10-K 1 prosper-10k_20141231.htm 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

 

Commission

File Number

  

Exact Name of Registrant as Specified in its Charter,

State or Other Jurisdiction of Incorporation,

Address of Principal Executive Offices, Zip Code

and Telephone Number (Including Area Code)

  

I.R.S.
Employer

Identification
Number

 

 

 

333-179941-01

  

PROSPER MARKETPLACE, INC.

a Delaware corporation

221 Main Street, 3rd Floor

San Francisco, CA 94105

Telephone: (415)593-5400

  

73-1733867

 

 

 

333-179941

  

PROSPER FUNDING LLC

a Delaware limited liability company

221 Main Street, 3rd Floor

San Francisco, CA 94105

Telephone: (415)593-5479

  

45-4526070

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Registrant

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Prosper Marketplace, Inc.

 

None

 

None

Prosper Funding LLC

 

None

 

None

Securities registered pursuant to Section 12(g) of the Act:

 

Registrant

 

Title of Each Class

 

 

Prosper Marketplace, Inc.

 

None

 

 

Prosper Funding LLC

 

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Yes ¨ No x

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 ¨ No x

Yes ¨ No x

Indicate by check mark whether each 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 and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Yes x No ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 (applicable to Prosper Marketplace, Inc. only). ¨

 

 

 

 

 


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.

 

 

  

Large

Accelerated

Filer

  

Accelerated
Filer

  

Non-
Accelerated
Filer

  

Smaller
Reporting
Company

 

 

 

 

 

Prosper Marketplace, Inc.

  

¨

  

¨

  

¨

  

x

 

Prosper Funding LLC

  

¨

  

¨

  

¨

  

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Yes ¨ No x

Prosper Marketplace Inc. and Prosper Funding LLC meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K.

 

Registrant

  

Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 30, 2014

  

Number of Shares of
Common Stock of the
Registrant
Outstanding at
March 30, 2015

Prosper Marketplace, Inc.

  

$ 59,433(a)

  

14,689,215
($.01 par value)

Prosper Funding LLC

  

None (b)

  

None

(a)

Solely for purposes of calculating this aggregate market value, Prosper Marketplace, Inc. has defined its affiliates to include (i) those persons who were, as of June 30, 2014, its executive officers, directors and beneficial owners of more than 10% of its common stock, and (ii) such other persons who were, as of June 30, 2014, controlled by, or under common control with, the persons described in clause (i) above. Prosper Marketplace, Inc.’s common stock is not publicly traded; therefore, it has assumed the aggregate market value of its common stock is equal to the par value of the common stock of $0.01 per share.

(b)

All voting and non-voting common equity is owned by Prosper Marketplace, Inc.

THIS COMBINED FORM 10-K IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.

 

 

 

2


TABLE OF CONTENTS

 

ITEM

  

 

  

Page

PART I

  

 

  

 

ITEM 1

  

Business

  

6

ITEM 1A

  

Risk Factors

  

41

ITEM 1B

  

Unresolved Staff Comments

  

61

ITEM 2

  

Properties

  

61

ITEM 3

  

Legal Proceedings

  

61

ITEM 4

  

Mine Safety Disclosures

  

62

 

PART II

  

 

  

 

ITEM 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

63

ITEM 6

  

Selected Financial Data

  

64

ITEM 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

64

ITEM 7A

  

Quantitative and Qualitative Disclosures About Market Risk

  

73

ITEM 8

  

Financial Statements and Supplementary Data

  

73

ITEM 9

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  

73

ITEM 9A

  

Controls and Procedures

  

73

ITEM 9B

  

Other Information

  

75

 

PART III

  

 

  

 

ITEM 10

  

Directors, Executive Officers and Corporate Governance

  

76

ITEM 11

  

Executive Compensation

  

84

ITEM 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

89

ITEM 13

  

Certain Relationships and Related Transactions, and Director Independence

  

94

ITEM 14

  

Principal Accounting Fees and Services

  

97

 

PART IV

  

 

  

 

ITEM 15

  

Exhibits, Financial Statement Schedules

  

99

 

SIGNATURES

  

 

  

S-1

 

EXHIBIT INDEX

  

 

  

 

 

Exhibit 31.1

  

 

  

 

Exhibit 31.2

  

 

  

 

Exhibit 32.1

  

 

  

 

 

XBRL Content

  

 

  

 

 

 

 

3


Except as the context requires otherwise, as used herein, “we,” “us,” “our,” “Prosper,” and refer Prosper Marketplace, Inc. (“PMI”) on a consolidated basis and “Registrants” refers to PMI and Prosper Funding LLC (“PFL”), a wholly owned subsidiary of PMI.  In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” In addition, although historically we referred to our investor members as “lender members”, we call them “investor members” herein to avoid confusion since WebBank is the lender for loans originated through our marketplace.  We have recently updated the registration agreement our investor members execute before they may invest through our marketplace to reflect this change in terminology, but we are still in the process of effecting the change on the website.

The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. 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.

 

 

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 (the “Securities Act”) 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,” “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, Prosper Funding LLC or Prosper Marketplace, Inc. expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our respective managements, 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 Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;

×

PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding loans;

×

our ability to attract potential borrowers to the our platform

×

the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investor members;

×

our ability to service the loans, and our ability or the ability of 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 and the effectiveness of our credit rating systems;

×

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;

×

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;

4


×

potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the loans originated through the platform;

×

the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;

×

the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;

×

the lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform;

×

the federal income tax treatment of an investment in the Notes and the PMI Management Rights;

×

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 the platform or adversely impact our ability to service loans; and  

There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Annual Report on Form 10-K. PFL and Prosper 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 PFL or Prosper’s results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause PFL and Prospers’s 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. PFL and Prosper 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.

 

 

 

5


PART I

 

Item  1.

Business

Our Company

Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return. Our marketplace facilitated $1.6 billion in Borrower Loan originations during 2014 and $2.4 billion in Borrower Loan originations since it first launched in 2006.

We believe our online marketplace model has key advantages relative to traditional banks, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency, and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure like traditional banks or consumer finance institutions do; instead, we use data and technology to drive automation and efficiency in our operation. As a result, we believe our business model has lower operating costs than traditional banks and consumer finance institutions, allowing us to deliver what we believe is higher value and a better experience for both borrowers and investors.

To consumer borrowers, we believe that we offer generally better pricing, on average, than the pricing those borrowers would pay on outstanding credit card balances or unsecured installment loans from a traditional bank. We also believe that we offer faster decisions and loan originations, and greater transparency, resulting in a better customer experience than that provided by traditional consumer finance lenders.

To individual and institutional investors, we offer a new asset class that we believe has attractive risk adjusted returns, transparency, access to consumer loans, and lower duration risk.

Our marketplace offers fixed rate, fully amortizing, unsecured consumer loans from $2,000 to $35,000. Loan terms of three and five years are available, depending upon the Prosper Rating and loan amount. All Borrower Loans are originated and funded by WebBank, an FDIC-insured, state chartered industrial bank organized under the laws of Utah. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data.  Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.

Investors invest in Borrower Loans through two channels – (i) the first channel allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan (the “Note Channel”); and (ii) the second channel allows accredited and institutional investors to purchase a Borrower Loan in their entirety directly from PFL (the “Whole Loan Channel”).   

PMI developed our marketplace and, until February 1, 2013, owned the proprietary technology that makes operation of our marketplace possible. On February 1, 2013, PMI transferred the marketplace to PFL. PFL has been organized and is operated in a manner that is intended (i) to minimize the likelihood that it will become subject to a voluntary or involuntary bankruptcy or similar proceeding, and (ii) to minimize the likelihood that it would be substantively consolidated with PMI in the event of PMI’s bankruptcy and thus have its assets subjected to claims of PMI’s creditors. We believe we have achieved this by imposing through PFL’s organizational documents and covenants in the Amended and Restated Indenture certain restrictions on PFL’s activities and certain formalities designed to reinforce PFL’s status as a distinct entity from PMI. In addition, under the Administration Agreement, PMI has agreed, in its dealings with PFL and with third parties, to observe the “separateness covenants” described below as they relate to PFL.

PFL and PMI have entered into an Administration Agreement, pursuant to which PMI has agreed to provide certain administrative services relating to our marketplace. The Administration Agreement between PFL and PMI contains a license granted by PFL to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank in relation to loan origination and funding. The license is terminable in whole or in part in relation to failure by PMI to pay the licensing fee or the termination of PMI as the provider of some or all of the aforementioned services. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Prosper Marketplace, Inc.—Agreements with PFL” for more information.

In January 2015, PMI acquired all of the outstanding limited liability company interests of American HealthCare Lending, LLC (“AHL”), a company that operates a cloud-based patient financing platform, and merged AHL with and into PHL, with PHL surviving the merger.

6


 

Industry Background and Trends

According to the Board of Governors of the Federal Reserve System, as of November 2014, the balance of outstanding consumer credit in the United States totaled $3.3 trillion. This amount included $888 billion of revolving consumer credit, which many consumers seek to refinance for a lower interest rate.

The market for consumer lending is competitive and rapidly evolving. We believe Prosper offers a superior solution for both borrowers and investors.

For borrowers, we believe the following are the principal competitive factors: Better pricing versus other alternatives; a simple, easy and intuitive customer experience; a fast and efficient process; and trust and transparency.

For investors, we believe the following are the principal competitive factors: Attractive risk adjusted returns; diversification from other asset classes; a simple, easy and intuitive customer experience; and trust and transparency.

For borrowers, we compete with banking institutions, credit unions, credit card issuers and other consumer finance companies. We also face competition from other online consumer lending companies. For investors, we compete with other investment vehicles and asset classes such as equities, bonds and commodities. We may also face potential competition from new market entrants, or business expansion from established companies. These companies may have significantly greater financial, technical, marketing and other resources and may be able to devote greater resources to the development, promotion, sale and support of their consumer marketplaces. 

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and provide us with sustainable competitive advantages:

×

Leading Online Marketplace: Since inception, our marketplace has facilitated $2.4 billion loan originations, of which $1.6 billion was for the year-ended December 31, 2014. As our business grows, our brand, reputation and scale strengthens. This allows us to attract top talent, speed up product innovation, attract marketplace participants and drive down our cost structure which further benefit borrowers and investors;

×

Robust Network Effect:   The attractiveness of our marketplace increases as the number of participants on our marketplace increases yielding a classic network effect. Our marketplace offers consumer borrowers access to affordable credit, and allows individual and institutional investors to invest in an asset class with attractive risk-adjusted returns. The diversity of investors brings scale and breadth of funding to our marketplace and makes credit more affordable. As both sides of the equation grow, the advantages (reduced risk, lower cost) scale accordingly, attracting even more borrowers and investors. The increased participant pool generates more data which we use to improve the effectiveness of our credit decisioning and scoring models. This enhances our aggregate loan performance and builds increased trust in our marketplace, which in turn attracts more borrowers and investors;

×

Technology Platform: Our technology platform automates key aspects of our operations including borrower application, verification, loan funding, investing and servicing. This provides a significant time and cost advantage over traditional consumer lending business models. Using our accumulated performance data, we continually invest in incremental improvements in our algorithms thus extending our technological advantage;

×

Proprietary Risk Management Capabilities: We have developed a proprietary risk model based on consumer loan performance data, which we believe allows us to accurately assess the credit risk profile of borrower members and which we believe also allows investor members to earn attractive risk adjusted returns. We leverage the results from our growing data stream to continually refine this risk model and more accurately predict loan performance;

×

Unique Corporate Structure: Our corporate structure was designed to offer our investors extra protection. The separation of PMI from PFL should serve to protect our Note investors in the event of a bankruptcy filing from PMI. This organizational structure and registration process, expensive and time consuming to develop, and is not easily duplicated by competitors.

 

7


×

Efficient and Attractive Financial Model: We have multiple revenue streams and an efficient cost model. (i) We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations. We receive servicing fees related to Borrower Loans for which we retain the servicing rights. (ii) Our technology platform significantly reduces the need for physical infrastructure and therefore allows our business to grow with a lower cost operating model, providing us with significant operating leverage.

Sources of Revenues

We have two primary sources of revenues: Prosper earns transaction fees charged to borrowers by facilitating the funding of Borrower Loans by WebBank. The transaction fee is equal to the fee Webbank charges borrowers to originate a Borrower Loan net of WebBank’s fees to Prosper.  Prosper earns servicing fees from investors for processing principal and interest payments and passing such payments on to investors.

For the Note Channel, interest income earned on the Borrower Loans and the interest expense on related Notes are reported on our Statement of Operations on a gross basis.  Interest expense on Notes is generally equal to the interest income on the Borrower Loans less 1% of the outstanding principal balance of the corresponding Borrower Loan, which PFL retains to compensate for the servicing activities it performs.  For the Whole Loan Channel, Prosper retains servicing rights on these loans and generally charges 1% per annum of the outstanding principle balance of the corresponding Borrower Loan prior to applying the current payment.  This fee is recorded on our Statement of Operations as Servicing Fees.    

Sales and Marketing

Our sales and marketing efforts are designed to attract individuals and institutions to our marketplace, to enroll them as members and to have them understand and utilize the services for borrowing or investing. We employ a wide range of marketing channels to reach potential customers and build our brand and value proposition.  These channels include word-of-mouth referrals, online marketing, direct mail, radio campaigns, partners and affiliates, emails, and public media. We are constantly seeking new methods to reach more potential members, while testing and optimizing the end to end customer experience.

Origination and Servicing

We have highly efficient and scalable systems for credit risk assessment, loan underwriting, and servicing. Our risk model takes borrower members’ supplied information and combines that information with public and proprietary data to make real time decisions. Our verification agents use automated tools to confirm credit eligibility and underwrite the Borrower Loan. Our loan servicing platform calculates a loan’s amortization and processes payments received from borrowers and passes such payments on to investors.

Technology

We have made substantial investment in our customer acquisition capability, onsite customer experience, credit underwriting, loan servicing and payment systems. Our marketplace utilizes proprietary accounting software to process electronic cash movements, record book entries and calculate cash balances in members’ funding accounts. Electronic deposits and payments are mostly done via Automated Clearing House (“ACH”) transactions. The technology platform allows us to economically acquire and service Borrower Loans and Notes, and allows WebBank to efficiently originate and fund such loans. We believe the growth of our marketplace will give us the economies of scale to continuously lower unit cost.

The system hardware for our marketplace is located in a hosting facility in San Francisco, California. We own all of the hardware deployed in support of our marketplace. We continuously monitor the performance and availability of our marketplace. The infrastructure is scalable and utilizes standard techniques such as load-balancing and redundancies.

Key aspects of our technology include:

Scalability: Our marketplace is designed and built as a highly scalable, multi-tier, redundant system. It 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 scaling both horizontally and vertically depending on marketplace utilization. 

8


Data integrity and security:  We are committed to protecting our customer’s information and we take the integrity and security of the data provided by them very seriously. We accomplish this by having documented policies which are enforced using the latest technologies. All sensitive information is transmitted on secure channels using SSL technology. SSL certificates are issued by VeriSign (Symantec). We employ principles of least privilege and layered security to protect stored sensitive information. Information at rest is encrypted using the industry level encryption technologies with appropriate controls to access the data. We protect the network perimeter using the latest technologies including but not limited to the firewalls. We use strong multi factor authentication to protect and monitor remote access. We back up all data securely and would expect to recover operations in a short period of time in the event of a disaster. Extensive logging and monitoring of the systems and security controls enables us to ensure that the controls are functional and that alerts are triggered on policy violations.

Fraud detection: We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. These include knowledge based authentication, 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 the identity fraud detection systems. We also have a dedicated team which conducts additional investigations of cases flagged for high fraud risk. See “Item 1. Business—Borrower Identity and Financial Information Verification” for more information. Finally, we enable investor members to report suspicious activity, which we may then evaluate further.

Back up servicing agreement: PFL has a back-up servicing agreement with First Associates Loan Servicing, LLC (“First Associates”), a loan servicing company that is willing and able to assume servicing responsibilities in the event that we are no longer able to service the Borrower Loans and Notes. First Associates is a financial services company that has entered into numerous successor loan servicing agreements.

Intellectual Property

We rely on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. In addition, we believe the following factors help us to maintain a competitive advantage with respect to intellectual property:

×

the technological skills of our software and website development personnel who developed our marketplace;

×

frequent enhancements to our marketplace; and

×

high levels of member satisfaction.

Our competitors may develop products that are similar to our technology. We enter into confidentiality and other written agreements with our employees, consultants and service providers, and through these and other written agreements, attempt to control access to and distribution of the software, documentation and other proprietary technology and information. Despite these efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality. Policing all unauthorized use of intellectual property rights is nearly impossible. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.

Employees and Contractors

As of December 31, 2014, we employed 229 full-time employees and 2 contractors. The following table shows a breakdown by function:

 

 

 

Employees

 

 

Contractors

 

 

Total

 

Origination and Servicing

 

 

99

 

 

 

1

 

 

 

100

 

Sales and Marketing

 

 

15

 

 

 

 

 

 

15

 

General and Administrative - Research and Development

 

 

65

 

 

 

 

 

 

65

 

General and Administrative - Other

 

 

50

 

 

 

1

 

 

 

51

 

Total Headcount

 

 

229

 

 

 

2

 

 

 

231

 

9


None of our employees are represented by labor unions. We have not experienced any work stoppages and believe that our relations with our employees are good.

Government Regulation

Overview

The lending and securities industries are highly regulated. The marketplace, Notes and the Borrower Loans are subject to extensive and complex rules and regulations. We also are subject to licensing and examination by various federal, state and local government authorities. These authorities impose obligations and restrictions on our activities and the Borrower Loans acquired and Notes issued through our marketplace. In particular, these rules limit the fees that may be assessed on the Borrower Loans, require extensive disclosure to, and consents from, borrower members and borrowers, prohibit discrimination and impose multiple qualification and licensing obligations on marketplace activities. Failure to comply with these requirements may result in, among other things, revocation of required licenses or registration, loss of approved status, voiding of loan contracts, indemnification liabilities to contract counterparties, class action lawsuits, administrative enforcement actions and civil and criminal liabilities. While compliance with such requirements is at times complicated by our novel business model, we believe we are in compliance with these rules and regulations. These rules and regulations are subject to continuous change, however, and a material change could have an adverse effect on our compliance efforts and ability to operate.

State and Federal Laws and Regulations

State Licensing Requirements. We hold licenses in a number of states and are otherwise authorized to conduct activities on a uniform basis in all other states and the District of Columbia, with the exceptions of Iowa, Maine, North Dakota and Pennsylvania. We are subject to supervision and examination by the state regulatory authorities that administer the state lending laws. The licensing statutes vary from state to state and prescribe or impose different recordkeeping requirements; restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; disclosure requirements; requirements that licensees submit to periodic examination; surety bond and minimum specified net worth requirements; periodic financial reporting requirements; notification requirements for changes in principal officers, stock ownership or corporate control; restrictions on advertising; and requirements that loan forms be submitted for review.

Section 521 of the Depository Institution Deregulation and Monetary Control Act of 1980 (12 U.S.C. § 1831d) (“DIDA”) and Section 85 of the National Bank Act (NBA) (12 U.S.C. § 85), federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri and Marquette National Bank of Minneapolis v. First Omaha Service Corporation and FDIC advisory opinion 92-47 permit FDIC-insured depository institutions, such as WebBank, to “export” the interest rate permitted under the laws of the state where the bank is located, regardless of the usury limitations imposed by the state law of the borrower’s residence unless the state has chosen to opt out of the exportation regime. WebBank is located in Utah, and Title 70C of the Utah Code does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through our marketplace. Only Iowa and Puerto Rico have opted out of the exportation regime under Section 525 of DIDA and we do not operate in either jurisdiction. However, we believe that if a state in which we did operate opted out of rate exportation that judicial interpretations support the view that such opt outs only apply to loans “made” in those states. If a Borrower Loan made through our marketplace was deemed to be subject to the usury laws of a state that has opted-out of the exportation regime, we could become subject to fines, penalties, possible forfeiture of amounts charged to borrowers and we may decide not to originate Borrower Loans through our marketplace in that applicable jurisdiction, which may adversely impact our growth.

The Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains a number of provisions that could substantially affect our business including:

×

creating the Consumer Financial Protection Bureau (the “CFPB”), a new agency responsible for administering and enforcing laws and regulations relating to consumer financial products and services;

×

making it unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive or abusive act or practice, and giving the CFPB rule-making and enforcement authority to prevent unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service; and

×

transferring rulemaking and enforcement authority to the CFPB with respect to most federal consumer lending laws and regulations, including the Truth-in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act and the Electronic Funds Transfer Act and their respective implementing regulations.

10


Truth-in-Lending Act. The federal Truth-in-Lending Act (“TILA”), and Regulation Z, which implements TILA, require investors to provide consumers with uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. These rules apply to WebBank as the creditor for Borrower Loans facilitated through our marketplace, but because the transactions are carried out on our hosted website, we facilitate compliance. For closed-end credit transactions of the type provided through our marketplace, these disclosures include providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment. The creditor must provide the disclosures before the Borrower Loan is closed. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our marketplace provides borrowers with a TILA disclosure prior to the time a Borrower Loan is originated. We also seek to comply with TILA’s disclosure requirements related to credit advertising.

Equal Credit Opportunity Act. The federal Equal Credit Opportunity Act (“ECOA”) prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, or the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from applicants and from making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as well as to a party such as ourselves that regularly participates in a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers of Notes, if they are deemed to regularly participate in credit decisions. In the underwriting of Borrower Loans on our marketplace, both WebBank and we seek to comply with ECOA’s provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide consumers with timely notices of adverse action taken on credit applications. WebBank and we provide prospective borrowers who apply for a Borrower Loan through our marketplace but are denied credit with an adverse action notice in compliance with applicable requirements (see also below regarding “Fair Credit Reporting Act”).

Fair Credit Reporting Act. The Federal Fair Credit Reporting Act (“FCRA”), administered by the Federal Trade Commission, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report, and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. WebBank and we have a permissible purpose for obtaining credit reports on potential borrowers and WebBank and we also obtain explicit consent from borrowers to obtain such reports. As the servicer for the Borrower Loan, we accurately report Borrower Loan payment and delinquency information to appropriate reporting agencies. We provide an adverse action notice to a rejected borrower on WebBank’s behalf at the time the borrower is rejected that includes all the required disclosures. We have implemented an identity theft prevention program.  

Fair Debt Collection Practices Act. The Federal Fair Debt Collection Practices Act (“FDCPA”) provides guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third-party debt collectors, debt collection laws of certain states impose similar requirements on creditors who collect their own debts. Our agreement with our investors prohibits investors from attempting to directly collect on the Borrower Loan. Actual collection efforts in violation of this agreement are unlikely given that investors do not learn the identity of borrowers. We use our internal collection team and professional third-party debt collection agents to collect delinquent accounts. They are required to comply with the FDCPA and all other applicable laws in collecting delinquent accounts of our borrowers.  

Servicemembers Civil Relief Act. The federal Servicemembers Civil Relief Act (“SCRA”) allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires us to adjust the interest rate of borrowers who qualify for and request relief. If a borrower with an outstanding Borrower Loan qualifies for SCRA protection, we will reduce the interest rate on the Borrower Loan to 6% for the duration of the borrower’s active duty. During this period, the investors who have invested in such Borrower Loan will not receive the difference between 6% and the Borrower Loan’s original interest rate. For a borrower to obtain an interest rate reduction on a Borrower Loan due to military service, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders. We do not take military service into account in assigning Prosper Ratings to borrower loan requests and we do not disclose the military status of borrowers to investors.  

Other Lending Regulations. We are subject to and seek to comply with other state and federal laws and regulations applicable to consumer lending, including additional requirements relating to loan disclosure, credit discrimination, credit reporting, debt collection and unfair, deceptive or abusive business practices. These laws and regulations may be enforced by state consumer credit regulatory agencies, state attorneys general, the CFPB and private litigants, among others. Given our novel business model and the subjective nature of some of these laws and regulations, particularly laws regulating unfair or deceptive business practices, we may become subject to regulatory scrutiny or legal challenge with respect to their compliance with these requirements.

11


Electronic Funds Transfer Act. The federal Electronic Fund Transfer Act (“EFTA”), and Regulation E, which implements it, provides guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts. In addition transfers performed by ACH electronic transfers are subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (“NACHA”). Most transfers of funds in connection with the origination and repayment of the Borrower Loan are performed by ACH. We obtain necessary electronic authorization from borrowers and investors for such transfers in compliance with such rules. Transfers of funds through our marketplace are executed by Wells Fargo and conform to the EFTA, its regulations and NACHA guidelines.  

Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act. The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) and similar state laws, particularly the Uniform Electronic Transactions Act (“UETA”), authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions to obtain the consumer’s consent to receive information electronically. When a borrower or investor registers with our marketplace, we obtain his or her consent to transact business electronically and maintain electronic records in compliance with ESIGN and UETA requirements.  

Privacy and Data Security Laws. The federal Gramm-Leach-Bliley Act (“GLBA”) limits the disclosure of nonpublic personal information about a consumer to nonaffiliated third parties and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information. A number of states have similarly enacted privacy and data security laws requiring safeguards to protect the privacy and security of consumers’ personally identifiable information and to require notification to affected customers in the event of a breach. We have a detailed privacy policy, which complies with GLBA and is accessible from every page of our website. We maintain participants’ personal information securely, and we do not sell, rent or share such information with third parties for marketing purposes unless previously agreed to by the participant. In addition, we take a number of measures to safeguard the personal information of our borrowers and investors and to protect it against unauthorized access.  

Bank Secrecy Act. In cooperation with WebBank, we have implemented an anti-money laundering policy and various anti-money laundering procedures to comply with applicable federal law. With respect to new borrowers and investors, we apply the customer identification and verification program rules and screen names against the list of Specially Designated Nationals maintained by the U.S. Department of the Treasury Office of Foreign Asset Control’s (“OFAC”) pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act (“BSA”) and its implementing regulation.

State Securities Laws. We are subject to the securities laws of each state in which the registration or qualification to offer and sell the Notes and PMI Management Rights has been approved. Certain of these state laws require us to renew the registration or qualification of Notes and PMI Management Rights on an annual basis.

New Laws and Regulations.  From time to time, various types of federal and state legislation are proposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. As a consequence of the extensive regulation of commercial lending in the United States, our business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the cost of doing business.

Foreign Laws and Regulations

We do not permit non-U.S. residents to register as members of our marketplace and we do not operate outside the United States. Therefore, we are not subject to foreign laws or regulations.

 

How our Marketplace Works

The marketplace that Prosper operates is an online marketplace that matches individuals who wish to obtain unsecured consumer loans (“borrower members”) with those who are willing to help fund those loans (“investor members”). A borrower member who wishes to obtain a loan through our marketplace must post a loan listing to our marketplace. We allocate listings to one of two investor member funding channels: (i) the Note Channel, which allows investor members to commit to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the Whole Loan Channel, which allows investor members to commit to purchase a Borrower Loans in their entirety directly from PFL. If a listing receives enough investor member commitments to be funded, WebBank will originate the loan requested and then sell it to PFL. Each Note issued and sold by PFL comes attached with a PMI Management Right issued by PMI.

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In order to obtain a loan through our marketplace, a borrower member must first complete a loan application. We then obtain a credit report on the borrower member and use data from that report as well as data supplied by the borrower member to assign a risk grade to the listing, which is called a “Prosper Rating.” Each time we post a group of listings on our marketplace, we determine the relative proportions of such listings that will be allocated to the Note Channel and the Whole Loan Channel, respectively, based on our estimate of the relative overall demand in each channel. We then use a random allocation methodology to allocate individual listings between the two channels based on those proportions. We currently post listings on our marketplace twice per day on weekdays and once per day on weekends, although the frequency with which we post listings may change in the future. The format for listings is shown below. The images are not from actual listings, but rather depict hypothetical listings created for purposes of illustration. Each listing includes the Prosper Rating, selected items from the borrower member’s credit report and the intended use of the potential loan.

Within the Note Channel, the minimum amount an investor member may bid is $25. Bids made through Quick Invest or Auto Quick Invest, our automated bidding tools, or through Premier, our order execution service, may be for up to 100% of the requested loan amount. For all other bids, the maximum bid amount is 10% of the requested loan amount during the first 24 hours after the loan listing is posted, and 100% of the requested loan amount after that. Thus, it is typical to have multiple investor members bid on a single listing.

The 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. The website, which is located at www.prosper.com, provides detailed information about our marketplace, including detailed fee information, the full text of the member legal agreements and help pages. In addition to the customer support materials available on the website, we make additional customer support available to members by email and phone. Our customer support team is currently located in Killeen, Texas, Phoenix, Arizona and at our headquarters in San Francisco, California.

13


We attract investor members and borrowers to the website 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 the website. In December 2014, the website received approximately 478,568 unique visitors.

Marketplace Participants, Registration Requirements and Minimum Credit Criteria

All marketplace participants must register with PFL and agree to our marketplace’s rules and terms of use, including consent to doing business 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 borrower or investor role for which they are registering.

Borrower Members

Any natural person at least 18 years of age who is a U.S. resident in a state where loans through our marketplace are available with a bank account and a social security number may apply to become a borrower member by registering at www.prosper.com. After passing the anti-fraud and identity verification process, borrower members can request unsecured borrower loans at interest rates set by us. We set minimum credit and other credit guidelines for borrowers, as discussed in the risk grading section.

When a borrower member requests a loan, we first evaluate whether the borrower member meets the underwriting criteria established in conjunction with WebBank. WebBank originates loans to borrower members and then sells and assigns the promissory notes evidencing those loans to PFL. The underwriting criteria apply for all Borrower Loans originated through our marketplace and may not be changed without WebBank’s consent. All borrower members who request a loan are subject to the following eligibility criteria: (1) have at least a 640 credit score, (2) have fewer than seven credit bureau inquiries within the last 6 months, (3) have a stated income greater than $0, (4) have a debt-to-income ratio below 50%, (5) have at least two open trades reported on their credit report, (6) have no reported delinquencies of 30 or more days within the last 3 months, and (7) have not filed for bankruptcy within the last 12 months. In addition, for borrower members who have previously obtained a loan through our marketplace, such borrower members must also have (1) paid off such loan in full, (2) have no prior charge-offs on loans originated through our marketplace, and (3) satisfy the following requirements:

 

Credit Score Range

 

Minimum # Months

Since

Origination of 1st

Borrower Loan

 

 

# of Consecutive

Months

Without 31+ DPD

on 1st

Borrower Loan

 

640-719

 

 

9

 

 

 

9

 

720+

 

 

6

 

 

 

6

 

Underwriting requirements for Borrower Loans, including eligibility requirements for subsequent loans, are subject to change over time.

Borrower members may have up to two Borrower Loans outstanding at one time, provided that (1) the first Borrower Loan is current, (2) the aggregate outstanding principal balance of both Borrower Loans does not exceed the then-current maximum allowable loan amount for Borrower Loans (currently $35,000) and (3) they comply with the prior borrower constraints above.

After receiving a borrower member’s loan request, we verify the deposit account into which the Borrower 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, we will cancel the listing if we are unable to verify the borrower member’s deposit account. While we attempt to authenticate each marketplace participant’s identity, our fraud checks could fail to detect identity theft, fraud and inaccuracies. See “Item 1A. Risk Factors—Risks Related to Borrower Default” for more information.  

Investor Members

Investor members are individuals and institutions that have the opportunity to buy Notes or Borrower Loans. Investor members must register on our marketplace. An individual investor 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 be required to provide his or her state driver’s license or state identification card number. An institutional investor member must provide its taxpayer identification number and entity formation documentation. During the investor registration process, potential investor members who are individuals must authorize us to obtain their credit report for identification purposes. Individual and institutional investor members also must consent to any applicable tax withholding statement and must agree to the terms and conditions of the website. Investor members are not required to give credit information to the same extent as borrower members.

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Investor members who participate in the Note Channel must enter into an investor registration agreement, which agreement governs all sales of Notes to such investor members. At the time an investor member registers to participate in the Note Channel, the investor member must satisfy any minimum financial suitability standards and maximum investment limits established for the Note Channel by the state in which the investor member resides.

Only investor members that are approved by us are eligible to participate in the Whole Loan Channel. At a minimum, an investor member cannot participate in the Whole Loan Channel unless it is an institutional investor and meets the definition of an “accredited investor” set forth in Regulation D under the Securities Act of 1933, as amended. Investor members who participate in the Whole Loan Channel must enter into loan purchase and loan servicing agreements. 

Prior to bidding on a listing, investor members must transfer funds to a funding account maintained on our marketplace. The funds of most investor members are held in a single, pooled funding account, which is referred to s the “pooled funding account”. We have also established dedicated funding accounts for certain investor members that participate in the Whole Loan Channel, each of which is referred to as a “dedicated funding account”. The pooled funding account and each dedicated funding account (collectively, the “FBO Funding accounts”) is a non-interest bearing, demand deposit account, currently maintained by PMI or PFL at Wells Fargo Bank, National Association (“Wells Fargo”). The pooled funding account is held in the name of PFL for the benefit of its investor members, and each dedicated funding account is held in the name of PMI or PFL for the benefit of the applicable investor member.

We cause all payments made or collected on any Note or Borrower Loan owned by an investor member to be deposited into the applicable FBO funding account. An investor member that wishes to make a commitment to purchase a Note or Borrower Loan must have funds equal to the sum of such commitment and all the investor member’s other outstanding purchase commitments in the FBO applicable funding account. For the FBO Funding accounts, We maintain sub-account balances on our system to track commitments and purchases made and loan proceeds received at the investor member level. These sub-accounts are purely administrative and reflect balances and transactions concerning funds in the FBO Funding accounts. Individual investor members have no direct relationship with Wells Fargo by virtue of funds or transactions within the FBO Funding accounts or by virtue of participating on our marketplace.

Each FBO funding account is FDIC-insured on a “pass through” basis to each investor member, subject to applicable limits. This means that each investor member’s cash balance is protected by FDIC insurance, up to the limits established by the FDIC. Other funds the investor member has on deposit with Wells Fargo may count against any applicable FDIC insurance limits. Funds of an investor member in an FBO funding account can consist of amounts deposited by the investor member but never committed to Note or Borrower Loan purchases; amounts the investor member has committed to one or more such purchases, where origination of the corresponding Borrower Loan has not yet occurred; or amounts received as principal and interest payments on Notes or Borrower Loans owned by the investor member that the investor member has not yet withdrawn. Upon request by an investor member, we will transfer funds from the applicable FBO funding account to the investor member’s designated and verified external bank account, provided such funds are not already committed to Note and/or Borrower Loan purchases. To the extent an investor member does not withdraw any such amounts, they will remain in the applicable FBO funding account indefinitely.

Relationship with WebBank

WebBank is a FDIC-insured, Utah-chartered industrial bank that originates all Borrower Loans made through our marketplace. WebBank and Prosper are parties to a Loan Account Program Agreement, under which PMI manages the operations of our marketplace that relate to the submission of Borrower Loan applications by borrower members, the making of related Borrower Loans by WebBank and the funding of such Borrower Loans by WebBank in exchange for a fee equal to the origination fee charged by WebBank. Under the Loan Account Program Agreement, Prosper has agreed to indemnify WebBank with respect to any damages arising from WebBank’s participation in the origination of Borrower Loans as contemplated in the Loan Account Program Agreement. Prosper is a party to a Loan Sale Agreement, under which WebBank sells and assigns the promissory notes evidencing the Borrower Loans to PFL. As consideration for WebBank’s agreement to sell and assign the promissory notes, Prosper pays WebBank a monthly fee in addition to the purchase price of the promissory notes themselves.  

Risk Management

Our risk management has evolved from its inception. We have consistently worked to improve the information provided to investor members in order to help them make sound investment decisions. A major source of improvement has been to progressively incorporate the historical performance of Borrower Loans originated through our marketplace into our proprietary rating system (the “Prosper Rating”) as more Borrower Loan outcome data becomes available over time. We intend to continuously refine the Prosper Rating system by regularly reassessing the system. For more information about how the Prosper Rating and estimated loss rates are calculated and reassessed, see the following sections under this discussion of “Risk Management”.

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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 reflects the 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 recent information. There are currently seven Prosper Ratings, but this, as well as the loss ranges associated with each, may change over time as our marketplace dictates. We intend to regularly update the loss rates associated with the Prosper Ratings to reflect the ongoing actual performance of 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 Borrower Loans with similar characteristics and is primarily determined by two scores: (i) a custom Prosper Score, and (ii) 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. 

Prosper Score

The Prosper Score predicts the probability of a Borrower Loan going “bad,” where “bad” is defined as going more than 60 days past due within twelve months of the application date. To create the Prosper Score, we developed a custom risk model using our historical data as well as a data archive from a consumer credit bureau. We built the model on our borrower member population so that it would incorporate behavior that is unique to that population. In contrast, a credit score obtained from a credit reporting agency is based on a much broader population, of which borrower members through our marketplace 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 the custom risk model, we used borrower members from April 2008 through May 2012 and measured their performance for the twelve months following their date of application. 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. The final model includes variables such as “Inquiries last six months” and “Debt-to-Income Ratio”. The former is an example of a credit report variable and the latter uses both credit report information as well as income information provided by the borrower member.

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The model assigns weights to all of the variables based on their value in predicting the likelihood of a Borrower Loan going bad. For a given borrower member, the model estimates the probability of the borrower member becoming bad, which is called the borrower member’s “probability of bad.” The probability of bad for a borrower member is then mapped to a Prosper Score, which is displayed as part of that listing. Prosper Scores range from 1 to 11, with 11 being the best, or lowest risk value. The probability of bad ranges and the corresponding Prosper Scores are as follows.  

 

Probability of Bad

 

Prosper Score

 

> 10.50%

 

 

1

 

9.50 < x <= 10.50%

 

 

2

 

8.50 < x <= 9.50%

 

 

3

 

7.00 < x <= 8.50%

 

 

4

 

6.50 < x <= 7.00%

 

 

5

 

5.75 < x <= 6.50%

 

 

6

 

5.00 < x <= 5.75%

 

 

7

 

4.25 < x <= 5.00%

 

 

8

 

3.75 < x <= 4.25%

 

 

9

 

3.00 < x <= 3.75%

 

 

10

 

0.00 < x <= 3.00%

 

 

11

 

For example, a probability of bad of 3.29% equates to a Prosper Score of 10 and a probability of bad of 12.00% equates to a Prosper Score of 1. The probability of bad ranges may change over time as additional performance data is acquired.

Credit Bureau Score

In addition to the Prosper Score, another major element used to determine the Prosper Rating for a listing is a credit score from a consumer reporting agency. We currently use Experian’s FICO08 score, although we may use one or more different scores in the future. (We used Experian’s Scorex PLUS score for all listings begun prior to September 6, 2013.) The minimum credit score required for a borrower to post a listing is 640 as of December 31, 2014.

We obtain a borrower member’s credit score at the time the 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 Borrower Loans, and we include the applicable score ranges by month in listings on the Note Trader platform. We do not disclose the borrower member’s exact credit score to any of marketplace members, except for the borrower himself.

17


Assigning Estimated Loss Rates

Estimated loss rates are based on the historical performance of Borrower Loans originated through our marketplace with similar characteristics and are primarily determined by Prosper Scores and credit scores. The starting point for this determination is the base loss rate table, shown below, which was created by dividing the range of Prosper Scores and credit scores into multiple segments and combining them into a single grid. A base loss rate is estimated for each cell in the table, based on the historical performance of Borrower Loans originated through our marketplace that occupied the same cell (i.e., that had the same point of intersection for their Prosper Score and credit score). Cells may be given the same loss rate due to small volume, similar behavior or both. We review loan performance on a monthly basis to see how the loss rate estimates compare to the actual performance of Borrower Loans, and make adjustments as necessary based on such reviews. Please refer to the website for the estimated base loss rate table currently in use. Estimated base loss rates for the cells in the table below correspond to those in effect as of December 31, 2014.

 

 

 

Experian FICO08 Credit Score

 

 

 

 

 

Prosper Score

 

599-619

 

 

619-639

 

 

639-659

 

 

659-679

 

 

679-699

 

 

699-719

 

 

719-739

 

 

739-759

 

 

759-779

 

 

779-799

 

 

799-829

 

 

829-850

 

1

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

 

 

22.25

%

2

 

 

22.25

%

 

 

22.25

%

 

 

15.75

%

 

 

14.75

%

 

 

13.25

%

 

 

10.75

%

 

 

8.99

%

 

 

7.49

%

 

 

6.99

%

 

 

4.99

%

 

 

3.49

%

 

 

3.24

%

3

 

 

22.25

%

 

 

22.25

%

 

 

14.75

%

 

 

12.25

%

 

 

11.25

%

 

 

9.25

%

 

 

8.49

%

 

 

6.99

%

 

 

5.74

%

 

 

4.24

%

 

 

3.24

%

 

 

2.99

%

4

 

 

22.25

%

 

 

22.25

%

 

 

13.75

%

 

 

9.25

%

 

 

8.74

%

 

 

8.49

%

 

 

7.24

%

 

 

6.24

%

 

 

5.24

%

 

 

3.49

%

 

 

2.99

%

 

 

2.24

%

5

 

 

22.25

%

 

 

22.25

%

 

 

12.25

%

 

 

8.99

%

 

 

7.49

%

 

 

6.74

%

 

 

5.49

%

 

 

5.24

%

 

 

4.74

%

 

 

3.24

%

 

 

2.49

%

 

 

1.99

%

6

 

 

22.25

%

 

 

22.25

%

 

 

9.25

%

 

 

7.74

%

 

 

5.99

%

 

 

5.74

%

 

 

4.99

%

 

 

4.49

%

 

 

4.24

%

 

 

2.49

%

 

 

1.99

%

 

 

1.24

%

7

 

 

22.25

%

 

 

22.25

%

 

 

8.49

%

 

 

5.99

%

 

 

5.24

%

 

 

4.49

%

 

 

4.99

%

 

 

3.74

%

 

 

3.74

%

 

 

2.49

%

 

 

1.74

%

 

 

0.99

%

8

 

 

22.25

%

 

 

22.25

%

 

 

7.24

%

 

 

4.99

%

 

 

4.24

%

 

 

3.74

%

 

 

3.49

%

 

 

3.24

%

 

 

2.99

%

 

 

2.24

%

 

 

1.49

%

 

 

0.99

%

9

 

 

22.25

%

 

 

22.25

%

 

 

5.49

%

 

 

4.24

%

 

 

3.74

%

 

 

3.49

%

 

 

2.99

%

 

 

2.49

%

 

 

2.24

%

 

 

1.74

%

 

 

1.24

%

 

 

0.74

%

10

 

 

22.25

%

 

 

22.25

%

 

 

5.24

%

 

 

3.74

%

 

 

3.74

%

 

 

3.24

%

 

 

2.74

%

 

 

1.99

%

 

 

1.49

%

 

 

0.99

%

 

 

0.74

%

 

 

0.74

%

11

 

 

22.25

%

 

 

22.25

%

 

 

4.24

%

 

 

3.24

%

 

 

2.74

%

 

 

1.74

%

 

 

1.49

%

 

 

1.24

%

 

 

0.74

%

 

 

0.74

%

 

 

0.74

%

 

 

0.74

%

The table above applies to borrower members seeking their first Borrower Loan through our marketplace. Although borrower members with credit scores below 640 are depicted in the table above, such borrower members are not eligible for a Borrower Loan through our marketplace as of December 31, 2014. We can make adjustments to the base loss rate to determine the final loss rate. For example we make adjustments for whether the borrower member has already been a borrower through our marketplace and for the term of the Borrower Loan. The final loss rate determines the Proper Rating. The value of the adjustments are based on historical data, where available, as well as observed industry performance and behavior. An example of a potential adjustment is shown below:

Here is an example of how the final loss rate and Prosper Rating for a loan listing would be calculated:

-

Borrower member credit bureau score = 730 and Prosper score = 6

-

Borrower member selects a 60 month loan term

 

Base Loss Rate:

 

 

4.99

%

Adjustments:

 

 

 

 

-Loan Term:

 

 

1.75

%

Final Loss Rate:

 

 

6.74

%

Prosper Rating:

 

C

 

Calculating Loss Estimates

Loss rates for a particular group of Borrower Loans will be a function of the group’s delinquency and loss behavior over time, pre-payment behavior over time, and responsiveness to collections activity. For Borrower Loans originated through our marketplace, the largest driver of the loss rate is the rate at which a group of Borrower Loans becomes delinquent and charges off. A loan becomes “charged off” and is considered a loss when it becomes 121 or more days past due.

Modeling Loss Rates. The loss rate is the balance-weighted average of the monthly loss rates for the group of Borrower Loans over the term of such loans. The gross loss rate is adjusted for principal recovery net of collection expenses to arrive at a net loss rate.

18


Estimating Losses. We determine the loss component of the loss rate calculation by analyzing losses for Borrower Loans and making adjustments to reflect anticipated deviations from historical performance that may exist due to the current macro-economic or competitive environment. Changes in delinquency and losses have the largest impact on the expected loss rate of a group of Borrower Loans, and so changes in loan delinquency and loss performance are monitored on at least a monthly basis.

Calculating Average Balance. To calculate the average balance for each period, we used the amount of loan principal on Borrower Loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each Borrower Loan declines over time.

When a Borrower Loan pays faster than its amortization schedule (pre-payment), the portion of the principal that is pre-paid is no longer included in the outstanding balance for subsequent periods. Once a Borrower Loan has been charged-off, the principal associated with such loan is considered a credit loss and is no longer included in the outstanding periodic balance.

Collection Expense and Recovery Adjustments. When an account becomes past due, we may collect on the account directly or refer the account to a third-party collection agency. Our in-house collections department and third-party collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule. Once an account has been charged-off, any subsequent payments received or proceeds from the sale of the Borrower Loan in a debt sale are considered recoveries and reduce the amount of principal lost.

Comparing Estimated Loss Rates to Actual Losses

We review the performance of Borrower Loans on a monthly basis to determine how loss rate estimates compare to actual performance. As part of this monthly review, the processes for calculating and assigning loss rates and Prosper Ratings described in the preceding sections are reassessed to ensure continued accuracy. The graphs below show the estimated versus actual cumulative dollar loss rates by Prosper Rating for Borrower Loans, collectively, booked from July 13, 2009 through December 31, 2014. Performance is as of December 31, 2014. The loss performance is tracked by vintage, meaning each line represents all Borrower Loans originated in a given period. The graphs only include Borrower Loans that have been outstanding at least 6 months. In addition, data for a point along the x axis is only included if the entire vintage is at least that mature. So, although Borrower Loans originated in April 2014 have 8 months of performance, only 6 months of performance are reflected in the graphs below because the June 2014 Borrower Loans, which are also a part of the 2014 Q2 vintage, have only completed 6 months of performance.  

Vintages generally contain enough loan volume for their performance curves to be meaningful. For presentation purposes, some of the older vintages have been grouped into annual and half-year vintages.

19


Below is a graph that shows cumulative net charge-offs as a percentage of originations across all Prosper Ratings by vintage for Borrower Loans, collectively, originated from July 13, 2009 to June 30, 2014. The addition of “H1” means that the information reported reflects the first six months of the year presented, while “H2” reflects the second 6 months of the year presented. Similarly, “Q1” or “Q2” means that the information reported reflects the first or second quarter of the year presented.

 

Overall, vintages originated in 2012H2 and early 2013 are demonstrating meaningfully lower cumulative losses than those originated in 2011 and 2012H1. We consider changes in the risk management process implemented at the end of 2012 and in early 2013 to be a meaningful driver of this trend.

20


The graphs below show cumulative net charge-offs for Borrower Loans, collectively, as a percentage of originations for each Prosper Rating presented by vintage from July 13, 2009 to December 31, 2014.

 

21


 


22


 


23


 

Note: Estimated 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 the estimated curve was set at 19.50% cumulative principal loss.

In many rating grades, risk is trending above estimates for the 2011 and 2012 vintages. In instances such as these where a material variance relative to estimates exists, we perform additional analysis to understand the reason for the variance and adjust our credit policy as necessary to bring losses back in-line with estimates. To date, all of the vintages since the Q1 2013 vintage have cumulative losses below their respective estimated lines. We consider this change in performance to be a direct result of changes made to our risk management practices at the end of 2012 and the beginning of 2013.  

24


Please note that the historical performance of Borrower Loans may not be indicative of the future performance of Borrower Loans. See “Item 1A. Risk Factors—Risks Related to PFL and PMI, our marketplace and PFL and PMI’s Ability to Service the Notes” for more information.  

Maximum Loan Amount

The maximum loan amount for a listing is determined by the borrower member’s Prosper Rating. The table below shows the maximum loan amount for each Prosper Rating as at December 31, 2014:

 

Prosper Rating

 

Maximum Loan Amount

 

AA

 

$

35,000

 

A

 

 

35,000

 

B

 

 

35,000

 

C

 

 

30,000

 

D

 

 

25,000

 

E

 

 

10,000

 

HR

 

 

7,500

 

Borrower Identity and Financial Information Verification

PFL reserves the right in its member agreements to verify the accuracy of all statements and information provided by borrower members and investor 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 a borrower member 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 a borrower member 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 borrower member, we will cancel the listing or related loan. Our participation in funding Borrower Loans through our marketplace from time to time has had, and will continue to have, no effect on the income and employment verification process, the selection of loan requests verified or the frequency of income and employment verification.

We verify the identity of every borrower who obtains a Borrower Loan through our marketplace using a combination of documentary and non-documentary methods. We compare the information contained in each borrower member’s credit report with the information contained in the application, and run the application information through a fraud database. In addition, we ask certain borrower members to submit a copy of their current driver’s license, passport or other government-issued, photo identification card, which are then authenticated using third-party reference materials. Finally, we require the borrower member to submit bank statements, cancelled checks or other documentary evidence to verify the accuracy of his or her bank account information. To the extent any of these processes identify inconsistencies between the information submitted by the borrower member and the information contained in another data source, the borrower member must submit documentation to resolve the discrepancy to our satisfaction. For example, the borrower member might be required to submit a recent utility bill to reconcile a discrepancy between the current address listed in his or her application and the one listed in his or her credit report. If we are unable to verify the identity of a borrower member in the manner described above, we will cancel the borrower member’s listing or pending loan.

In addition to the identity verification processes just described, we verify income and employment information for a subset of borrower members based on a proprietary algorithm. The intention of this algorithm is to identify instances where the borrower member’s self-reported income is highly determinative of the borrower member’s Prosper Rating. The algorithm gives greatest weight to the following factors:

×

Prosper Rating;

×

loan amount;

×

stated income; and

×

debt-to-income ratio.

25


To verify a borrower member’s income, we require the borrower member 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 member’s employment, we obtain confirmation from the human resources department of the borrower member’s employer, verbally or by email, or phone the main phone number of the borrower member’s employer and confirm that we can be connected directly to the borrower member’s work number from that main number.

Between July 14, 2009 and December 31, 2014 (based on start time of the applicable bidding period), we verified employment and/or income on approximately 60% of the Borrower Loans originated through our marketplace on a unit basis (117,992 out of 196,904) and approximately 78% of such loans on a dollar basis ($1,738 million out of $2,238 million). Breaking these numbers down by Prosper Rating:

·

for Borrower Loans with a Prosper Rating of AA, A or B, we  verified income and/or employment information on approximately 69% of such loans on a unit basis (68,594 out of 99,501) and approximately 83% of such loans on a dollar basis ($1,090 million out of $1,320 million);  

·

for Borrower Loans with a Prosper Rating of C or D, we verified income and/or employment information on approximately 63% of such loans on a unit basis (45,264 out of 71,724) and approximately 77% of such loans on a dollar basis ($618 million out of $799 million); and

·

for Borrower Loans with a Prosper Rating of E or HR, we verified income and/or employment information on approximately 16% of such loans on a unit basis (4,134 of 25,679) and approximately 25% of such loans on a dollar basis ($30 million out of $119 million).

Between July 14, 2009 and December 31, 2014, we canceled 29,065 or 15% of the loan listings for which we verified employment and/or income information because the listings contained inaccurate or insufficient employment or income information. Please note that historical data regarding Borrower Loans may not be indicative of the characteristics of future Borrower Loans. See “Item 1A. Risk Factors—Risks Related to our marketplace and PFL and PMI’s Ability to Service the Notes” for more information.

If a borrower member fails to provide satisfactory information in response to an income or employment verification inquiry, we will (a) request additional information from the borrower member, (b) cancel the borrower member’s listing or (c) refuse to proceed with the funding of the loan. Where we choose to verify a borrower member’s income or employment information, the verification is normally done after the borrower member’s listing has already been posted. This allows us to focus our 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 an application or listing that has resulted in the borrower member obtaining a different Prosper Rating or interest rate for his or her listing than she would have obtained if he or she had provided the correct information, we cancel the listing. If we identify inaccurate information in a 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 investor members who made commitments to the listing that the listing has been cancelled, and we send an adverse action notice to the borrower member indicating the reasons for cancellation. We make the funds committed by the investor 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 listings other than identity, income and employment information. We derive the borrower member’s debt-to-income ratio (“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 is presumed to be a homeowner. Investor members should not rely on unverified information provided by borrower members. See “Item I.A. Risk Factors—Risks Related to Borrower Default—The maximum debt-to-income ratio for all borrower members is 50%” for more information.  

Under the Administration Agreement, Prosper is required to perform borrower identity and financial information verification services on behalf of PFL in the manner and to the extent contemplated in this section. We are continuously looking for ways to improve our verification procedures in a cost-effective manner in order to increase the repayment performance of Borrower Loans. See “Item 1A. Risk Factors—Risks Related to Borrower Default—Information supplied by borrower members may be inaccurate or intentionally false. Information regarding income and employment is not verified in many cases” for more information.

26


Note Repurchase and Indemnification Obligations

Under the terms of each Note, if a “Repurchase Event” occurs with respect to that Note, PFL will, at its sole option, either repurchase the Note from the holder or indemnify the holder of the Note for any losses resulting from nonpayment of the Note or from any claim, demand or defense arising as a result of such Repurchase Event. A “Repurchase Event” with respect to a Note means (i) a Prosper Rating different from the Prosper Rating actually calculated by us was included in the listing for the corresponding Borrower Loan, as a result of which the interest of the holder in the Note is materially and adversely affected, (ii) a Prosper Rating different from the Prosper Rating that should have appeared was included in the listing for the corresponding Borrower Loan because either we inaccurately input data into the formula for determining the Prosper Rating or inaccurately applied the formula for determining the Prosper Rating and, as a result, the interest of the holder in the Note is materially and adversely affected, or (iii) the corresponding Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower member and a material payment default under the corresponding Borrower Loan has occurred.

Under PFL’s standard form of loan purchase agreement for participants in the Whole Loan Channel, PFL will repurchase a Borrower Loan from the purchaser if the Borrower Loan is legally unenforceable because it did not comply with applicable laws in effect at the time the Borrower Loan was originated, or if the Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower member.

The determination of whether verifiable identify theft has occurred is in our sole discretion, and we have the exclusive right to investigate such claims. We may, in our reasonable discretion, require proof of the identify theft, such as a copy of a police report filed by the person whose identity was wrongfully used to obtain the Borrower Loan, an identity theft affidavit, a bank verification letter or all of the above. Because we are the sole entities with the ability to investigate and determine verifiable identity theft, which in turn triggers PFL’s repurchase or indemnification obligations, a conflict of interest exists. We believe the risk created by this conflict of interest is mitigated by three factors that incent us to vigorously investigate claims of identity theft. First, without the protection offered by PFL’s repurchase and indemnification obligations, fewer potential investor members will have the confidence to participate in our marketplace, limiting the growth and long term profitability of PFL. Second, the Loan Program Agreement between Prosper and WebBank includes a requirement—and accompanying audit function—to ensure that claims of identity theft are thoroughly investigated and accurately reported. Third, California statutes provide strong remedies to victims of identity theft whose claims are not adequately investigated or were frivolously dismissed. See “Item 1A. Risk Factors—Risks Related to Borrower Default—The fact that we have the exclusive right and ability to investigate claims of identity theft in the origination of Borrower Loans creates a significant conflict of interest between us and our investor members.”

PFL is under no obligation to repurchase a series of Notes or indemnify any holder of Notes if a correctly determined Prosper Rating fails to accurately predict the actual losses on a Borrower Loan. In addition, the remedy described above for identity theft with respect to Notes and Borrower Loans 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. See “Item 1A. Risk Factors—Risks Inherent in Investing in the Notes—PFL is not obligated to indemnify a Note holder or repurchase any Notes except in limited circumstances.” PFL expects the incidence of identity fraud in our marketplace to be low because of the identity verification process. From 2006 through December 31, 2014, we experienced identity fraud cases affecting 59 Borrower Loans. In the cases of identity theft we have experienced, we received a police report and identity theft affidavit from the victim evidencing that identity theft had occurred. Please note that historical data regarding Borrower Loans may not be indicative of the future characteristics of Borrower Loans. See “Item 1A. Risk Factors—Risks Related to PFL and PMI, our marketplace and PFL and PMI’s Ability to Service the Notes” for more information.

Under PFL’s investor registration agreements with investor members who participate in the Note Channel, PFL represents and warrants that (i) if an investor member uses an automated bidding tool or order execution service offered by PFL, such as Quick Invest, Auto Quick Invest or Premier, to identify Notes for purchase, each Note purchased will conform to the investment criteria provided by the investor member through such tool or service, and (ii) each Note that an investor member purchases from PFL will be in the principal amount of the bid such investor member placed and will correspond to the Borrower Loan on which such investor member bid. If PFL breaches either of these representations and warranties and, as a result, the Note sold to an investor member is materially different from the Note that would have been sold had the breach not occurred or if the investor member would not have purchased the Note at all absent such breach, PFL will, at its sole option, either indemnify the investor member from any losses resulting from such breach, repurchase the Note or cure the breach, if the breach is susceptible to cure. If PFL breaches any of its other representations and warranties in the investor member registration agreement and such breach materially and adversely affects an investor member’s interest in a Note, PFL will, at its sole option, either indemnify the investor member, repurchase the affected Note from such investor member or cure the breach. The determination of whether a breach is susceptible to cure is in PFL’s sole discretion.

27


Calculation of Repurchase Price and Indemnification Payments

If PFL elects to repurchase a Note or Borrower Loan in connection with a repurchase event or breach described above, the repurchase price will be equal to the principal amount outstanding on the Note or Borrower Loan as of the date of repurchase and will not include accrued and unpaid interest. If PFL elects to provide indemnification in connection with a repurchase event or the breach of a representation or warranty under the investor registration agreement for Note Channel participants, PFL will not be required to take any action with respect to any losses suffered until the affected Note is at least one hundred twenty (120) days past due. For purposes of indemnification, PFL will calculate the losses resulting from nonpayment of a Note based on the principal amount outstanding on the Note. If PFL makes an indemnification payment, PFL will be entitled to retain any subsequent recoveries that it receives on the affected Note.

Effect on PMI Management Rights

If PFL repurchases any Notes, PMI will concurrently repurchase the related PMI Management Rights for zero consideration.

Historical Performance of Borrower Loans

The performance of Borrower Loans is a function of the credit quality of borrowers and the risk and return preferences of investor members. Investor 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, investor members consider borrower members’ Prosper Ratings, credit scores, debt-to-income ratios and other credit data and information displayed with listings. See “Item 1A. Risk Factors—Risks Related to Borrower Default.”

28


The graph below displays the overall level of delinquency for Borrower Loans, collectively, on a calendar basis. Loss estimates for the portfolio on a vintage basis may be found in the section “Comparing Estimated Loss Rates to Actual Losses”.

The following table presents aggregated information as of December 31, 2014, grouped by Prosper Rating, for all Borrower Loans, collectively, originated on our marketplace from July 13, 2009 through December 31, 2014. 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, 2014.

Borrower Loan Originations

July 13, 2009 - December 31, 2014

(as of December 31, 2014)

(in thousands, except for number amounts)

 

 

 

Total Loan Originations

 

 

Current Loans

 

 

1-30 Days Past Due

 

Prosper

Rating

 

No.

 

 

Origination

Amount

 

 

No.

 

 

Origination

Amount

 

 

Outstanding

Principal

 

 

No.

 

 

Origination

Amount

 

 

Outstanding

Principal

 

AA

 

 

16,952

 

 

$

217,602

 

 

 

14,045

 

 

$

189,294

 

 

$

160,420

 

 

 

40

 

 

$

566

 

 

$

430

 

A

 

 

40,245

 

 

 

520,440

 

 

 

33,277

 

 

 

452,126

 

 

 

384,579

 

 

 

214

 

 

 

2,968

 

 

 

2,292

 

B

 

 

41,489

 

 

 

570,002

 

 

 

34,114

 

 

 

492,938

 

 

 

432,598

 

 

 

349

 

 

 

4,941

 

 

 

4,006

 

C

 

 

44,449

 

 

 

543,620

 

 

 

35,504

 

 

 

456,773

 

 

 

403,475

 

 

 

591

 

 

 

7,733

 

 

 

6,414

 

D

 

 

26,854

 

 

 

250,019

 

 

 

16,914

 

 

 

179,730

 

 

 

158,648

 

 

 

397

 

 

 

4,157

 

 

 

3,308

 

E

 

 

17,527

 

 

 

90,533

 

 

 

10,632

 

 

 

58,515

 

 

 

50,555

 

 

 

301

 

 

 

1,687

 

 

 

1,405

 

HR

 

 

8,071

 

 

 

28,229

 

 

 

2,776

 

 

 

9,978

 

 

 

6,138

 

 

 

105

 

 

 

377

 

 

 

217

 

 

 

 

195,587

 

 

$

2,220,445

 

 

 

147,262

 

 

$

1,839,354

 

 

$

1,596,413

 

 

 

1,997

 

 

$

22,429

 

 

$

18,072

 

Avg loan size:

 

 

 

 

 

$

11.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total

 

 

 

 

 

 

 

 

 

 

75.3

%

 

 

82.8

%

 

 

 

 

 

 

1.0

%

 

 

1.0

%

 

 

 

 

29


 

 

 

Paid In Full

 

 

31+ Days Past Due

 

 

Defaulted 1

 

Prosper

Rating

 

No.

 

 

Origination Amount

 

 

No.

 

 

Origination

Amount

 

 

Outstanding

Principal

 

 

No.

 

 

Origination

Amount

 

 

Net

Charged Off

Principal

 

AA

 

 

2,708

 

 

$

25,885

 

 

 

37

 

 

$

475

 

 

$

374

 

 

 

122

 

 

$

1,383

 

 

$

982

 

A

 

 

5,899

 

 

 

55,585

 

 

 

190

 

 

 

2,465

 

 

 

1,901

 

 

 

665

 

 

 

7,296

 

 

 

5,440

 

B

 

 

5,624

 

 

 

56,513

 

 

 

375

 

 

 

4,885

 

 

 

4,033

 

 

 

1,027

 

 

 

10,725

 

 

 

8,389

 

C

 

 

6,110

 

 

 

55,549

 

 

 

563

 

 

 

7,134

 

 

 

6,037

 

 

 

1,681

 

 

 

16,431

 

 

 

13,393

 

D

 

 

6,736

 

 

 

44,741

 

 

 

430

 

 

 

4,200

 

 

 

3,464

 

 

 

2,377

 

 

 

17,191

 

 

 

13,330

 

E

 

 

4,355

 

 

 

19,619

 

 

 

330

 

 

 

1,801

 

 

 

1,509

 

 

 

1,909

 

 

 

8,911

 

 

 

6,889

 

HR

 

 

3,250

 

 

 

11,056

 

 

 

136

 

 

 

498

 

 

 

298

 

 

 

1,804

 

 

 

6,321

 

 

 

4,761

 

 

 

 

34,682

 

 

$

268,948

 

 

 

2,061

 

 

$

21,458

 

 

$

17,616

 

 

 

9,585

 

 

$

68,258

 

 

$

53,184

 

Percent of total

 

 

17.7

%

 

 

12.1

%

 

 

1.1

%

 

 

1.0

%

 

 

 

 

 

 

4.9

%

 

 

3.1

%

 

 

 

 

1

Includes all Borrower Loans more than 120 days past due

 

Default due to  Delinquency:

 

 

8,190

 

 

$

44,803

 

Default due to  Bankruptcy2 :

 

 

1,395

 

 

$

8,381

 

2

Only includes Borrower Loans where the bankruptcy notification date is prior to the date such loan became more than 120 days past due. If we were notified of a bankruptcy after a Borrower Loan was more than 120 days past due, then such loan is included in the “Default due to Delinquency” totals.

The data in the preceding tables regarding Borrower Loans may not be representative of the loss experience that will develop for future Borrower Loans. In addition, the data in the preceding tables may not be representative of the impact of prepayments experienced on Borrower Loans over time.

The following table presents aggregate information, as of December 31, 2014, regarding the results of Prosper’s collection efforts for Borrower Loans, collectively, originated after July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating (in thousands except for number amounts).

 

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

 

 

188

 

 

$

2,120

 

 

$

121

 

 

$

36

 

 

 

122

 

 

$

989

 

 

$

1

 

 

$

988

 

A

 

 

990

 

 

 

11,122

 

 

 

630

 

 

 

305

 

 

 

665

 

 

 

5,549

 

 

 

124

 

 

 

5,426

 

B

 

 

1,616

 

 

 

17,912

 

 

 

1,065

 

 

 

487

 

 

 

1,027

 

 

 

8,537

 

 

 

129

 

 

 

8,408

 

C

 

 

2,561

 

 

 

26,623

 

 

 

1,680

 

 

 

863

 

 

 

1,681

 

 

 

13,621

 

 

 

29

 

 

 

13,593

 

D

 

 

3,189

 

 

 

24,041

 

 

 

1,704

 

 

 

1,058

 

 

 

2,377

 

 

 

13,669

 

 

 

234

 

 

 

13,435

 

E

 

 

2,543

 

 

 

12,085

 

 

 

973

 

 

 

596

 

 

 

1,909

 

 

 

7,118

 

 

 

239

 

 

 

6,879

 

HR

 

 

2,174

 

 

 

7,653

 

 

 

652

 

 

 

443

 

 

 

1,804

 

 

 

4,933

 

 

 

133

 

 

 

4,800

 

 

 

 

13,261

 

 

$

101,556

 

 

$

6,825

 

 

$

3,788

 

 

 

9,585

 

 

$

54,416

 

 

$

889

 

 

$

53,529

 

* This amount excludes collection agency payments that were subsequently returned due to insufficient funds.

We may alter the terms or make principal reductions on some Borrower Loans, which may include cases where a reduction in the initial interest rate is required by law. The Servicemembers’ Civil Relief Act requires interest rates to be reduced to 6% while a borrower in the armed forces is on active duty. In order to comply with the Servicemembers’ Civil Relief Act, 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, PFL has refunded the interest to the borrower from PFL’s own funds and, as a result, the payments received by the applicable investor members were unchanged.

30


Loan Originations

The following table presents aggregated information about Borrower Loans, collectively, originated over the period from July 13, 2009 to December 31, 2014, grouped by Prosper Rating (in thousands except for number amounts).

 

Prosper Rating

 

Number

 

 

Amount

 

 

Average

Loan

Size

 

 

Weighted

Average

Investor

Yield

 

 

Weighted

Average

Borrower

Rate

 

 

Weighted

Average

Borrower

APR

 

AA

 

 

16,952

 

 

$

217,602

 

 

$

12.8

 

 

 

6.45

%

 

 

7.45

%

 

 

8.70

%

A

 

 

40,245

 

 

 

520,440

 

 

 

12.9

 

 

 

9.78

%

 

 

10.78

%

 

 

13.46

%

B

 

 

41,489

 

 

 

570,002

 

 

 

13.7

 

 

 

13.09

%

 

 

14.09

%

 

 

17.01

%

C

 

 

44,449

 

 

 

543,620

 

 

 

12.2

 

 

 

16.83

%

 

 

17.83

%

 

 

20.77

%

D

 

 

26,854

 

 

 

250,019

 

 

 

9.3

 

 

 

21.52

%

 

 

22.52

%

 

 

25.70

%

E

 

 

17,527