10-K 1 p10k12d31d2011.htm FORM 10-K p10k12d31d2011.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, 2011
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 jurisdictionof 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 þ  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 12, 2012 there were 2,897,859 shares of the registrant’s common stock outstanding.



 
 
 

 


PROSPER MARKETPLACE, INC.
 
TABLE OF CONTENTS
 
         
ITEM
  
 
  
Page
PART I
ITEM 1
  
  
1
ITEM 1A
  
  
48
ITEM 1B
  
  
71
ITEM 2
  
  
71
ITEM 3
  
  
71
ITEM 4
  
  
71
 
PART II
ITEM 5
  
  
72
ITEM 6
  
  
72
ITEM 7
  
  
73
ITEM 7A
  
  
84
ITEM 8
  
  
84
ITEM 9
  
  
84
ITEM 9A
  
  
85
ITEM 9B
  
  
85
 
PART III
ITEM 10
  
  
86
ITEM 11
  
  
94
ITEM 12
  
  
99
ITEM 13
  
  
103
ITEM 14
  
  
105
 
PART IV
ITEM 15
  
  
106
         
  
 
  
S-1
         
       
         
Exhibit 3.1        
       
       
       
         
XBRL Content
       


 
Forward-Looking Statements
 
     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, expressed in good faith and is believed to have a reasonable basis.  Nevertheless, 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 Borrower Payment Dependent Notes or “Note”, which, in addition to being speculative investments, 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 corresponding loans;
 
·  
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 borrower and do not include cross-default provisions;
 
·  
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;
 
·  
potential efforts by state regulators or litigants to characterize us, rather than WebBank, as the lender of the loans originated through our platform;
 
·  
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;
 
·  
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our platform or adversely impact our ability to service loans;
 
·  
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 in this Annual Report on Form 10-K. 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, because 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.


 
PART I
 
ABOUT PROSPER
 
Overview
 
Prosper’s peer-to-peer lending platform was designed to allow people to lend money to other people in an open transparent marketplace, with the aim of allowing both lenders and borrowers to profit financially as well as socially. We believe peer-to-peer lending represents a new model of consumer lending, where individuals can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional lender.   It is people that are the drivers of credit formation in peer-to-peer lending, not institutions. Prosper launched its platform to the public in 2006 and has attracted over one million members and facilitated over $290 million in consumer loans as of December 31, 2011.

As one of the first companies in this newly emerging industry, Prosper believes peer-to-peer lending presents an enormous opportunity to create a more transparent form of consumer lending.  Key drivers of peer-to-peer lending include:
 
· The possibility of lower rates and better terms for borrowers compared to traditional sources of consumer credit, such as credit cards;
 
· A new asset class for investors with the possibility of attractive risk adjusted returns that are not directly correlated to the performance of the stock market;
 
· An opportunity to combine social networking with financial services in a manner that allows users that help fund loans to feel they are directly helping other people while also potentially earning attractive returns;
 
· Growing acceptance of the Internet as an efficient and convenient forum for consumer transactions.
 
How Prosper Works

Our platform is an online marketplace that matches individuals who wish to obtain consumer loans, whom we refer to as “borrowers” or “borrower members”, with persons who are willing to help fund those loans, whom we refer to as “lender members”.  A borrower member who wishes to obtain a loan through us must post a listing on our platform.  Our lender members can review all the loan listings on our platform and make a commitment towards any listing they wish to help fund.  A commitment is a commitment to purchase a promissory note, or “Note”, from Prosper, the payments on which will be dependent on the payments Prosper receives from the borrower member on the loan requested in the listing.  If a listing receives enough lender member commitments to be funded, our partner WebBank, an FDIC-insured, Utah industrial bank, will originate the loan requested to the borrower member and then sell it to us and, at the same time, we will sell a Note to each lender member that made a commitment towards the loan in the principal amount of that commitment.
 
In order to post a listing a borrower member must first complete a loan application. We then obtain a credit report for the borrower and use data from that report as well as data supplied by the borrower to assign a risk grade to the listing, which we call a “Prosper Rating”. The listing is then posted on our web site.   The format for listings is shown below. The actual images are from hypothetical listings we created and not actual listings.  Each listing includes the Prosper Rating, selected items from the borrower’s credit report, intended use of the potential loan, plus information regarding any previous loans obtained by the borrower through Prosper.

 
 
 

 
Lender members can bid on listings in amounts ranging from the entire loan amount requested to as little as $25. Thus, it is typical to have multiple lender members bid on a single listing.  As the listing is funded, the listing will show the amount of commitments made towards that potential loan by lender members.
 
 




 
One unique aspect of peer-to-peer lending is that it allows lender members who are friends and family of a borrower member to bid on that borrower member’s listing. Friends and family bids can signal that a stronger social bond exists that could influence repayment rates. Friends and family can also vouch for the borrower member’s character. These bids are also shown on the listing page for all lender members to review, as shown below.
 
 
Our registration, processing and payment systems are automated and electronic.  We have no physical branches, no deposit-taking and interest payment activities and limited loan underwriting activities.  Our website provides detailed information about our platform, including detailed fee information, the full text of our member legal agreements and help pages.  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, including referrals from other parties (such as online communities, social networks and marketers), search engine results and online and offline advertising. We are not dependent on any one source of traffic to our website.  As of December 31, 2011, our website was receiving an average of approximately 331,400 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 upon the funding and origination of borrower loans.  For the fiscal year ended December 31, 2011, we facilitated the origination of approximately $75,138,000 of loans on our platform compared to approximately $26,940,000 loans originated for the fiscal year ended December 31, 2010.
 
 

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 set by Prosper.  We set minimum credit and other credit guidelines for borrower members as discussed in the risk grading section.

When a borrower member requests a borrower loan, we first evaluate whether the borrower meets the underwriting criteria we have 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 require 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) 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 have no prior charge-offs on borrower loans originated through our platform. 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 that equal or exceed the minimum amount required to fund, 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.
 
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 authorize us to obtain their credit report for identification purposes, consent to any applicable tax withholding and agree to 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 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 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.

Risk Management

Prosper’s risk management has evolved from its inception.  Prosper has consistently worked to improve the information provided to lenders in order to help them make sound investment decisions.  A major source of improvement has been to progressively incorporate the historical performance of loans originated by Prosper into the Prosper Ratings as more loan outcome data becomes available over time. It is Prosper’s intention to continuously refine our proprietary rating system.
 
 

Prosper Rating Assigned to Listings

Each listing is assigned a Prosper Rating. The Prosper Rating is a letter that indicates the expected level of risk associated with the listing. Each letter grade corresponds to an estimated average annualized loss rate range. The rating associated with a listing reflect Prosper’s loss expectations for that listing as of the time the rating is given.  This means that otherwise similar borrowers may have different Prosper Ratings at different points in time as the Prosper Rating is updated to incorporate more relevant information. 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.

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 estimated loss rate for each listing is based primarily on the historical performance of Prosper borrower loans with similar characteristics and is primarily determined by two scores: (1) a custom Prosper Score, and (2) a credit score obtained from a credit reporting agency.  The custom Prosper Score is updated periodically to include new information that is predictive of borrower risk as it becomes available or as the evidence supporting a particular datum becomes strong enough to merit its inclusion in the custom Prosper Score.

If a particular piece of information is found to be highly predictive of a borrower’s risk prior to a custom Prosper Score re-development, then it may be added to the rating process as an overlay until its impact on borrower risk is sufficiently captured by the combination of the custom Prosper Score and the credit bureau score.  Throughout 2011, for instance, increasingly strong evidence continued to emerge that successful performance on a previous Prosper Loan was a strong predictor of borrower risk (borrowers having successfully performed on a previous Prosper Loan were much less likely to default on a new loan than comparable borrowers who had not successfully paid a Prosper Loan).  Once this evidence was sufficiently robust, the presence of a second loan became an integral determinant of a borrower’s 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 within fifteen months of loan origination.  To create the Prosper Score, we developed a custom risk model using our historical data. We built the model on the Prosper borrower population so that it would incorporate behavior that is unique and inherent to that population. In contrast, a credit score obtained from a credit reporting agency is based on a much broader population, of which Prosper borrowers are just a small subset. We use both the Prosper Score and a credit score to assess the level of risk associated with a listing.
 
To build and validate our custom risk model, we used loans we booked from April 2007 through October 2008 and measured their performance for the fifteen months following origination. We analyzed variables available at the time of listing for potential inclusion in the final model.  Potential variables included those from the credit report and also those provided by the borrower.  We dropped or kept variables in the final model based on their contribution and stability over time, and went through a number of iterations before finalizing the model in its current form.  Some of the variables included in the final model are:
 
- Total Inquiries
- Inquiries last 6 months
- Total Trades
- Trades opened <= 6 months
- Trades Never Delinquent or Derogatory
- Trades with Delinquent Balance
- Available Credit on Open Bankcards
- Debt-to-Income Ratio
- Bankcard Utilization

The model assigns weights to all of its variables based on their value in predicting the likelihood of a loan going bad.  For a given listing, the model estimates the probability of the related loan becoming bad, which we call the listing’s “probability of bad”.  The probability of bad for a listing is then mapped to a Prosper Score, which is displayed as part of that listing.  Prosper Scores range from 1 to 10, with 10 being the best, or lowest risk value.  The probability of bad ranges and the corresponding Prosper Scores are as follows.

 
Probability Bad
 
Prosper Score
> 24.84%
 
1
20.33 < x <=24.84%
 
2
17.05 < x <= 20.33%
 
3
14.42 < x <= 17.05%
 
4
12.00 < x <= 14.42%
 
5
10.00 < x <= 12.00%
 
6
8.17 < x <= 10.00%
 
7
5.98 < x <= 8.17%
 
8
4.50 < x <= 5.98%
 
9
0.00 < x <= 4.50%
 
10

For example, a probability of bad of 3.29% equates to a Prosper Score of 10, a probability of bad of 12.00% equates to a Prosper Score of 6, and a probability of bad of 37.54% equates to a Prosper Score of 1. The probability of bad ranges are likely to change over time as we acquire additional performance data.

Credit Score
 
In addition to the Prosper Score, another major element we use to determine the Prosper Rating for a listing is a credit score from a consumer reporting agency. The credit score we use currently is Experian’s Scorex PLUSsm score, although we may use one or more different scores in the future.  The minimum credit score required for a borrower to post a listing is 640, except for borrower members who (i) previously obtained a Prosper loan and paid off the loan in full, or (ii) are seeking a second loan while their first loan is still outstanding and are otherwise eligible for such second loan, for whom the minimum score required is 600.

We obtain a borrower’s credit score at the time his listing is created, unless we already have a credit score on file that is not more than thirty days old.  This credit score is used to determine the Prosper Rating for the listing, and the range that credit score falls within is also included in the listing.  If available, we obtain updated credit scores on a monthly basis for borrowers with outstanding loans, and we include the applicable score ranges by month in listings on our Note Trader platform.  We do not disclose the borrower’s exact credit score to any of our customers, except for the borrower himself.

Assigning Estimated Loss Rates

Our estimated loss rates are based on the historical performance of Prosper loans with similar characteristics and are primarily determined by Prosper Scores and credit scores.  The starting point for this determination is our base loss rate table, shown below, which we created by dividing the range of Prosper Scores and credit scores into multiple segments and combining them into a single grid.  We estimate a base loss rate for each cell in the table, based on the historical performance of loans originated on our platform that occupied the same cell (i.e., that had the same point of intersection for their Prosper Score and credit score). Cells are grouped together due to small volume, similar behavior or both.  We review our loan performance on a monthly basis to see how our loss estimates compare to the actual performance of our loans, and we make any adjustments to those estimates we deem necessary based on such reviews. Please refer to our website for the estimated base loss rate currently in use. Estimated base loss rates for the cells in the table below are based on performance of historical Prosper borrower loans as of November 30, 2011.

 
     
Experian Scorex Plussm Score
 
Prosper Score
      600-619       620-639       640-649       650-664       665-689       690-701       702-723       724-747       748-777       778 +
  1       24.90 %     24.90 %     24.90 %     24.90 %     24.90 %     24.90 %     24.90 %     24.90 %     16.50 %     16.50 %
  2       24.90 %     24.90 %     24.90 %     19.90 %     19.90 %     16.50 %     16.50 %     16.50 %     16.50 %     16.50 %
  3       24.90 %     24.90 %     24.90 %     19.90 %     19.90 %     16.50 %     16.50 %     16.50 %     16.50 %     16.50 %
  4       19.90 %     19.90 %     19.90 %     19.90 %     16.50 %     16.50 %     16.50 %     16.50 %     16.50 %     16.50 %
  5       19.90 %     19.90 %     19.90 %     19.90 %     16.50 %     16.50 %     16.50 %     11.90 %     11.90 %     11.90 %
  6       19.90 %     19.90 %     19.90 %     14.70 %     14.70 %     11.90 %     11.90 %     8.90 %     8.90 %     8.90 %
  7       19.90 %     19.90 %     19.90 %     8.90 %     8.90 %     8.90 %     8.90 %     8.90 %     8.90 %     8.90 %
  8       14.70 %     14.70 %     14.70 %     5.65 %     5.65 %     5.65 %     5.65 %     5.65 %     5.65 %     3.30 %
  9       14.70 %     14.70 %     14.70 %     5.65 %     5.65 %     5.65 %     5.65 %     3.30 %     3.30 %     3.30 %
  10       14.70 %     14.70 %     14.70 %     5.65 %     5.65 %     5.65 %     5.65 %     3.30 %     3.30 %     1.00 %

The table above applies to borrowers seeking their first Prosper Loan.  Although borrowers with credit scores below 640 are depicted in the table above, borrowers seeking a first loan whose credit score is below 640 are not currently eligible for a loan on the platform.  We can make adjustments to the base loss rate to determine the final loss rate.  The final loss rate determines the Prosper Rating.  We currently make adjustments if the applicant has already been a borrower on the platform and based on loan term.  The value of the adjustments are based on historical Prosper data, where available, as well as observed industry performance.  Current adjustment variables and their values are:

   
Previous Prosper Loan
 
Loan Term
Base Loss Rate
 
Yes
 
No
 
1 year
 
3 year
 
5 year
0.00 – 1.99%
 
-0.25%
 
-
 
-0.15%
 
-
 
-
2.00 – 3.99%
 
-1.30%
 
-
 
0.00%
 
-
 
-
4.00 – 5.99%
 
-3.65%
 
-
 
0.00%
 
-
 
-
6.00 – 8.99%
 
-4.70%
 
-
 
-0.10%
 
-
 
-
9.00 – 11.99%
 
-7.70%
 
-
 
-0.10%
 
-
 
-
12.00 – 14.99%
 
-10.50%
 
-
 
-0.10%
 
-
 
-
15.00+%
 
-10.00%
 
-
 
-0.40%
 
-
 
-

Here is an example of how the final loss rate and Prosper Rating for a loan listing would be calculated:
- Applicant credit bureau score = 715 and Prosper score = 9
- Applicant has borrowed through the platform before
 
Base Loss Rate:
 
5.65%
Adjustments:
   
 
-Previous Loan:
-3.65%
Final Loss Rate:
 
2.00%
Prosper Rating:
 
A

Calculating Loss Estimates
 
        To calculate the estimated loss rates contained in our base loss rate table and our adjustment values, we developed a loan model to simulate the future performance of loans based on past performance data.  The principal elements of the model are as follows:
 
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 November 2009 on accounts that were 121+ days past due in 2008. The recovery rate assumptions were:

·  
Prosper Rating AA-D = 6.0% annual recovery rate
·  
Prosper Rating E-HR = 2.0% 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 total loans; if there was a significant difference, the ratio of average charged-off loan amount to average total loan amount was applied to the expected loss rate to account for this differential.  Estimated loss rates determine the Prosper Rating.



Comparing Estimated Loss Rates to Actual Losses

We review our loan performance on a monthly basis to see how our loss estimates compare to the actual performance of our loans, and we make any adjustments to those estimates we deem necessary based on such reviews.  The graphs below show the expected versus actual cumulative dollar loss rates by Prosper Rating for loans booked from July 13, 2009 through December 31, 2010.  Performance is as of December 31, 2011.   The loss performance is tracked by quarterly vintage, meaning each line represents all the loans originated in a given quarter.  We have only included quarterly vintages where all loans originated during that quarter have been outstanding at least 10 months, to ensure that all of the loans included are adequately seasoned.  In addition, we only include data for a point along the x axis if at least 70% of the amount originated in that vintage has been outstanding for at least that number of cycles. For example, in our graph for AA loans funded during Q3 2009, 70% or more of the original amount borrowed in that vintage has been outstanding for 27 cycles, but less than 70% of the original amount borrowed has been outstanding for 28 or more cycles. So, that graph includes a data point for cycle 27 but not for cycle 28.

Quarterly vintages generally contain enough volume for their performance curves to be meaningful, but there are exceptions.  For example, the volume of loans originated in the 3rd quarter of 2009 was relatively low because the platform was closed during the first few weeks of the quarter, and also because the  platform reopened during the quarter after having been shut down for almost nine months.  In addition, during the 4th quarter of 2010 only 31 loans were originated on the platform with a C Prosper Rating.  For such vintages, a few loans charging-off, or even a single charge-off, can result in actual losses for that vintage being well above estimates.  Therefore, we look at quarterly vintages individually as well as in aggregate to get a more complete picture of loan performance.

Below is a graph that shows our cumulative net charge-offs as a percentage of originations across all ratings by quarterly vintage.
Note: Expectation line reflects the weighted average expected loss rate across all vintages at the time of origination
 


The graphs below show our cumulative net charge-offs as a percentage of originations for each Prosper rating presented by quarterly vintage.








Note: Expectation lines represent the high end of the estimated loss rate range for each Prosper Rating, except for HR, where the high end of the range is 100% and we have set the expectation curve at 24.75%.
 
In aggregate, all 2009 and 2010 quarterly vintages are coming in below the expected loss rates.  Loss rates for some of the 2009 vintages have been higher than expected for the lower risk Prosper Ratings, AA-C, but subsequent 2010 vintages have generally been at or below expectations.  The higher risk Prosper Ratings, D-HR, have consistently performed at or better than expectations.
 
We review our actual losses on a monthly basis and analyze any material variances from our estimates.  To the extent we conclude that any such variance seems likely to continue, we adjust the Prosper Rating accordingly.  For example, based on the continuing exceptional risk performance of repeat borrowers, we made Prosper Rating adjustments in April 2011 that decreased the expected loss rate on repeat borrowers across most combinations of Prosper Score and credit bureau score.

Please note that the historical performance of Borrower Loans may not be indicative of the future performance of our borrower loans.  See “Risk Factors— Risks Related to Prosper, Our Platform and Our Ability to Service the Notes” for more information.

 

 
Criteria for Applying for a Second Loan
 
Borrowers may have up to two 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).  We treat any outstanding loan as a "loan" for purposes of this two-loan limit.  Currently, to be eligible to obtain a second borrower loan while an existing loan is outstanding:
 
·Borrowers must be current on their existing borrower loan, and must not have been more than 30 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 at time the existing loan was obtained);
 
·Borrowers may not post a listing for a second borrower loan within six to twelve months (depending on the borrower’s credit score range at time the existing loan was obtained) following the date of origination of their existing borrower loan; and
 
·Borrower’s credit score must be 600 or more.
 
Underwriting requirements for borrower loans, including eligibility requirements for second loans, are subject to change from time to time.

Maximum Loan Amount
 
The maximum loan amount for a listing is determined by the applicant’s Prosper Rating.  The table below shows the maximum loan amount for each Prosper Rating:
 
Prosper Rating
 
Maximum Loan Amount
AA
 
$
25,000
A
   
25,000
B
   
15,000
C
   
15,000
D
   
15,000
E
   
4,000
HR
 
$
4,000

Borrower Identity and Financial Information Verification

We reserve the right in our member agreements to verify the accuracy of all statements and information provided by borrower members and lender members in connection with listings, commitments 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 an applicant or listing, we will cancel or refuse to post the listing or cancel any or all commitments against the listing.  We may also delay funding of a borrower loan in order to verify the accuracy of information provided by an applicant in connection with the listing, or to determine whether there are any irregularities with respect to the listing.  If we identify material misstatements or inaccuracies in the listing or in other information provided by the applicant, we will cancel the listing or related loan.
 
We verify the identity of every borrower who obtains a loan through the platform using a combination of documentary and non-documentary methods. We ask each applicant to submit a copy of her current driver’s license, passport or other government-issued, photo identification card, which we authenticate using third-party reference materials.  In addition, we compare the information contained in the applicant’s credit report  with the information contained in the application. We also run the applicant’s application information through a fraud database.  Finally, we require the applicant to submit bank statements, cancelled checks or other documentary evidence to verify the accuracy of her bank account information. To the extent any of these processes identify inconsistencies between the information submitted by the applicant and the information contained in another data source, we require the applicant to submit documentation to resolve the discrepancy to our satisfaction.  For example, we might require the applicant to submit a recent utility bill to reconcile a discrepancy between the current address listed in her application and the one listed in her credit report.  For the small number of applicants who do not have a current, government-issued photo identification card, we may rely on the other screening processes described above to verify their identity. But we obtain and authenticate photo identification from the great majority of applicants, and perform the other processes described above for all borrowers.  If we are unable to verify the identity of an applicant in the manner described above, we will cancel the applicant’s listing or pending loan.
 

 
In addition to the identity verification processes just described, we verify income and employment information for a subset of applicants based on a proprietary algorithm.  The intention of this algorithm is to identify instances where the applicant’s self-reported income is highly determinative of the applicant’s Prosper Rating.  The algorithm gives greatest weight to the following factors:
 
·Prosper Rating;
 
·loan amount;
 
·stated income; and
 
·debt-to-income ratio.

To verify a borrower’s income, we require the borrower to submit a paystub from within the last thirty days and a W-2 or Form 1099 from the prior calendar year.  To verify a borrower’s employment, we obtain confirmation from the human resources department of the borrower’s employer, verbally or by email, or phone the main phone number of the borrower’s employer and confirm that we can be connected directly to the borrower’s work number from that main number.
 
Between July 14, 2009 and December 31, 2011 (based on start time of the applicable bidding period), we verified employment and/or income on approximately 47% of the loans we originated on a unit basis (8,904 out of 19,059)  and approximately 67% of our originations on a dollar basis ($75,308,364 out of $113,074,405). Breaking these numbers down by Prosper Rating:
 
·  
for loans with a Prosper Rating of AA, A or B, we verified income and/or employment information on approximately 62% of the loans we originated on a unit basis (4,184 out of 6,746) and approximately 81% of our originations on a dollar basis ($42,682,605 out of $52,631,119);
 
·  
for loans with a Prosper Rating of C or D, we verified income and/or employment information on approximately 48% of the loans we originated on a unit basis (3,317 out of 6,874) and approximately 65% of our originations on a dollar basis ($24,828,425 out of $38,146,063); and
 
·  
for loans with a Prosper Rating of E or HR, we verified income and/or employment information on approximately 26% of the loans we originated on a unit basis (1,403 of 5,439) and approximately 35% of our originations on a dollar basis ($7,787,874 out of $22,297,223).

It is our intention to continue to verify income and employment on roughly the same proportion of loans in the future.
 
If a borrower fails to provide satisfactory information in response to an income or employment verification inquiry, we will (a) request additional information from the borrower, (b) cancel the borrower’s listing or (c) refuse to proceed with the funding of the borrower loan.  Where we choose to verify a borrower’s income or employment information, the verification is normally done after the borrower’s listing has already been posted.  This allows Prosper to focus its verification efforts on the listings most likely to fund, and increases the percentage of funded loans that are subject to verification.

When we identify inaccurate employment or income information in a borrower’s application or listing that has resulted in the borrower obtaining a different Prosper Rating or interest rate for her loan than she would have obtained if she had provided the correct information, we cancel the listing. If we identify inaccurate information in the borrower’s listing that does not trigger cancellation of the listing, we do not update the listing to include the corrected information. Cancellation automatically triggers a notice to the borrower member and any lender members who made commitments that the listing has been cancelled, and we send an adverse action notice to the borrower indicating the reasons for cancellation. We make the funds committed by the lender members on the cancelled listing immediately available to them for bidding on other listings.
 

 
We generally do not verify information included by borrower members in their loan listings other than identity, income and employment information. Similarly, we do not verify the information in any recommendations from a borrower member’s Prosper friends. 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 the borrower member’s credit report. Although borrower members may provide proof of homeownership to establish homeownership status, in most instances, homeownership status is derived from the credit report as well.  For example, if the credit report reflects an active mortgage loan, the borrower member is presumed to be a homeowner. Lender members should not rely on unverified information provided by borrower members.
 
        Our participation in funding loans on the platform from time to time has had, and will continue to have, no effect on our income and employment verification process, the selection of loan requests verified or the frequency of income and employment verification.

We are continuously looking for ways to improve our verification procedures in a cost-effective manner in order to increase the repayment performance of loans.  See “Risk Factors—Risks Related to Borrower Default—Information supplied by borrowers may be inaccurate or intentionally false- Information regarding income and employment is not verified in the majority of cases” 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, we will repurchase the Note and credit the lender members’ account with the remaining unpaid principal balance of the Note.  Our repurchase obligation will apply only if the relevant Note is at least 120 days past-due; provided, that we may in our sole discretion elect to repurchase such Note at an earlier time.  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 protection against identity theft; in no way is it a guarantee of a borrower’s self-reported information (beyond identity) or a borrower’s creditworthiness.  We expect the incidence of identity fraud on the platform to be low because of our identity verification process. As of December 31, 2011, 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.  We have not experienced any cases of confirmed identity fraud during the years ended December 31, 2011 and 2010
 
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 repurchase obligation, fewer potential lender members will have the confidence to participate on the platform, limiting our growth and long term profitability.  In addition, our 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 was 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 circumstances where this may occur include where the listing contained the wrong Prosper Score, or where we miscalculated the Prosper Score, resulting in the wrong Prosper Rating appearing in the listing.  We are not, however, under any obligation to cure, indemnify or repurchase a series of Notes because a correctly determined Prosper Score or Prosper Rating fails to accurately predict the actual losses on a borrower loan.  In addition, we are not obligated to repurchase a Note or indemnify a lender member whose investment is not realized in whole or in part due to false or inaccurate statements or omissions of fact in a listing, whether in credit data, borrower’s representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the loan. Finally, if we repurchase a Note, we will only return the outstanding principal balance to the lender member and not unpaid interest.
 


Historical Performance of Prosper Borrower Loans

The performance of borrower loans is a function of the credit quality of our borrower members and the risk and return preferences of our 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 commitment 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, borrower loans did not have a Prosper Rating.  We have assigned a Prosper Rating retroactively to these loans in certain of the following tables in order to provide more meaningful historical performance data.  These retroactive Prosper Ratings were assigned based on the credit bureau data available at the time the loan listing was posted.  The portions of the historical information below regarding the performance of loans to which we have assigned a Prosper Rating retroactively should not be used in determining how Notes with the same Prosper Rating can be expected to perform in the future. See “Risk Factors—Risks Related to Borrower Default.”
 
The following seven graphs show loan performance through December 31, 2011 by delinquency rates and cumulative principal default rates.  Loans originated prior to July 13, 2009 were not assigned a Prosper Rating at the time of origination.  In order to view performance on a comparable basis, we have retroactively assigned a Prosper Rating to these loans based upon their applicable listing characteristics.  The “N/A” category includes loans with a credit score of less than the minimum score now required 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 graph below shows 1-30 and 31-120 day delinquency rates for loans originated prior to July 13, 2009 by quarter.  This graph shows delinquencies as a percentage of total outstanding principal balance. 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.  




The table below shows 1-30 and 31-120 day delinquency rates by quarter for loans originated between July 13, 2009 and December 31, 2011.  This graph shows delinquencies as a percentage of total outstanding principal balance.  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.  
 

The following graphs show cumulative principal default rates for borrower loans originated by year.  The cumulative charge-off rate is calculated as the sum of the cumulative principal balance charged-off divided by the original amount borrowed.  The vertical axis shows the percentage of principal charged-off.  The horizontal axis shows the age of the loan in monthly cycles.  We only include data for a point along the x axis if at least 70% of the original amount borrowed in that vintage has been outstanding for at least that number of cycles.  For example, in our graph for Loans Funded During 2009, 70% or more of the original amount borrowed in that vintage has been outstanding for 24 or more cycles, but less than 70% of the original amount borrowed has been outstanding for 25 or more cycles. So, that graph includes a data point for cycle 24 but not for cycle 25.
 


The following table shows cumulative principal default rates for loans originated from January 1, 2006 to December 31, 2006.   Loans originated during this period cannot be assigned a Prosper Ratings because the requisite credit variables needed to determine the Prosper Score were unavailable.
 
 
The following table shows cumulative principal default rates for loans originated from January 1, 2007 to December 31, 2007.   The “N/A” category consists of loans originated during this period that cannot be assigned a Prosper Rating because the requisite credit variables needed to determine the Prosper Score were unavailable.

 
The following table shows cumulative principal default rates for loans originated from January 1, 2008 to December 31, 2008.   The “N/A” category consists of loans originated during this period that cannot be assigned a Prosper Rating because the requisite credit variables needed to determine the Prosper Score were unavailable.
 
 
The following table shows cumulative principal default rates for loans originated from January 1, 2009 to December 31, 2009.
 
 

 
The following table shows cumulative principal default rates for loans originated from January 1, 2010 through December 31, 2010.
 

 
The following table presents additional aggregated information as of December 31, 2011 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, 2011.
 
Loan Originations
 
November 2005 - July 12th, 2009
 
(as of December 31, 2011)
 
                                                         
           
Total Loan Originations
   
Current Loans
   
1-30 Days Past Due
 
Prosper Rating
   
Number
   
Amount
   
Number
   
Origination Amount
   
Outstanding Principal
   
Number
   
Origination Amount
   
Outstanding Principal
 
AA
            1,148     $ 5,610,741       1     $ 3,000     $ 459       -     $ -     $ -  
  A             1,241       6,315,414       -       -       -       -       -       -  
  B             319       2,254,565       -       -       -       -       -       -  
  C             1,448       11,287,831       1       1,000       170       -       -       -  
  D             2,048       14,156,042       1       3,000       558       -       -       -  
  E             622       3,750,560       1       1,000       206       -       -       -  
HR
            6,914       67,881,305       -       -       -       -       -       -  
  N/A1               15,273       67,881,166       -       -       -       -       -       -  
                  29,013     $ 179,137,624       4     $ 8,000     $ 1,393       -     $ -     $ -  
               
avg loan size:
    $ 6,174                                                  
                                                                             
percent of total
                              0.0 %     0.0 %             0.0 %     0.0 %        
                                                                             
               
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
              1,102     $ 5,205,787       -     $ -     $ -       45     $ 401,954     $ 203,891  
  A               1,121       5,645,364       -       -       -       120       670,050       360,326  
  B               280       1,949,165       -       -       -       39       305,400       164,431  
  C               1,142       8,452,979       -       -       -       305       2,833,852       1,740,663  
  D               1,588       10,855,353       3       15,500       1,333       456       3,282,189       1,978,522  
  E               458       2,602,035       -       -       -       163       1,147,525       691,785  
HR
              3,974       36,033,205       1       3,000       111       2,939       31,845,100       21,313,658  
  N/A1               8,619       37,949,248       8       19,300       2,249       6,646       29,912,618       20,257,130  
                  18,284     $ 108,693,136       12     $ 37,800     $ 3,692       10,713     $ 70,398,689     $ 46,710,405  
                                                                             
percent of total
              63.0 %     60.7 %     0.0 %     0.0 %             36.9 %     39.3 %        
    1
includes loans with Credit Score<640 or insufficient credit data to determine Prosper Rating
 
Default due to Delinquency:
       
    2
includes all loans >120 days past due
      9,533     $ 41,112,974  
    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.
 
Default due to Bankruptcy3 :
         
              1,180     $ 5,597,431  
 
From November 2005 through July 12, 2009, we 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, 2011, 4 loans were current, 18,284 loans  or 63.0% of the loans were paid in full or had reached maturity, no loans were 1 to 30 days past due, 12 loans were more than 30 days past due, and 10,713 loans or 36.9% of the 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.  Of these 29,013 borrower loans, 13,347 loans, or 46%, have been greater than 15 days past due at any time, 12,325 loans, or 43%, have been more than 30 days past due at any time, and 11,682 or 40%, have been more than 60 days past due at any time. We repurchased notes with an aggregate origination principal amount  of approximately $577,000, due to identification theft or operational issues relating to borrower loans originated from November 2005 through July12, 2009.
 
Of the loans originated prior to July 13, 2009, 10,713 had defaulted as of December 31, 2011, equaling a total net defaulted amount of $46,710,405.  Of these 10,713 defaulted loans, the borrowers of 1,177 of the loans have filed for bankruptcy, resulting in a net defaulted amount of $5,597,431.
 
 
 
The following table presents additional aggregated information as of December 31, 2011, grouped by Prosper Rating, for all loans originated on our website from July 13, 2009 through December 31, 2011.  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, 2011.
 
Loan Originations
 
July 13, 2009 - December 31, 2011
 
(as of December 31, 2011)
 
                                                   
     
Total Loan Originations
   
Current Loans
   
1-30 Days Past Due
 
Prosper Rating
 
Number
   
Amount
   
Number
   
Origination Amount
   
Outstanding Principal
   
Number
   
Origination Amount
   
Outstanding Principal
 
 
AA
      1,509     $ 12,105,915       994     $ 8,839,687     $ 6,080,335       3     $ 36,000     $ 27,195  
  A       2,933       21,751,991       2,314       18,429,823       14,488,686       23       134,633       89,445  
  B       2,258       17,620,970       1,896       15,168,739       12,818,264       24       152,199       123,274  
  C       1,896       11,032,743       1,356       8,399,833       6,638,847       29       169,924       130,281  
  D       4,936       26,522,849       3,775       21,379,773       18,255,493       119       636,002       526,140  
  E       3,139       14,639,866       2,380       11,419,100       9,863,148       97       448,757       385,387  
HR
      2,242       7,288,460       1,588       5,187,800       4,220,241       67       242,683       200,589  
          18,913     $ 110,962,794       14,303     $ 88,824,755     $ 72,365,015       362     $ 1,820,198     $ 1,482,312  
       
avg loan size:
    $ 5,867                                                  
                                                                     
percent of total
                    75.6 %     80.0 %             1.9 %     1.6 %        
                                                                     
                                                                     
       
Paid In Full
   
31+ Days Past Due
   
Defaulted 1
 
Prosper Rating
 
Number
   
Origination Amount
   
Number
   
Origination Amount
   
Outstanding Principal
   
Number
   
Origination Amount
   
Net Charged Off Principal
AA
      477     $ 2,916,928       7     $ 62,400     $ 41,903       28     $ 250,900     $ 185,797  
  A       502       2,718,238       23       156,909       108,654       71       312,387       242,185  
  B       270       1,821,132       33       223,300       182,900       35       255,600       216,630  
  C       389       1,823,436       26       147,000       109,709       96       492,550       409,324  
  D       656       2,801,859       137       686,260       577,220       249       1,018,955       863,234  
  E       361       1,409,143       136       710,851       643,889       165       652,016       586,809  
HR
      345       1,085,718       74       241,473       204,457       168       530,786       451,490  
          3,000     $ 14,576,454       436     $ 2,228,194     $ 1,868,732       812     $ 3,513,194     $ 2,955,469  
                                                                     
percent of total
    15.9 %     13.1 %     2.3 %     2.0 %             4.3 %     3.2 %        
                                                                     
    1
includes all loans >120 days past due
                                                   
    2
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
   
Default due to Delinquency:
         
     
after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals.
                      720     $ 2,681,669  
                                                                     
                                                                     
                                               
Default due to Bankruptcy2 :
         
                                                          92     $ 273,800  
 
From July 13, 2009 through December 31, 2011, Prosper facilitated the origination of 18,913 borrower loans with an average original principal amount of $5,867 and an aggregate original principal amount of $110,962,794.  As of December 31, 2011, 75.6% of the borrower loans were current or had not reached their first billing cycle and 15.9% were paid in full, 1.9% were 1 to 30 days past due, 2.3% were more than 30 days past due, and 4.3% 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 these 18,913 borrower loans, 1,811 loans, or 10%, have been greater than 15 days past due at any time, 1,356 loans, or 7%, have been more than 30 days past due at any time, and 1,147 loans or 6%, have been more than 60 days past due at any time. We repurchased notes with an aggregate origination principal amount of approximately $30,000, due to identification theft or operational issues related to borrower loans originated from July 13, 2009 through December 31, 2011.

Of loans originated after July 13, 2009, 812 have defaulted as of December 31, 2011, equaling a total net defaulted amount of $2,955,469.  Of these 812 defaulted loans, the borrowers of 83 of the loans have filed for bankruptcy, resulting in a net defaulted amount of $273,800.

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 tables 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 table presents aggregate information, as of December 31, 2011 on the results of our collection efforts for loans originated prior to July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating.  For purposes of this analysis, we have excluded the notes that we repurchased due to identity theft or operational issues.
 
Prosper Rating
   
Loans In Collections
   
Origination Amount
   
Aggregate Amount Sent to Collections
   
Gross Amount Collected on Accounts sent to Collections
   
Number of Loans Charged-off
   
Gross Aggregate Principal Balance of Loans Charged-Off
   
Gross Amount Recovered on Loans Charged-Off
   
Net Aggregate Charge-Off
 
AA
      57     $ 480,055     $ 29,316     $ 17,940       45     $ 218,106     $ 14,215     $ 203,891  
 A       147       827,933       53,734       30,998       120       382,386       22,060       360,326  
 B       46       347,200       22,611       5,310       39       166,068       1,638       164,431  
 C       344       3,170,977       210,092       109,855       305       1,807,346       66,682       1,740,663  
 D       536       3,901,560       263,026       166,835       456       2,074,104       95,582       1,978,522  
 E       183       1,258,624       88,988       40,063       163       735,268       43,483       691,785  
HR
      3,214       34,756,301       2,490,616       1,249,389       2,939       21,978,321       664,663       21,313,658  
 N/A1       7,299       32,880,426       2,458,102       1,370,338       6,646       21,035,343       778,214       20,257,130  
          11,826     $ 77,623,076     $ 5,616,485     $ 2,990,728 *     10,713     $ 48,396,942     $ 1,686,537     $ 46,710,405  
                                                                     
* This amount excludes collection agency payments that were subsequently returned by the bank
                                 
1 includes loans with Credit Score<640 or insufficient credit data to determine Prosper Rating
                                 
 
The following table presents aggregate information, as of December 31, 2011 regarding the results of our collection efforts for loans originated after July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating.  
 
Prosper Rating
   
Loans In Collections
   
Origination Amount
   
Aggregate Amount Sent to Collections
   
Gross Amount Collected on Accounts sent to Collections
   
Number of Loans Charged-off
   
Gross Aggregate Principal Balance of Loans Charged-Off
   
Gross Amount Recovered on Loans Charged-Off
   
Net Aggregate Charge-Off
 
AA
      44     $ 353,800     $ 22,916     $ 7,033       28     $ 185,797     $ -     $ 185,797  
 A       114       545,421       34,942       16,645       71       244,885       2,700       242,185  
 B       73       497,900       34,334       5,780       35       219,132       2,502       216,630  
 C       153       772,006       58,700       26,875       96       416,629       7,306       409,324  
 D       449       1,963,128       159,716       70,275       249       881,413       18,179       863,234  
 E       342       1,523,067       139,078       63,563       165       599,778       12,969       586,809  
HR
      286       908,859       80,288       42,238       168       457,540       6,050       451,490  
          1,461     $ 6,564,181     $ 529,974     $ 232,409 *     812     $ 3,005,174     $ 49,706     $ 2,955,469  
                                   
* This amount excludes collection agency payments that were subsequently returned by the bank
                                 
 
In order to comply with the Servicemembers’ Civil Relief Act, which requires interest rates to be reduced to 6% while a borrower in the armed forces is on active duty, Prosper has elected to make “pre-refunds” of the interest differential to the affected borrower for the period of deployment.  The borrower then continues to make their regular payments.  In these cases, Prosper has refunded the interest to the borrower from Prosper’s own funds and, as a result, the payments received by the applicable lenders are unchanged.
 


Loan Originations Prior to July 13, 2009
 
The following table presents aggregated information about borrowers for loans originated over the period from our inception to October 16, 2008, grouped by credit grade.  These loans did not have a Prosper Rating, and were initially only assigned credit grades.  Therefore, all loans presented in the below table are grouped by credit grade rather than Prosper Rating. This table does not include the notes repurchased by Prosper due to identity theft or operational issues.
 
Credit Grade
 
Number of Borrowers
 
Average Interest Rate
 
Average APR
AA
 
3,512
 
11.50%
 
12.20%
A
 
3,312
 
14.20%
 
15.20%
B
 
4,386
 
16.50%
 
17.50%
C
 
5,643
 
18.80%
 
20.00%
D
 
5,151
 
21.20%
 
22.40%
E
 
3,289
 
25.50%
 
26.80%
HR
 
3,505
 
25.50%
 
26.90%
NC
 
141
 
23.30%
 
24.20%
 
The following table presents aggregated information for loans originated from the period from March 1, 2007 to October 16, 2008 reported by a consumer reporting agency about Prosper borrowers at the time of their loan applications, grouped by credit grade, and does not include notes repurchased by Prosper due to identity theft or operational issues.  These loans did not have a Prosper Rating, and were initially only assigned credit grades.  Prosper has not independently verified this information.
 
Credit Grade
 
Average Experian Scorex PLUSsm
 
Average Number Current Delinquencies
 
Average Number Total Open Lines
 
Average Number Total Credit Lines
AA
 
792.3
 
0.12
 
9.72
 
26.59
A
 
737.5
 
0.27
 
9.01
 
24.65
B
 
697.6
 
0.38
 
8.78
 
25.15
C
 
656.8
 
0.7
 
8.12
 
25.07
D
 
619.5
 
1.05
 
7.89
 
23.77
E
 
578.3
 
2.2
 
7.62
 
26.63
HR
 
536.7
 
3.82
 
5.08
 
19.24
 
Recent Loan Originations
 
The following table presents aggregated information about borrowers for loans originated over the period from July 13, 2009 to December 31, 2011, grouped by Prosper Rating.
 
Prosper Rating
   
Number
   
Amount
   
Average Loan Size
   
Weighted Average Lender Yield
   
Weighted Average Borrower Rate
   
Weighted Average Borrower APR
 
AA
      1,509     $ 12,105,915     $ 8,022       7.85 %     8.85 %     9.26 %
 A       2,933       21,751,991       7,416       10.43 %     11.43 %     13.59 %
 B       2,258       17,620,970       7,804       15.34 %     16.34 %     18.58 %
 C       1,896       11,032,743       5,819       19.77 %     20.77 %     23.71 %
 D       4,936       26,522,849       5,373       25.31 %     26.31 %     29.72 %
 E       3,139       14,639,866       4,663       30.48 %     31.48 %     35.27 %
HR
      2,242       7,288,460       3,251       31.09 %     32.09 %     35.52 %
Total
      18,913     $ 110,962,794     $ 5,867       19.42 %     20.42 %     23.07 %
 

 
The following table presents aggregated information about borrowers for loans originated over the period from July 13, 2009 to December 31, 2011, grouped by Prosper Rating.  The information was obtained from a credit reporting agency at the time of the borrower members’ loan applications. Prosper has not independently verified this information:  
 
Prosper Rating
   
Average Experian ScorexPlussm Score
 
Average Number of Current Delinquencies
 
Average Number of Open Credit Lines
 
Average Number of Total Credit Lines
AA
     
801
 
0.04
   
8.94
 
26.43
 A      
753
 
0.12
   
8.93
 
25.91
 B      
728
 
0.23
   
8.41
 
25.19
 C      
701
 
0.25
   
9.09
 
27.83
 D      
695
 
0.42
   
7.89
 
25.20
 E      
676
 
0.68
   
8.28
 
27.29
HR
     
673
 
0.74
   
7.89
 
26.80
 
Posted 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.
 
When creating a listing, the borrower member may opt for partial funding. Partial funding means the member’s loan does not have to receive bids for 100% of the amount requested to fund, but can be funded if it receives bids for 70% or more of the amount requested.  Each listing will indicate whether the borrower has elected partial funding and, if so, the minimum amount of bids required for the loan to fund. We may change the percentage threshold for partial funding, which is currently set at 70%, from time to time.  Any such change will be disclosed on our website, and will only affect listings created after we have implemented such change.
 
Borrower loans are unsecured obligations of individual borrower members with an interest rate determined by Prosper and with a specified loan term, currently set at one, three or five years, but which Prosper may in the future extend to between three months to seven years. Prosper borrower members may currently request loans within specified minimum and maximum principal amounts (currently, between $2,000 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 equal to or exceeding the minimum amount required for the loan to fund.
 
In addition to the Prosper borrower’s requested loan amount, Lender members are able to view:
 
·the interest rate, annual percentage rate and monthly payment amount on the requested borrower loan;
 
·the servicing fee lenders must pay to Prosper;
 
·the lender yield percentage (net of the servicing fee);
 
·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 minimum amount required for the loan to fund and whether the borrower has opted for partial funding;
 
·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 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;
 
·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 requested loan amount. The DTI is expressed as a percentage and is calculated by dividing the borrower’s monthly debt payments, including the debt resulting from the borrower loan being requested, by the borrower’s monthly income. 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 may not be verified by Prosper.
 
Borrower listings may include the borrower’s narrative description of why the loan is being requested, and of the borrower’s financial situation.
 

 
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, 2011, Prosper borrower members identified their intended use of loan proceeds by unit distribution as follows:
 
·debt consolidation (approximately 47%);
 
·business use, such as financing their home-based or small businesses (approximately 10%);
 
·home improvement (approximately 10%);
 
·tuition or other education expenses (approximately 1%)**;
 
·financing the purchase of an automobile (approximately 6%); and
 
·other (approximately 26%).
_________________________
 
*    During 2009, “Personal Use” was discontinued as a use option.

**  During 2010, “Tuition or Other Education Expenses” 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.”

Loan listings and other borrower information available on our platform or in our sales and listing reports are 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”) as well as the antifraud provisions of the Securities Act.  In general, Section 10b-5 and the antifraud 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 prospectus, 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. Alternatively, the SEC or a court could determine that we have not advised you of all of the material facts regarding an investment in the Notes, which could give you the right to rescind your investment and obtain damages, and could subject us to civil fines or criminal penalties in addition to any such rescission rights or damages.
 


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 equaling or exceeding the amount required for the listing to fund.  Lender members bid the amount they are willing to commit to purchase a Note dependent for payment on payments we receive on the borrower loan described in the listing.  
 
The bidding period for a listing begins when the listing is posted on our website and ends either 14 days after posting or on the first date on which the listing has received bids totaling the loan amount requested, whichever is earlier. Lender members cannot place bids on a listing once its bidding period has ended.  If the borrower opts for partial funding, the bidding period still will not end prior to the end of the 14 day post-listing period unless the listing has received bids totaling the full amount of the loan requested.
 
If the listing does not receive bids equal to or exceeding the minimum amount required for the loan to fund by the end of the bidding period, the listing will terminate and will not be funded. 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.
 
In order to make Note purchase commitments by bidding on listings, lender members must have funds on deposit in their Prosper accounts in at least the amount of their bid or bids. Once bids are placed, they are irrevocable.  Lender members may not cancel their bids or withdraw the amount of their bids from their Prosper accounts unless the bidding period expires without the listing having received bids in the required minimum amount, or unless the listing is withdrawn by a borrower or cancelled by Prosper.
 
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. Depending on the amount of the winning bids at the end of the bidding period, there may be a winning bidder on a listing with a winning bid of less than $25. But there cannot be more than one partial winning bid on a listing.
 
It is expected that a single borrower loan that gets funded will receive Note purchase commitments from many different lender members. For example, since our re-launch in July 2009 till December 31, 2011, the average aggregate loan size was approximately $5,867 and the average investment commitment per lender per loan was approximately $66.
  
Lender members may browse online through available listings displayed on our platform by desired borrower loan amount, yield percentage, Prosper Rating, estimated loss rate, debt-to-income ratio, group or other borrower characteristics. Alternatively, lender members can use our loan search tool to identify loan listings that meet their investment criteria.  A lender member can bid on as many listings as the lender member desires, subject to the aggregate bidding limit.  A lender member can diversify her risk of default 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.
 
Quick Invest
 
Our loan search tool, Quick Invest, allows lenders to identify Notes that meet their investment criteria. A lender using Quick Invest is asked to indicate (i) the Prosper Rating or Ratings she wishes to use as search criteria, (ii) the total amount she wishes to invest and (iii) the amount she wishes to invest per Note. If she wishes to search for Notes using criteria other than, or in addition to, Prosper Rating, she can use one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio and credit score.


 
Quick Invest then compiles a basket of Notes for the lender’s consideration that meet her search criteria.  If the pool of Notes that meet her criteria exceeds the total amount she wishes to invest, Quick Invest selects Notes from the pool based on how far the listings corresponding to the Notes have progressed through our loan verification process, i.e., Notes from the pool that correspond to listings for which we have completed our loan verification process will be selected first.  If the pool of Notes that meet the lender member’s criteria and for which we have completed loan verification still exceeds the amount she wishes to invest, Quick Invest selects Notes from that pool based on the principle of first in, first out, i.e.,  the Notes from the pool with the corresponding listings that were posted on our website earliest will be selected first. To the extent available Notes that meet the lender’s criteria are insufficient to fill her order, the lender is advised of this shortfall and given an opportunity either to reduce the size of her order or modify her search criteria to make her search more expansive.

If the lender’s search criteria included multiple Prosper Ratings, Quick Invest divides her basket into equal portions, one portion representing each Prosper Rating selected, and then attempt to fill each portion in the manner just described.  To the extent there are insufficient Notes available with a particular Prosper Rating to fill that portion of the lender’s basket, Quick Invest attempts to make up the deficit by including additional Notes with the other Prosper Ratings selected in equal proportions. To the extent available Notes with these other Prosper Ratings are still insufficient to fill the lender’s order, the lender is advised of this shortfall and given an opportunity either to reduce the size of her order or to modify her search criteria to make her search more expansive.

For example, if a lender using Quick Invest indicated that she wished to invest a total of $600 in Notes with a Prosper Rating of B, C or D, Quick Invest would first attempt to fill her order with equal portions of B, C and D Notes ($200 – B; $200 – C; $200 – D). If there were only $100 of D Notes available, the search tool would attempt to increase the allocation of B and C Notes from $200 to $250 ($250 – B; $250 – C; $100 – D).  If there were $250 of B Notes available but only $200 of C Notes available, the search tool would then attempt to make up the remaining gap by increasing the allocation of B Notes from $250 to $300 ($300 – B; $200 – C; $100 – D). But if there were only $275 worth of B Notes available, the lender would be given the choice of expanding her search criteria or reducing the total size of her order from $600 to $575.  If she elected to reduce the size of her order, her final order would consist of $575 of Notes: $275 of B Notes, $200 of C Notes and $100 of D Notes.

Our Auto Quick Invest feature allows lender members (i) to have Quick Invest searches run on their designated criteria automatically each time new listings are posted on our platform, and (ii) to place bids on any Notes identified by each such search. As with a lender making manual bids, a lender using Quick Invest is not permitted to place a bid unless the funds in her account are sufficient to cover the bid, and funds will only be debited from her account if and when her bid is successful.

We implemented Quick Invest in June 2011.  Prior to June 2011, our platform included an automated plan system.  This system allowed each lender member to create his or her own automated bidding plan.  By creating such a plan, a lender member could have bids placed automatically on her behalf on loan listings that met loan criteria selected by her.  In creating an automated bidding plan, the lender member could design these criteria herself, use a group of model criteria selected by Prosper, or customize one of those groups of model criteria as she saw fit.  Each automated bidding plan created by a member consisted of a group of loan criteria, such as maximum loan amount, Prosper Rating and employment status.  This group of criteria was divided into sub-groups, each of which we referred to as a “slice”.  The specific loans on which the member bid through her plan would be determined by the criteria in each of her plan slices.  If a loan listing was posted that satisfied all of the criteria in any of her plan slices, a bid would automatically be placed on the listing on her behalf.
 
Setting Interest Rates

We have an interest rate committee, consisting of our Chief Executive Officer, Chief Financial Officer, Executive Vice President, Acquisition and Risk Management, and General Counsel, which meets regularly to set interest rates for all borrower loans.  These rates are set forth in a rate table, which is posted on our website.  The table dictates the interest rate for all borrower loans, based on Prosper Rating, as well as additional factors, such as estimated loss rates, loan terms, group affiliations, competitive conditions and the general economic environment.  The yield percentage on each series of Notes is equal to the interest rate on the related borrower loan, minus Prosper’s servicing fee, currently set at 1%, which Prosper may extend in the future to an amount greater than 1% and less than or equal to 3%.



The interest rate committee meets on at least a monthly basis, but may meet more frequently as changes in market conditions and the general economic environment dictate.  At each meeting, the committee reviews the interest rate table and makes adjustments to the extent the committee deems necessary.  The factors besides Proper Rating that the committee takes into consideration in updating the table, as well as the weight the committee accords each such factor, may change from time to time.
 
Our current interest rates are posted on our website.  In addition, the interest rate for each loan listing, as well as the yield percentage for the corresponding Notes, is included in the listing report we file for that listing after it has been posted to our website for bidding. 

Purchase of Notes by Prosper or Related Parties
 
From time to time, Prosper may bid of listings and hold any Notes it purchases as a result of such bidding for its own account. Any Prosper bid on a loan will be made public in the same manner in which bids by other bidders on a particular loan are made public.  In addition, loans upon which Prosper bids will be identified to other bidders through the use of a special symbol and a user profile that are intended to make it clear that Prosper is bidding on a particular loan request.
 
Prosper will bid on listings on its platform on the same terms and conditions and through the use of the same information that is made available to other potential lenders on the platform.  In some cases, Prosper’s bidding on a listing may cause the listing to fund, and in some cases, fund faster, than it would fund in the absence of Prosper’s bid.  The amount that Prosper may choose to bid on any particular listing may vary significantly and Prosper reserves the right to bid up to the entire amount of a given listing.
 
Some of our executive officers, directors and 5% 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, 2011, these individuals had purchased $4,697,560 in loans.  The loans were obtained on the same terms and conditions as those obtained by other lenders. However, 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 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 operations department has developed an audit process that identifies and investigates bidding and funds transfer activities that are classified as “suspicious.”

Treatment of Lender Member Balances

In order to bid 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 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 limits established by the FDIC. Other funds the lender member has on deposit with the same institution where the FBO account is maintained may count against the FDIC insurance limits for that member.
 
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 corresponding listing does not receive sufficient bids to fund, and may also include payments on 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 the bidding period for a Prosper borrower listing ends, if the listing has received bids from lender members equal to or exceeding the minimum amount required to fund, we proceed with the funding of the corresponding borrower loan and with the sale of the Prosper Borrower Notes to the lender members bid 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 verification process, the borrower executes an electronic promissory note in favor of WebBank in an amount equal to the total amount of winning bids.  WebBank then electronically endorses the promissory note to Prosper and sells and assigns the promissory note to Prosper without recourse to WebBank. 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.
 
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. Each borrower authorizes the loan proceeds to be disbursed by ACH transfer into the borrower’s designated bank account.
 
Borrowers pay an origination fee out of the proceeds of the borrower loan at the time of funding.  As of December 31, 2011 borrowers with a AA Prosper Rating pay an origination fee equal to 0.5% of the loan amount, borrowers with a Prosper Rating of A and B pay an origination fee equal to 3% of the loan amount, and borrowers with Prosper Ratings C through HR pay an origination fee equal to 4.5% of the loan amount.  The origination fees are charged by WebBank, and we receive payments from WebBank equal to the origination fees as compensation for our marketing and administrative activities with respect to the platform.
 
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.  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 Wells Fargo Bank, NA 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 agencies charge collection fees from 17.0% to 30.0% of the amount recovered up to the “total amount delinquent.” To the extent that Prosper places loans with another collection agency, we will disclose the collection fees percentages on our website.

Description of Fee
 
Fee Amount
 
When Fee is Charged
 
Effect on Lender Member
             
Prosper Borrower Notes
       
             
Servicing fee
 
Annualized rate currently set at 1% of outstanding principal balance, but which Prosper may increase in the future up to  3%.  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 reflected in the lender yield percentage included in each listing.
             
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 assesses 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
 
Prosper’s current collection agencies charge collection fees from 17.0% to 30.0% of the amount recovered up to the “total amount delinquent” 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.  This fee 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.  The payment date for Notes 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 lender yield percentage set forth in the loan listing. 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 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 who sell Notes on the Note Trader platform will be subject to transaction fees charged by FOLIOfn Investments, Inc.  The transaction fee is currently equal to one percent 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 FOLIO 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 FOLIO.  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, the Note may only be resold through the Note Trader platform.
 
Notes Subject to Sale by Subscribers.   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 participate 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 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 Listings.  Only 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.
 
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 employs 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 purchasing 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.
  



Information About Prosper Marketplace, Inc.
 
Overview

Prosper Marketplace, Inc. is the operator of an Internet credit platform.  The platform is described in more detail in this annual report under the caption “About Prosper-How Prosper Works.” Our platform provides a number of benefits to our borrowers.  We believe the key features of the Prosper experience are the following:
 
·  
better interest rates than those available from traditional banks;
 
·  
24-hour online availability to initiate a loan listing;
 
·  
convenient, electronic payment processing; and
 
·  
amortizing, fixed rate loans, which represent a more responsible way for consumers to borrow than revolving credit facilities.
 
Business Strengths


We believe that the following business strengths differentiate us from competitors and are key to our success:
 
Scalable Operating Infrastructure: We have built an operating platform that allows us to economically originate and service our borrower loans and Notes.  This platform is both flexible and highly scalable;
 
Proprietary Risk Management Capabilities:  We are the only company that has developed a proprietary risk model based on P2P specific performance data.  This model allows Prosper to accurately gauge the riskiness of borrowers and allows lenders to earn attractive risk adjusted returns;
 
Unique Regulatory Structure:  Prosper has successfully registered its continuous public offering of Notes, which allows it to create micro securities backed by consumer loans.  This registration process was expensive and time consuming to achieve and is not easily duplicated by competitors;
 
Management Team:  Prosper has a management team with experience in a broad set of areas that are essential to the operation of a P2P business.  These areas include but are not limited to risk management, fraud detection, loan servicing operations, technology development, data management, financial controls, securities regulation, compliance, customer management and website development;
 
Open access:  We allow individuals with a wide range of credit characteristics to apply for loans, and enable them to leverage their social capital and receive loans through commitments from the lender community at large; and
 
Transparency and data availability:  By making all site transactions visible to our customers and available electronically for analysis, we allow our customers to better understand our marketplace and make better decisions about their activity.



Corporate History

We were incorporated in the State of Delaware in March 2005, and our principal executive offices are located at 111 Sutter Street, 22nd Floor, San Francisco, California 94104.  Prosper’s telephone number at that location is (415) 593-5400.  Prosper’s website address is www.prosper.com.  The information contained on our website is not incorporated by reference into this annual report.
 
From the launch of our platform in February 2006 until October 16, 2008, the operation of our platform differed from the structure described in this report, and we did not offer Notes.  Instead, our platform allowed lender members to purchase, and take assignment of, borrower loans directly as described under “Prior Operation of Our Platform.”
 
Available Information
 
       Our website is located at www.prosper.com. The following filings are available on our website after we file them with the SEC: Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. These filings are also available for download free of charge on our website.  Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov.
 
Marketing

Our marketing efforts are designed to attract individuals and institutions to our website, to enroll them as members and to have them understand and utilize our services for borrowing or investing in Notes on our platform.  We believe there are significant opportunities to increase the number of members who use our platform through additional marketing initiatives.  We employ a combination of paid and unpaid sources to market our platform.  We also invest in public relations to build our brand and visibility.  We are constantly seeking new methods to reach more potential Prosper members.
 
We attract members in a variety of ways, including advertising, search engine results and word-of-mouth referrals.  We frequently hear from new borrowers that they heard about us from current borrowers.  In addition, we have been featured in a variety of media outlets, including television and print media.  We have also participated in interviews to promote Prosper.
 
We continuously measure website visitor-to-member conversion.  We test graphics and layout alternatives in order to improve website conversion.  We also seek to customize the website to our members’ needs whenever possible.  We carefully analyze visitor website usage to understand and overcome barriers to conversion.
 
From time to time, we may conduct special promotions to increase the participation of existing members on our platform or to attract new members.  These promotions could include offering special incentives for registering as a lender or a borrower, posting a loan listing, moving money onto our platform, placing bids on loan listings or successfully bidding on a loan listing.  The incentives could include cash bonuses or rebates or fee discounts or waivers. These promotions may be offered to all customers for all products or could be restricted to particular products or types of customers.  For example, we could conduct a special promotion to attract customers who come to our site through a marketing partnership we have with another company.
 
For the years ended December 31, 2011, we spent approximately $2.0 million and $634.9 thousand, respectively, on marketing.

Technology

Our system hardware is located in a hosting facility located in San Francisco, California, owned and operated by Rincon 365 Borrower, LLC under an agreement that expires in August 2014.  Generally, unless either party delivers a termination notice the agreement is automatically renewable for three year terms.  The facility provides around-the-clock security personnel, video surveillance and biometric access screening and is serviced by onsite electrical generators, fire detection and suppression systems.  The facility has multiple interconnects to the Internet, and we use Internap Network Services Corporation as our Internet service provider.  We also maintain off-site backups at a secure, Tier 1 data center in Las Vegas, Nevada. We back up all customer data daily and replicate this data offsite via an encrypted connection.
 
We own all of the hardware deployed in support of our platform.  We continuously monitor the performance and availability of our platform.  We have a scalable infrastructure that utilizes standard techniques such as load-balancing and redundancies.
 

 
We have written our own accounting software to process electronic cash movements, record book entries and calculate cash balances in our members’ funding accounts.  We process electronic deposits and payments by originating ACH transactions.  Our software puts these transactions in the correct ACH transaction data formats and makes book entries between individual members’ accounts using a Write-Once-Read-Many (WORM) ledger system.
 
We have entered into a back-up servicing agreement with a loan servicing company that is willing and able to transition servicing responsibilities in the event we can no longer do so.  The third party is a financial services company that has extensive experience and knowledge entering into successor loan servicing agreements.  The third party will provide monthly investor reports on our loan servicing activity that will be available to all registered users.

Scalability

Our platform is designed and built as a highly scalable, multi-tier, redundant system.  Our platform incorporates technologies designed to prevent any single point of failure within the data center from taking the entire system offline.  This is achieved by utilizing load-balancing technologies at the front end and business layer tiers and clustering technologies in the back-end tiers to allow us to scale both horizontally and vertically depending on platform utilization.  In addition, the core network load-balancing, routing and switching infrastructure is built with fully redundant hardware and sub-second failover between those devices.

Data integrity and security

All sensitive data that is transmitted to and from our customers and service providers is transacted using a secure transport protocol.  Communication of sensitive data via the web site to our customers is secured utilizing SSL 128-bit enabled encryption certificates provided by VeriSign and Thawte, Inc.  Communication of sensitive data with our service providers is secured utilizing authenticated VPN, SSL 128-bit encryption and SSH protocols depending on the service providers’ requirements.  Storage of sensitive data is encrypted utilizing AES 256-bit and 3DES 168-bit cryptographic ciphers depending upon our service providers’ requirements and internal storage policies.  Access to the data by our employees is restricted based upon a least-privilege principle such that employees have access only to the information and systems needed to perform their function.  In the event of disaster, data is repeatedly stored securely at an offsite data center.
 
We protect the security of our platform using a multilayered defense strategy incorporating several different security technologies and points of monitoring.  At the perimeter of the network, multi-function security technologies implement firewall, intrusion prevention, anti-virus and anti-spam threat management techniques.  Internally, the network and hosts are segmented by function with another layer of firewalls and traffic inspection devices.  At the host level, our platform utilizes host based intrusion prevention, anti-virus, anti-spyware, and application control systems.  Logging and monitoring for network security devices is done in real-time with notifications to the appropriate staff upon any suspicious event or action that requires attention.  Logging and monitoring of host systems is done in real-time to a centralized database with web based reporting and additional notification to the appropriate staff for any remediation.
 
Fraud detection

We consider fraud detection to be of utmost importance to the successful operation of our business.  We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud.  We employ techniques such as knowledge based authentication, or KBA, out-of-band authentication and notification, behavioral analytics and digital fingerprinting to prevent identity fraud.  We use services from third-party vendors for user identification, credit checks and for checking customer names against the list of Specially Designated Nationals maintained by the Office of Foreign Assets Control (OFAC).  In addition, we use specialized third-party software to augment our identity fraud detection systems.  In addition to our identity fraud detection system, we have a dedicated team which conducts additional investigations of cases flagged for high fraud risk.  See “About Prosper—Borrower Identity and Financial Information Verification” for more information.  We also enable our lender members to report suspicious activity to us, which we may then decide to evaluate further.
 
 

Engineering

We have made substantial investment in software and website development and we expect to continue or increase the level of this investment as part of our strategy to continually improve our platform.  In addition to developing new products and maintaining an active online deployment, the engineering department also performs technical competitive analysis as well as systematic product usability testing.  As of December 31, 2011, our engineering team consisted of seven developers, one quality assurance manager, four quality assurance contractors, two senior database administrators, one Vice President of Business Technology & Services, two network engineers, two senior business analysts, one business intelligence analyst, two product managers, one project manager, one Director of Development and the Executive Vice President of Technology and Operations. 
 
Competition
 
The market for peer-to-peer lending is competitive and rapidly evolving.  We believe the following are the principal competitive factors in the peer-to-peer lending market:
 
·fee structure;
 
·website attractiveness;