advise you of the limitations on the reliability of the information provided by Prosper borrowers with respect to borrower listings.  Accordingly, a court could determine that Prosper has advised you of all material facts regarding the information supplied by Prosper borrowers and your recourse in the event this information is false or misleading may be extremely limited under the securities laws because you have been so advised.
 
 
 
How to Bid to Purchase Notes
 
A bid on a listing is a lender member’s binding commitment to purchase a Note in the principal amount of the lender member’s bid, should the listing receive bids totaling the full amount of the requested loan.  Lender members bid the amount they are willing to commit to purchase a Note dependent for payment on payments we receive on a borrower loan described in the listing, and the minimum yield percentage they are willing to receive, subject to a minimum yield percentage based on the Prosper Rating assigned to each listing. Because servicing fees reduce the effective yield to lenders, the yield percentage displayed in listings, which is the rate lenders must bid, is net of servicing fees.  The highest yield percentage lender members may bid on a listing is the yield percentage that corresponds to the maximum interest rate set by the borrower.  The minimum yield percentage applicable to each listing is based on the Prosper Rating assigned to the listing and will be calculated by adding the national average certificate of deposit rate that matches the term of the borrower loan, as published by BankRate.com, to the minimum estimated loss rate associated with the Prosper Rating assigned to the listing, which estimated loss rate is based on the historical performance of similar Prosper borrower loans. For listings with AA Prosper Ratings, an estimated loss rate of 1.0%, which represents the middle of the estimated loss rate range, is added to the national average certificate of deposit rate to determine the minimum yield percentage.
 
We provide for two types of lender member bids. Lender members can (i) make manual bids, by browsing through and bidding on one or more borrower listings or (ii) by using our portfolio plan system. Lender members can employ either or both methods of bidding. Currently, the minimum amount a lender member may bid is $25, and the maximum amount a lender member may bid on a listing is the amount of the requested borrower loan. The maximum aggregate amount a single lender member may bid on our platform is currently $5,000,000 for individuals and $50,000,000 for institutions. Prosper may change the minimum bid amount or the maximum aggregate bid amounts from time to time.
 
To make manual bids, lender members may browse online through available listings displayed on our platform by desired borrower loan amount, current auction yield percentage, borrower Prosper Rating, estimated loss rate, debt-to-income ratio, group and other borrower characteristics. A lender member can bid on as many listings as the lender member desires, subject to the aggregate bidding limit.
 
Both the manual and portfolio plan bidding methods enable lender members to diversify the risk of default of the corresponding borrower loans if they elect to do so. It is solely up to the individual lender members to select their bidding method and the credit characteristics that are acceptable to the lender member and to determine a diversification strategy.
 
To the extent there are multiple bids at the same yield percentage in an aggregate amount in excess of the requested loan amount, the bids placed earliest in time take precedence over later bids. When the total amount of all bids placed in the auction equals or exceeds the initial loan amount, further bids have to be placed at least 0.05% below the current winning yield percentage. It is possible that only a portion of a lender member’s bid is winning on a Prosper borrower listing. Depending on the amount of the winning bids at the end of the auction period, there may be a winning bidder on a listing with a winning bid of less than $25. There may be only a maximum of one partial winning bidder on a listing.
 
In order to make Note purchase commitments by bidding on listings (whether through manual bids or bids through portfolio plans), lender members must have funds on deposit in their Prosper accounts in at least the amount of the lender member’s bid or bids. Once bids are placed, they are irrevocable, and lender members may not withdraw their bids. During the time a bid is a “winning” bid on the listing, the amount of the bid is not permitted to be withdrawn from the lender member’s Prosper account. Bids expire automatically when they are no longer “winning” – i.e., when the bidding lender member is outbid – or when a listing expires without having received bids in the amount of the requested borrower loan or is withdrawn by a borrower or cancelled by Prosper.  It is expected that a single listing will receive Note purchase commitments from many different lender members.
 
Borrower listings remain open and available for bidding for seven days, during which time lender members may make commitments, in the form of bids, to purchase Notes that will be dependent for payment on payments we receive on the borrower loans. The duration of the auction bidding period is set forth in the listing. Prosper borrower members may elect to end the listing at any time after the listing receives bids totaling the requested loan amount. Prosper borrower members may also elect to forego the potential benefits of continuing auction bidding and designate their listing for “automatic funding,” in which case the bidding period will end automatically as soon as the listing receives bids totaling the amount requested in the listing.  The yield percentage will be fixed at the minimum yield percentage acceptable to all lender members who are winning bidders. A borrower loan will not be made unless the listing has received bids totaling the full amount of the requested borrower loan.  The interest rate that will be set forth in the Prosper Borrower Notes corresponding to the loan requested in the borrower listing will be equal to the sum of the final yield percentage determined from the auction bidding process on a borrower listing and the servicing fee.
 
 
 
It is expected that a single borrower loan that gets funded will receive Note purchase commitments from many different lender members. For example, as of October 16, 2008, during the period in which our lender members purchased loans directly instead of Notes dependent for payment on the corresponding borrower loan, the average aggregate loan size was approximately $6,172 and the average loan purchase commitment per lender per loan was approximately $91. If by the end of the auction bidding period a borrower listing does not receive bids totaling the amount of the requested borrower loan, the listing expires and no loan is funded to the borrower. Prosper borrower members whose listings expire due to an insufficient amount of bids may post a new loan listing on our platform, although we have the right under our borrower registration agreement to limit the number of listings a borrower member may post on the platform.
 
Our Portfolio Plan System
In bidding to purchase Notes on our platform, our lender members can use our proprietary portfolio plan system. This system allows lender members to select their preferred criteria for bidding on loan listings in advance, and then have bids placed automatically on their behalf on listings that meet those criteria.  Lender members can select these criteria themselves, use base criteria selected by Prosper, or customize those base criteria as they see fit.  Of all the successful bids made on our platform since our relaunch in July 2009, approximately 51% of those bids (measured in terms of dollar volume) were made by members using our portfolio plan system.

We refer to each automated bidding plan created by a lender member using this system as a “portfolio plan”.  Each portfolio plan created by a lender member consists of a number of sets of loan criteria, such as maximum loan amount, Prosper Rating and employment status.  We refer to each of these sets of criteria as a plan “slice”.  The specific loans on which the member bids through her portfolio plan will be determined by the criteria she selects for each of her plan slices.  If a loan listing is posted that satisfies all of the criteria in one of the member’s plan slices, a bid will automatically be placed on the listing on her behalf.

As a convenience to lender members, we have created sets of base criteria, which are intended to help members who are creating portfolio plans achieve returns that are generally consistent with the characterization of a member’s investment goals as “Balanced”, “Moderate” or “Aggressive”.  All of these base criteria are fully customizable.  Prosper estimates expected returns for members who use these base criteria based on the historical performance of loans previously originated on our platform.  We continue to assess this historical performance on an ongoing basis and periodically make adjustments to these base criteria to the extent merited by changes in such performance over time. If we make any changes to our base criteria, a member who has created a portfolio plan using those criteria will be given an option to incorporate the changes into her plan.  A lender member who creates a portfolio plan can make additional or alternative changes to her plan criteria at any time.  Successful bids previously made by a lender member based on her old plan criteria will not be affected by any such changes.

When creating a portfolio plan, a lender member indicates the total amount she wishes to invest in listings that meet her plan criteria as well as the maximum amount she wishes to invest per bid. The lender member can increase or decrease this amount at any time (provided that any downward adjustment is not less than the amount already invested in loans or winning bids).  To the extent a new loan listing appears that satisfies all of the criteria set forth in one of her plan slices, a bid can only be made if the successful bids already made by her through her plan do not in the aggregate exceed the total amount she has elected to invest through the plan. Furthermore, the lender member will not be permitted to place a bid through her plan unless the funds in her account at that time are sufficient to cover a minimum bid of $25.  Funds will only be debited from her account when she makes a successful bid on a listing through her plan, and then only in the amount of the successful bid.

Setting the Minimum Yield Percentage
 
In order to create a consistent price range for each series of Notes, Prosper has established a methodology that sets a minimum yield percentage lender members may bid on each listing.  Borrowers have the ability to set the maximum interest rate they are willing to pay up to a maximum of 36% and subject to a minimum interest rate based on the Prosper Rating assigned to the borrower’s listing.  The range of possible yield percentages for any listing will be based on the maximum interest rate set by the borrower, net of servicing fees, and the minimum yield percentage.  As a result, each listing and each series of Notes will have a uniform price range for all lender members. The minimum yield percentage applicable to each listing is based on the Prosper Rating assigned to the listing and will be calculated by adding the national average certificate of deposit rate that matches the term of the borrower loan, as published by BankRate.com, to the minimum estimated loss rate assigned to that Prosper Rating, which estimated loss rate is based on the historical performance of similar Prosper borrower loans. For listings with AA Prosper Ratings, an estimated loss rate of 1.0%, which represents the middle of the estimated loss rate range, is added to the national average certificate of deposit rate to determine the minimum yield percentage.   See “About the Platform – How to Bid to Purchase Notes” for more information.
 
 
 
The national average certificate of deposit rate is a proxy for a risk free consumer rate and is published daily by BankRate.com.  The national average certificate of deposit rate that matches the term of the borrower loan will be used.  For a listing that results in a three year loan the three year national average certificate of deposit rate will be used.  The risk free rate will be updated on the third business day of each month based on the certificate of deposit rate published on BankRate.com on the first business day of each month.
Based on the current 3-year certificate of deposit rate of 2.06%, below are the minimum yield percentages that correspond to each Prosper Rating as of the date of this report:
 
Risk Free Rate:             *2.06%
Prosper Rating
Estimated Avg. Annual Loss Rate
Bottom of Range
Floor
AA**
0.00% - 1.99 %
1.00%**
3.06%
A
2.00% - 3.99%
2.00%
4.06%
B
4.00% - 5.99%
4.00%
6.06%
C
6.00% - 8.99%
6.00%
8.06%
D
9.00% - 11.99%
9.00%
11.06%
E
12.00% - 14.99%
12.00%
14.06%
HR
>=15.00%
15.00%
17.06%
*3-year certificate of deposit as of December 31, 2009.  3-year certificate of deposit is updated on a monthly basis as noted above.
** For AA rated listings, the mid point of the loss range (1.0%) is used instead of the bottom of the range.
 
 
Purchase of Notes by Prosper or Related Parties
 
Prosper does not participate on the platform as a lender. Some of our executive officers, directors and shareholders have bid on and purchased loans originated through the platform from time to time in the past, and may purchase Notes in the future. As of December 31, 2009, these individuals had purchased $1,184,448 in loans. As certain of our executive officer and directors, by virtue of their duties as employees, have access to information not available to the general population of lender members, we have adopted the following procedures to prevent or detect the improper use of non-public information in bidding activities by such officers and directors:
 
·Our corporate policies, distributed to all employees, prohibit an employee’s use of non-public information and any violation of this policy is grounds for immediate termination.
 
·Security features of our system limit access to data to information needed to perform particular employee job functions. These limitations are defined by “security group,” which corresponds to both job title and functional content and the number of employees that have access to such non-public information on a “bulk” or “query” basis is extremely limited.
 
·In addition to prevention efforts, our internal control department has developed a suite of audit trails and audits that are used to identify and investigate bidding activities that are classified as “suspicious.”
 
Treatment of Lender Member Balances
 
In order to make Note purchase commitments by bidding on listings, lender members must have sufficient funds in their funding account at Prosper. This is accomplished by having each lender member authorize an electronic transfer using the Automated Clearing House, or ACH, network from the lender member’s designated and verified bank account to the account we currently maintain at Wells Fargo Bank, N.A. “for the benefit of” our lender members. This so-called “FBO account” is a pooled account titled in our name “for the benefit of” our lender members.
 
Funds in the FBO account will always be maintained at an FDIC member financial institution. Our individual members have no direct relationship with Wells Fargo Bank, N.A. by virtue of participating on our platform as a borrower or lender member. We maintain and administer the FBO account. Under the FBO account, we maintain sub-accounts for each of our lender members on our platform to track and report funds committed by lender members to purchase Notes, as well as payments received from borrower members. These record-keeping sub-accounts are purely administrative and reflect balances and transactions concerning the funds in the FBO account. No Prosper monies are ever commingled with the assets of lender members in the FBO account.
 
 
The FBO account is FDIC-insured on a “pass through” basis to the individual lender members, subject to applicable limits. This means that each individual lender member’s balance is protected by FDIC insurance, up to the aggregate amounts established by the FDIC. Other funds the lender member has on deposit with Wells Fargo Bank, N.A., for example, may count against the FDIC insurance limits.
 
Funds of a lender member may stay in the FBO account indefinitely. Funds held in the FBO account do not earn interest. Such funds may include funds in the lender member’s sub-account never committed to the purchase of Notes or committed to the purchase of Notes for which the listing for the corresponding borrower loan did not receive bids totaling the requested loan amount, and may also include payments received from Prosper related to Notes previously purchased. Upon request by the lender member, we will transfer lender member funds in the FBO account to the lender member’s designated and verified bank account by ACH transfer, provided such funds are not already committed to the future purchase of Notes.
 
Borrower Loan Funding and Purchases; Sale of Notes
 
Once a Prosper borrower listing receives bids from lender members totaling the loan amount requested, we proceed with the funding of the corresponding borrower loan and with the sale of the Prosper Borrower Notes to the lender members who were the winning bidders on the listing.
 
Borrower members execute an electronic borrower registration agreement at the time they post a listing on the platform.  After expiration of the bidding period for the listing and satisfactory completion of our pre-funding review, the borrower executes an electronic promissory note in favor of WebBank in the amount of the requested borrower loan.  Loan proceeds are then disbursed to the borrower’s account by ACH transfer.  WebBank then electronically endorses the promissory note to Prosper and sells and assigns the promissory note to Prosper without recourse to WebBank.  Borrower loans are sold and assigned by WebBank to Prosper on the first business day following loan disbursement.  Borrowers with a AA Prosper Rating are charged 0.5% with no minimum fee and borrowers with a Prosper Rating of A through HR are charged 3% or $50, whichever is greater, and is deducted from the gross loan proceeds prior to disbursement of funds to the borrowers, each time a borrower loan is funded.
 
We are obligated to maintain sufficient funds in a funding account maintained by WebBank to satisfy the daily projected borrower loan fundings.  WebBank funds all loans originated on the platform, and we disburse the loan proceeds on WebBank’s behalf to the borrower member who is receiving the borrower loan.
 
The promissory note and the borrower registration agreement contain customary agreements and covenants requiring the borrower members to repay their borrower loans and describing the process of posting listings and obtaining loans through our platform.  Borrowers authorize the loan proceeds to be disbursed by ACH transfer into the borrower’s designated bank account.
 
Borrowers pay an origination fee upon successful funding of the borrower loan.  The origination fee is paid by the borrower out of the proceeds of the borrower loan at the time of funding.  The origination fees are charged by WebBank, and we receive amounts equal to a percentage of the total origination fees as compensation for loan origination activities.
 
Lender members know only the screen names, and do not know the actual names, of borrower members.  The actual names and mailing addresses of the borrower members are known only to us and WebBank.  We maintain custody of the electronically-executed promissory notes evidencing borrower loans and the Notes sold to lender members in electronic form on our platform.
 
After the funding of a borrower loan we issue a Note to a lender member and register the Note on our books and records.  We transfer the principal amount of the Note from such lender member’s sub-account under the FBO account to a funding account maintained by WebBank for our benefit.  This transfer represents the payment by the lender member of the purchase price for the Note.  These proceeds are paid to Prosper to reimburse us for our purchase from WebBank of the particular borrower loan that corresponds to the lender member’s Note.  WebBank is the lender for all borrower loans to borrower members, which allows our platform to be available on a uniform basis to borrower members throughout the United States.  The lender registration agreement provides that, in the event of a material breach of our representations and warranties pertaining to a Note, we must either cure the defect, repurchase the Note, or indemnify and hold the lender member harmless against losses resulting from the breach.
 

 
Loan Servicing and Collection
 
Following Prosper’s purchase of borrower loans and our sale of Notes corresponding to the borrower loans, we begin servicing the borrower loans and Notes.  We collect payments from borrowers on borrower loans.  We transfer amounts collected to the lender members who own Notes corresponding to the borrower loan, after deducting servicing fees.  On Notes, the payment dates will fall on the sixth day after the due date for each installment of principal and interest on the corresponding borrower loan.
 
To the extent we do not receive the anticipated payments on a borrower loan, we will not make any payments on the Notes related to that borrower loan, and a holder of a Note will not have any rights against Prosper or the borrower member in respect of the Note or the borrower loan corresponding to such holder’s Note.  Each holder’s right to receive principal and interest payments and other amounts in respect of that Note is limited in all cases to the holder’s pro rata portion of the amounts received by Prosper in connection with the corresponding borrower loan, including without limitation, all payments or prepayments of principal and interest, subject to servicing fees and charges retained by Prosper, or a third party as set forth in the following chart. Prosper’s current collection agency charges a collection fee of 17.0% of the amount recovered up to the “total amount delinquent.” To the extent that Prosper places loans with another collection agency, it will disclose the collection fees on its website and in a supplement to this report.
 
         
Description of Fee
  Fee Amount  
When Fee is Charged
 
Effect on Lender Member
             
Prosper Borrower Notes            
             
Servicing fee
 
Annualized rate of 1% of outstanding principal balance. The servicing fee percentage is subject to change from time to time, is disclosed in all borrower listings and is posted in the Fees and Charges section of the Prosper website, but will not change during the course of the loan.
 
The servicing fee is payable on all payments received on borrower loans, including, without limitation, partial payments made toward a borrower’s loan.
 
The servicing fee will reduce the effective yield below the interest rate on the borrower loan. This reduction is automatically taken into account in the Prosper borrower listing as the yield percentage the lender members must bid displays the lender member’s yield net of servicing fees.
             
Non-sufficient funds fee
 
$15, unless a lesser amount is required by applicable law.
 
First failed payment for each billing period.
 
Prosper retains 100% of the non-sufficient funds fees to cover its administrative expenses.
             
Late payment fee
 
Equal to greater of 5% of the unpaid installment amount or $15, unless a lesser amount is required by applicable law.
 
After 15-day grace period, Prosper accesses a late fee. The late payment fee is charged only once per payment period.
 
Any late payment fees Prosper receives are paid to the lender members subject to deductions for Collection Charges and Servicing Fees
             
Collection Charges
 
A collection agency will charge a collection fee of between 15% and 40% on delinquent amounts collected plus any legal fees incurred in the event legal action is taken to collect a loan. The collection fees vary dependent upon the collection agency used. Prosper’s current collection agency charges a collection fee of 17.0% of the amount recovered and is posted in the Fees and Charges section of the Prosper website.
 
Prosper reserves the right to perform collection efforts itself. If Prosper elects to do so, it will not charge a collection fee greater than the amounts charged by collection agencies.
 
After a borrower loan becomes more than 30 days past due, the loan may be referred to a collection agency. Collection charges and any related legal fees are only charged if delinquent amounts are collected.
 
Prosper’s servicing fee is also deducted from the net payments Prosper receives as a result of any collection efforts on a delinquent borrower loan.
 
Lender members will not receive any collection fees we or a third-party collection agency charges, which fees will be retained by the party charging the fees as additional servicing compensation.
 
The collection fees and any related legal fees will be deducted from any borrower loan payments Prosper receives. These fees will reduce the lenders’ effective yield, and are not reflected in the yield percentage shown on the Prosper borrower listing.
             
Loan modification fees
 
Prosper will not charge a fee for restructuring a borrower loan.
 
Prosper may work with the borrower member to structure a new payment plan in respect of the borrower loan without the consent of any holder of the Notes corresponding to the borrower loan. This generally would only occur in lieu of bankruptcy, or similar proceeding.
 
Not applicable.

Our procedures for collecting borrower loan payments generally involve the automatic debiting of borrower bank accounts by ACH transfer.  Such funds are transferred to a master servicing account in our name.  Thereafter, we make payments on the Notes by transferring the appropriate funds from the master servicing account to the FBO account and allocating amounts received on specific borrower loans to the appropriate lender member’s sub-account.  We transfer amounts due to us for servicing from the master servicing account to another operating account of ours.  A lender member may transfer uncommitted funds out of his or her FBO sub-account by ACH transfer to the lender member’s designated bank account at any time, subject to normal execution times for such transfers (generally 2-3 days).
 
We will make payments on the Notes upon receiving payments under the corresponding borrower loan, in accordance with the payment schedule for each Note.  Each Note will have a payment schedule providing for monthly payments over a term equal to the corresponding borrower loan.  For Prosper Borrower Notes the payment dates will fall on the sixth day after the due date for each installment of principal and interest on the corresponding borrower loan. The stated interest rate on each Note will be the final lender yield percentage as determined from the auction bidding process. The yield percentage that lender members bid is net of the servicing fee applicable to the loan described in the listing.
 
We disclose on our website to the relevant lender members and report to consumer reporting agencies regarding borrower members’ payment performance on borrower loans.  We have also made arrangements for collection procedures in the event of borrower member default.
 
We keep lender members apprised of the delinquency status of borrower loans by identifying delinquent loans on our website as “1 month late,” “2 months late,” “3 months late,” or “current.” Borrower loans that become more than 120 days overdue are charged off and designated as such on our website.  Through their online Prosper account lender members are able to monitor the borrower loans corresponding to their Notes, but cannot participate in or otherwise intervene in the collection process.
 


If a borrower member dies while a borrower loan is in repayment, we require the executor or administrator of the estate to send a death certificate to us.  Depending on the size of the estate, we may not be able to recover the outstanding amount of the loan.  If the estate does not include sufficient assets to repay the outstanding borrower loan in full, we will treat the unsatisfied portion of that borrower loan as charged off with zero value.  In addition, if a borrower member dies near the end of the term of a borrower loan, it is unlikely that any further payments will be made on the Notes corresponding to such borrower loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.
 
Our normal collection process for borrower loans changes in the event of a borrower member bankruptcy filing.  When we receive notice of the bankruptcy filing, as required by law, we cease all automatic monthly payments on the borrower loan and defer any other collection activity.  The status of the borrower loan, which the relevant lender members may view through their online Prosper account, switches to “bankruptcy.”  We then determine whether we have a basis to object to the inclusion of the debt in any bankruptcy action (e.g., based on the time between loan origination and bankruptcy filing).  If the proceeding is a Chapter 7 bankruptcy filing seeking liquidation, we attempt to determine if the proceeding is a “no asset” proceeding, based on instructions we receive from the bankruptcy court.  If the proceeding is a “no asset” proceeding, we take no further action and assume that no recovery will be made on the borrower loan.
 
In all other cases, we file a proof of claim involving the borrower member.  The decision to pursue additional relief beyond the proof of claim in any specific matter involving a borrower member will be entirely within our discretion and will depend upon certain factors including:
 
·if the borrower member used the proceeds of the borrower loan in a way other than that which was described in the Prosper borrower listing;
 
·if the bankruptcy is a Chapter 13 proceeding, whether the proceeding was filed in good faith and if the proposed plan reflects a “best effort” on the borrower member’s behalf; and
 
·our view of the costs and benefits to us of any proposed action.
 
Note Trader Platform
 
Lender members may not transfer their Notes except through the Note Trader platform operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer.  This Note Trader platform is an internet-based trading platform on which our lender members may offer their Notes for sale or bid on and purchase Notes offered for sale by other lender members.  Lender members must first establish a brokerage relationship with FOLIOfn Investments, Inc. before using the Note Trader platform.  In this section, we refer to lender members who have established such brokerage relationships as “subscribers.”  Only transactions involving the sale of previously-issued Notes will be effected through the Note Trader platform; the Note Trader platform will not handle any aspect of transactions involving the initial offer and sale of Notes by Prosper.  Subscribers may post requests to sell their Notes on the Note Trader platform at prices established by the subscriber.  Other subscribers will have the opportunity to view these prices, along with the listing for the borrower loan corresponding to the Note and the payment history of the corresponding borrower loan.
 
Subscribers who sell Notes on the Note Trader platform will be subject to transaction fees charged by FOLIOfn Investments, Inc.  The transaction fee is expected to be equal to a specified percentage of the sale price of the Note sold.
 
We are not a registered national securities exchange, securities information processor, clearing agency, broker, dealer or investment adviser.  All securities services relating to the Note Trader platform are provided by FOLIOfn Investments, Inc.  Neither Prosper nor FOLIOfn Investments, Inc. will make any recommendations with respect to transactions on the Note Trader platform.  There is no assurance that subscribers will be able to establish a brokerage relationship with the registered broker-dealer.  Furthermore, we cannot assure subscribers that they will be able to sell Notes they offer for sale through the Note Trader platform at the offered price or any other price nor can we offer any assurance that the Note Trader platform will continue to be available to subscribers.
 


Sale of the Notes
 
The Notes may be sold to other subscribers through the Note Trader platform.  If a selling subscriber desires to sell a Note prior to the end of the Note’s term, the selling subscriber may post the Note for sale on the Note Trader platform for sale in an auction format.  If a subscriber purchases the Note, then the Note will be transferred through the Note Trader platform to the purchasing subscriber.  A Note sold through the Note Trader platform must be purchased in its entirety by a single subscriber.  Once a Note has been sold through the Note Trader platform to a subsequent subscriber, the Note may again be sold through the Note Trader platform.  After the date of our prospectus, the Notes will be non-transferable except through the Note Trader platform.
 
Notes Subject to Sale by Subscribers.  The Note Trader platform will enable subscribers to sell Notes originated on our platform or purchased from other subscribers through the Note Trader platform.  All Notes, including Notes for which the corresponding borrower loans have become delinquent, will be eligible for sale on the Note Trader platform.  There is no limit on the number of times a Note may be sold on the Note Trader platform, so long as the Note is outstanding.
 
Lender Members Eligible to Bid on Note Listings.  Lender members must first establish a brokerage relationship with FOLIOfn Investments, Inc. before using the Note Trader platform.  To open an account, FOLIOfn Investments, Inc. may require lender members to confirm that they satisfy certain minimum financial suitability standards and maximum investment limits, if any, that may be imposed by the state in which the lender member resides.  If the lender member does not satisfy these suitability requirements he or she will not be able to place bids on the Note Trader platform.
 
Creation of Note Listings.  Subscribers who want to sell one or more of their Notes may offer them for sale on the Note Trader platform by creating and posting a “Note listing.”  Subscribers may offer to sell any or all of the Notes they own and may offer to sell more than one Note at the same time. When posting a Note listing the subscriber will designate a minimum sale price the subscriber is willing to receive for the Note.
 
Note listings will have a seven-day auction bidding period, but selling subscribers may elect to end the listing early at any time after a winning bid is made.  Selling subscribers may also add an “automatic sale” feature to their Note listing, which would end the bidding period on a Note listing immediately after the listing receives an initial bid equal to an automatic sale price set by the selling subscriber.  In such instances the Note would be immediately sold to the subscriber who placed the bid.
 
The selling subscriber may withdraw Note listings without charge at any time prior to expiration of the auction bidding period, before any bids are received.  Note listings with at least one bid cannot be withdrawn by the selling subscriber.
 
Display of Note Listings.  Note listings will be displayed for auction on the Note Trader platform, and include the selling subscriber’s screen name, the offered sale price of the Note, the interest rate on the Note and the remaining term of the Note, and the yield to maturity that corresponds to the offered sale price.  Note listings will also include the repayment status of the borrower loan corresponding to the Note (i.e., current or delinquent), the payment history on the borrower loan and the next scheduled payment on the Note.  Note listings will also include the remaining duration of the Note listing, the number of bids, and whether the Note listing has an automatic sale feature.
 
Note listings will include a link to the original listing (including the listing title, description, credit data, recommendations, questions and answers, and original bidding history) for the borrower loan that corresponds to the Note being offered for sale.  Although Note listings will be displayed publicly on the Note Trader platform, the borrower’s payment history and corresponding listings will be viewable only by registered subscribers.
 
        Bidding on Note ListingsOnly registered subscribers are eligible to bid for and purchase Notes listed for sale on the Note Trader platform.  Subscribers may bid for and purchase one or more Notes from selling subscribers.  As with bidding on borrower listings, subscribers who bid on Note listings must have funds on deposit in the subscriber’s funding account in at least the aggregate amount of the subscriber’s bids; subscribers are prohibited from withdrawing amounts from the subscriber’s funding account to the extent any such withdrawal would reduce the balance below the aggregate amount of the subscriber’s pending bids on borrower listings and Note listings.  Subscribers are not eligible to bid on their own Note listings.
 
 
 
Subscribers bidding on Note listings must bid for the full amount of the Note being sold, and there may be only one winning bidder for a Note offered for sale by a selling subscriber.
 
Subscribers bidding on Note listings can only make manual bids, by browsing through and choosing one or more Note listings that appeal to the subscriber.
 
Bids may be made by subscribers until the end of the auction bidding period specified in the Note listing.  The selling subscriber may, however, end the auction bidding period early at any time after a winning bid is made.  The winning bidder is the subscriber who has bid the highest price as of the end of the auction bidding period (or the automatic sale price with respect to a Note listing with such a feature).
 
Proxy Bidding.  The Note Trader platform will employ an automated proxy bidding system that enables bidding subscribers to place a bid higher than the then current minimum bid, and have bids continually applied against a Note listing, up to a specified maximum bid amount.  The maximum bid amount is hidden from view until competing bids push the current sale price higher than the bidder’s maximum bid.
 
Close of Bidding and Sale of Notes.  When a Note listing ends with a winning bidder, upon settlement of the sale of the Note to the winning bidder, which will normally occur on the business day following expiration of the Note listing, the final sale price is withdrawn from the winning subscriber’s funding account to pay the selling subscriber.  The transaction fee is deducted from the sale price and retained by FOLIOfn Investments, Inc.
 
Upon the selling subscriber’s receipt of the final net sale proceeds, the Note is sold, transferred and assigned by the selling subscriber to the winning bidder without recourse.  All further payments made on the Note following settlement of the sale will be credited to the account of the subscriber who purchased the Note from the previous subscriber.  The purchasing subscriber may retain ownership of the Note for the remainder of its term, or list the Note for sale on the Note Trader platform.  The electronic original Note is kept in the possession and control of Prosper, as servicer of the Note, for the remaining term of the Note.
 
Historical Information About Prosper Borrower Members and Outstanding Borrower Loans
 
The performance of borrower loans is a function of the credit quality of the borrowers and the risk and return preferences of the lender members.  Lender members can choose to pursue a variety of bidding strategies including strategies that may or may not maximize the return on their investment.  When making bidding decisions, lender members consider borrowers’ Prosper Rating, credit score, debt-to-income ratios and other credit data and information displayed with listings.   Prior to 2009, member loans did not have a Prosper Rating.  These loans, when applicable, were assigned a Prosper Rating retroactively in order to provide more meaningful historical performance in the following tables.  The Ratings were assigned based on the credit bureau data available at the time of the loan listing and the Prosper score in place at the time of the effective date.  The following historical information should not be used in determining how Notes with the same letter grade can be expected to perform in the future. See “Risk Factors—Risks Related to Borrower Default.”
 
From November 2005 through July 12, 2009, Prosper facilitated 29,013 borrower loans with an average original principal amount of $6,174 and an aggregate original principal amount of $179,137,624.  As of December 31, 2009, 35.8% of the borrower loans were current, 31.2% were paid in full, 0.6% were 16 to 30 days past due, 2.8% were more than 30 days past due, and 29.3% had defaulted.  A borrower loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy.  Of the 29,013 borrower loans 11,569 loans, or 40%, had been greater than 15 days past due at any time, 10,342 loans, or 36%, had been more than 30 days past due at any time, 9,424 loans or 32%, had been more than 60 days past due at any time. A total of 77 loans, with an aggregate original principal amount of $577,402 (0.3% of total) were repurchased by Prosper due to identification theft or operational issues. 
 
The defaulted loans as of December 31, 2009 were comprised of 8,514 borrower loans, equaling a total net defaulted amount of $41,726,190.  Of these 8,514 defaulted loans, 937 were loans in which the borrowers had filed for bankruptcy, equaling $4,996,133 in net defaulted amount.

 
The following table presents additional aggregated information as of December 31, 2009 regarding delinquencies, defaults and borrower payments, grouped by Prosper Rating, for all loans originated on our website from November 2005 through July 12, 2009.  With respect to delinquent borrower loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of December 31, 2009.
 
Loan Originations
November 2005 - July 12, 2009
(as of December 31, 2009)
                                                   
     
Total Loan Originations
   
Current Loans
   
16-30 Days Past Due
 
Prosper Rating
 
Number
   
Amount
   
Number
   
Origination Amount
    Outstanding Principal 
  
 
Number
   
Origination Amount
   
Outstanding Principal
 
AA
      1148     $ 5,610,741       469     $ 2,619,460     $ 1,113,323       2     $ 27,500     $ 14,796  
  A       1241       6,315,414       657       3,552,139       1,541,613       6       31,000       13,913  
  B       319       2,254,565       157       1,067,155       449,093       0       -       -  
  C       1448       11,287,831       800       5,843,714       2,596,111       6       36,551       23,253  
  D       2048       14,156,042       1176       7,807,791       3,487,058       12       59,700       26,242  
  E       622       3,750,560       364       2,022,015       943,259       2       7,600       3,449  
HR
      6914       67,881,305       3045       26,410,623       10,802,667       59       593,599       249,790  
  N/A       15273       67,881,166       3716       14,011,885       4,953,068       81       287,780       111,841  
                                                                     
          29,013     $ 179,137,624       10,384     $ 63,334,782     $ 25,886,191       168     $ 1,043,730     $ 443,284  
       
avg loan size:
    $ 6,174                                                  
                                                                     
percent of total
                    35.8 %     35.4 %             0.6 %     0.6 %        
                                                                     
                                                                     
                                                                     
       
Paid In Full
   
31+ Days Past Due
   
Defaulted 2
 
Prosper Rating
 
Number
   
Origination Amount
 
 
Number
   
Origination Amount
     Outstanding Principal
   
 
Number
   
Origination Amount
   
Net Charged Off Principal
 
AA
      646     $ 2,707,516       9     $ 63,500     $ 34,199       20     $ 184,765     $ 131,758  
  A       494       2,281,625       17       112,950       48,706       64       331,950       249,590  
  B       135       984,510       5       32,000       17,275       22       170,900       114,283  
  C       416       3,155,656       43       312,699       186,921       174       1,868,111       1,362,877  
  D       522       3,751,992       53       371,104       210,844       282       2,157,655       1,607,740  
  E       138       862,570       23       173,050       95,136       94       684,325       531,813  
HR
      1311       13,015,429       280       2,925,064       1,485,923       2207       24,724,390       18,821,977  
  N/A       5393       25,423,930       385       1,488,748       611,482       5651       26,397,271       18,906,152  
                                                                     
          9,055     $ 52,183,227       815     $ 5,479,115     $ 2,690,487       8,514     $ 56,519,368     $ 41,726,190  
                                                                     
percent of total
    31.2 %     29.1 %     2.8 %     3.1 %             29.3 %     31.6 %        
                                                                     
                                                                     
       
Repurchased
                           
Default due to Delinquency:
         
Prosper Rating
 
Number
      Origination Amount 
       
 
                              7,577     $ 36,730,057  
AA
      2     $ 8,000                                                  
  A       3       5,750                                                  
  B       0       -                            
Default due to Bankruptcy3 :
 
  C       9       71,100                                       937     $ 4,996,133  
  D       3       7,800                                                  
  E       1       1,000                                                  
HR
      12       212,200                                                  
  N/A       47       271,552                                                  
                       
 
 
          77     $ 577,402    
 
                         
                       
percent of total
    0.3 %     0.3 %  
 
 
 
  1  includes loans with Credit Score<640 or insufficient credit data to determine Prosper Rating
  2  includes all loans >120 days past due
  3  Only includes loans where the bankruptcy notification date is prior to the date the loan became 121 days past due. If we were notified of a bankruptcy after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals.

 
 
From July 13, 2009 through December 31, 2009, Prosper facilitated 2,034 borrower loans with an average original principal amount of $4,369 and an aggregate original principal amount of $8,886,296.  As of December 31, 2009, 96.5% of the borrower loans were current or had not reached their first billing cycle , 0.3% were 16 to 30 days past due, 0.3% were more than 30 days past due.  Of the 2,034 borrower loans 19 loans, or 0.93%, had been greater than 15 days past due at any time, 9 loans, or 0.44%, loans had been more than 30 days past due at any time, 3 loans or 0.15%, had been more than 60 days past due at any time. As of December 31, 2009, no loans had defaulted.  A borrower loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy.   There were no loans originated during this period that were repurchased by Prosper due to identification theft or operational issues. 
 
The following table presents additional aggregated information as of December 31, 2009, grouped by the Prosper Rating, for all loans originated on our website from July 13, 2009 through December 31, 2009.  With respect to delinquent borrower loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of December 31, 2009.
 
Loan Originations
July 13, 2009 - December 31, 2009
(as of December 31, 2009)
                                                   
     
Total Loan Originations
     Current Loans
 
 
16-30 Days Past Due
 
Prosper Rating
 
Number
   
Amount
   
Number
   
Origination Amount
      Outstanding Principal
 
 
Number
   
Origination Amount
   
Outstanding Principal
 
AA
      308     $ 1,967,710       296     $ 1,915,010     $ 1,820,295       0     $ -     $ -  
  A       478       2,305,010       460       2,245,217       2,142,832       0       -       -  
  B       100       618,984       98       593,984       562,056       0       -       -  
  C       403       1,639,510       389       1,580,410       1,502,151       1       1,000       939  
  D       340       1,240,486       325       1,195,936       1,155,247       3       6,000       5,885  
  E       195       465,496       192       462,196       450,539       0       -       -  
HR
      210       649,100       202       622,552       596,487       3       10,700       10,700  
                                                                     
          2,034     $ 8,886,296       1,962     $ 8,615,305     $ 8,229,608       7     $ 17,700     $ 17,524  
       
avg loan size:
    $ 4,369                                                  
                                                                     
percent of total
                    96.5 %     97.0 %             0.3 %     0.2 %        
                                                                     
                                                                     
                                                                     
       
Paid In Full
       31+ Days Past Due
 
 
Defaulted 2
 
Prosper Rating
 
Number
   
Origination Amount
   
Number
   
Origination Amount
      Outstanding Principal
 
 
Number
   
Origination Amount
   
ChargedOffPrincipal
 
AA
      12     $ 52,700       0     $ -     $ -       0     $ -     $ -  
  A       18       59,793       0       -       -       0       -       -  
  B       1       15,000       1       10,000       9,555       0       -       -  
  C       12       57,100       1       1,000       1,000       0       -       -  
  D       10       31,250       2       7,300       7,182       0       -       -  
  E       2       2,300       1       1,000       1,000       0       -       -  
HR
      4       13,348       1       2,500       2,500       0       -       -  
                                                                     
          59     $ 231,491       6     $ 21,800     $ 21,236       -     $ -     $ -  
                                                                     
percent of total
    2.9 %     2.6     0.3 %     0.2 %             0.0 %     0.0 %        
                                                                     
                                                                     
       
Repurchased
                           
Default due to Delinquency:
         
Prosper Rating
 
Number
     Origination Amount  
     
 
                              -     $ -  
AA
      0     $ -                                                  
  A       0       -                                                  
  B       0       -                            
Default due to Bankruptcy3 :
 
  C       0       -                                       -     $ -  
  D       0       -                                                  
  E       0       -                                                  
HR
      0       -                                                  
                                                                     
                       
 
 
          -     $ -    
 
                         
                       
percent of total
    0.0 %     0.0 %  
 
 
 
1
includes loans with Credit Score<640 or insufficient credit data to determine Prosper Rating
2
includes all loans >120 days past due
3
Only includes loans where the bankruptcy notification date is prior to the date the loan became 121 days past due. If we were notified of a bankruptcy after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals.
 
Because of our limited operating history, the data in the preceding tables regarding loss experience may not be representative of the loss experience that will develop over time as additional borrower loans are originated through our platform and the borrower loans already originated through our platform have longer payment histories.  In addition, because of our limited operating history, the data in the preceding table regarding prepayments may not be representative of the prepayments we expect over time as additional borrower loans are originated through our platform and the borrower loans already originated through our platform have longer payment histories.

 
 
The following three tables show loan performance through December 31, 2009 by Prosper Rating and loan age.  Loans originated prior to 2009 were not assigned a Prosper Rating.  In order to view performance on a comparable basis, loans originated prior to 2009 were retroactively assigned a Prosper Rating based upon their applicable listing characteristics.  The “No Rating” category includes loans with a credit score of less than 640 as well as loans for which we could not generate a Prosper Rating because the credit variables needed to determine the rating were not available.
The table below shows 31-120 day past due delinquency rates for loans originated prior to July 13, 2009.  We consider loans more than 30 days past due to be severely delinquent due to the significant decrease in the likelihood of receiving future payment once a loan has missed two payments.  
 
Unit Delinquency Rate by Cycle for Loans Originated Prior to July 13, 2009
 
31+ Days Past Due / Number Loans Outstanding
                   
                                                   
     
Prosper Rating
 
Age in Months:
   
AA
      A       B       C       D       E    
HR
   
No Rating
 
1       0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %
2       0.19 %     0.17 %     0.00 %     0.36 %     0.30 %     0.66 %     0.86 %     2.46 %
3       0.19 %     0.34 %