Tuesday, April 8, 2008

Mail from Lending Club

I got this in my inbox today:

Dear Judith,

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.

Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

Q&A:

Q1. What about money I have begun moving, but is still in transit to Lending Club?
A1.1. If you are in the process of verifying your bank account, you will be able to complete that verification but will not be able to add new funds
A1.2 If you have initiated a transfer, the funds will be displayed in your Lending Club account balance as soon as those funds are available.
A1.3 If you have uncommitted funds, you may request that Lending Club return those funds via the same method used to load the funds. For example,
• If you have initiated an ACH to add funds, these funds will be transferred into your Lending Club account but you will not be able to lend these funds out. You can go into your Lending Club account once the ACH transfer has been completed and withdraw funds back into your linked bank account..
• If you've wired funds into your Lending Club account and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to wire these funds back to you at no charge.
• If you've sent funds by check, and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to send you a check by mail for the same amount at no charge.

Q2. What about referrals?
A2.1 The current referral program is terminated. If you have referred someone who has already signed up as a lender or a borrower, or if you have been referred by someone and have already signed up as a lender or a borrower, you will be receiving your referral payment within the next few days.

Sincerely,

Patrick Gannon
Senior Vice President
Lending Club
440 N Wolfe Road
Sunnyvale CA 94085
www.lendingclub.com


What this means is that uncommitted money I have in my account can't go to work there. I have to take it out to get it working, for an unspecified amount of time. What it means is no more referrals. And all this is out of the blue. I'm not impressed. But I've got his address. And so do you.

Friday, March 28, 2008

Credit unions: why I am considering a move

The other day I received a notice from my bank - Washington Mutual - that five debits had not cleared my account and therefore I was charged $30 per transaction for the overdraw - a total of $150. I discovered the problem when I was glancing at my accounts for another reason, before I got a notice from the bank.

I made a mistake. I have two checking accounts there and each has a debit card. Somehow the card I normally use had gotten shoved down in my wallet and the other one, which I normally do not use, was staring out at me. I used the wrong card for those transactions and therefore overdrew that account.

I wrote to the bank to ask

1) why don't they let me know the day the overdraw occurs, and
2) how about reversing some of those charges.

They wrote back. Sorry can't reverse the charges. For my convenience they did overdraw the account rather than bounce the checks.

I wrote back. What about my first question? And why are your fees so ridiculously high?

The answer: WaMu does offer the option of sending alerts. The message went on to describe how to set it up to get alerts. Fees are always being reviewed to be competitive with the industry.

Of course I already get alerts. Just not in time. And fees being set to be competitive? How about setting them to draw customers or keep the ones you have? The messages clearly were standardized. I guess the person answering picks out a couple of key words and sends the appropriate response.

In other words, I got no satisfaction. My daughter Elaine mentioned that she is looking into getting a credit union account instead because of the ridiculous fees and the delays in clearing checks whenever she and her husband deposit a large check.

I am now in the midst of choosing a credit union myself. What I hope to find is one that offers the options I find most valuable - free billpay, for example - as well as better rates for savings and lower fees for everything. My first step was to go to bankrate.com.

Bankrate.com offers a page: Six ways to find a credit union. For me, the big find on this page was CUNA: The Credit Union National Association.

On this site I found a page that helps one find a credit union. Because I am not employed right now and do not belong to any organizations (other than animal rights and eco types) or to any church, I simply entered my city, county, and state. Five matches turned up. I am now set to evaluate those matches.

Saturday, March 22, 2008

Freakonomics, by Steven Levitt and Stephen Dubner


Levitt and Dubner repeatedly say that this book does not have a "theme". And in the sense that Blink or The Tipping Point have themes, they are right. But it does have a fundamental focus: on "conventional wisdom".

Levitt, as an economist, has made his name by asking different questions - like "do teachers cheat?" - and by finding ways to sort data to get the answers he is looking for. Dubner interviewed Levitt for a NYT article a while back and soon a collaboration was born - the collaboration that yielded this book. Both Levitt and Dubner appear to be good writers, as evidenced by the Freakonomics blog at http://freakonomics.blogs.nytimes.com/, where both post individual as well as joint articles. I sense that the overall style of the book is more Dubner than Levitt, based on my seeing Dubner speak at Prosper Days (see my articles on Prosper Days at http://fightdebt.blogspot.com/search/label/Prosper%20Days).

In this book we find answers to a wide range of questions that few people would think to ask, about topics from sumo wrestlers to parenting. What does it have to do with economics? Simply that it has to do with how people get what they want - and how people can be encouraged to do the right thing and avoid doing the wrong thing. The outline of the entire book can be found in Dubner's original article, which is included as part of the additional material in this book, along with selected blog posts and heavy-duty footnotes.

I for one really did want a bit more of a theme than this non-theme, but I do think the basic premise is sound and a good reason for people to read the book - it is important to question conventional wisdom. For example, at one point another economist read Levitt's original article on the relationship between abortion and the drop in crime, and he said (I'm paraphrasing), "I have read this over and over and I can't find anything wrong with it, but I still don't believe it.". This is how most of us are: we can be faced with incontrovertible evidence but we find it difficult to let go of what we have believed for so long.

Portfolios: Prosper vs Lending Club

*edited 3/26/08
I recently joined Lending Club and added $500 to my account. I received an incentive deposit of $50 - I think because I joined through someone else's link. (You too can get an incentive when you join - click on the link to the right.)

Today I created a portfolio on Lending Club. I have six portfolios on Prosper. Here is a quick comparison of the two:

Lending Club:

There are actually two types of portfolios on Lending Club. The notes below apply to the automatic portfolio, known as LendingMatch. The other type is formed when you choose individual loans.

  • $500 minimum for each portfolio
  • Choice of "risk levels" from low to high but no other options
  • $25 bids on each loan are automatically set - that is, the portfolio automatically bids $25 on each loan that fits the criteria. You can change the amount of each bid when you "review" the portfolio.

Prosper:

  • No minimum for each portfolio
  • Wide range of options in addition to risk levels. Can choose to exclude "auto funding", can set no. of delinquencies that are acceptable, can choose to include only those loans that friends of the borrower have bid on, for example.
  • You choose the minimum bid ($50 or more).


What then?

On Prosper, it takes several minutes before a portfolio chooses loans that meet the criteria. On Lendingclub a list of loans is chosen immediately and you can select some from the list to delete if you like. (On Prosper you can't withdraw from a bid that is placed automatically by your portfolio.)

It takes less time, then, to set up a Lending Club portfolio and you get immediate results. On Prosper, though, you can add more criteria to tailor the loans you make. What works best for you obviously depends on your goals and preferences.

Friday, March 7, 2008

Lending Club


At Prosper Days I learned of a couple of other new "peer-to-peer" lending companies. One is loanio, which has not yet gone live. Another is Lending Club. I just joined Lending Club, in part as a diversification strategy and in part to find out what it's like.

Lending Club is similar to Prosper in its overall makeup: people lend to other people. Specifically, Lending Club makes loans and sells them to individual lenders, just like Prosper. There are, of course, differences. Lending Club only accepts borrowers with credit scores of 640 or higher, and may reject those if their credit balances are too high.

Acceptance as a lender is also similar to Prosper, except that instead of a checking account a lender can wire money to Lending Club. There aren't other options, like credit cards, yet.

Borrowers and lenders pay fees to Lending Club, based on the value of the loan. My quick glance tells me the percentages are higher than Prosper's.

Lending Club offers portfolios too, although some of the criteria differ from Prosper's.

I will offer more details in future posts.

Sunday, March 2, 2008

Stephen Dubner: Unexpected consequences

The keynote speaker on the second day of Prosper Days was Stephen Dubner, co-author (with Steven Leavitt) of Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, author of Turbulent Souls: A Catholic Son's Return to His Jewish Family, Confessions of a Hero-Worshipper, and a children's book. Obviously it was Freakonomics that brought Dubner into the Prosper fold. Or at least to the podium. He connected his work to Prosper members by describing research on altruism, picking up on the "people helping people" theme.



Dubner is a likeable, funny guy, and an excellent speaker. He's clearly been at this for some time. In his presentation for Prosper Days he focused on the same general topic, the overarching topic, of Freakonomics: the study of incentives, but zeroed in particularly on the quality of research and how that quality reflects (poorly or well) real life.



Scrutiny tweaks the outcome. For example, there is a difference between "stated preferences" and "revealed preferences". If the people in a room are asked to raise their hands if they wash their hands after using a public toilet close to 100% will raise their hands. If, instead, researchers slyly count the number of persons washing their hands after using a public toilet they find that about 30% do not. This difference obviously comes from a factor known as "scrutiny".



What are the rewards, Dubner asks, for truthfulness? What is the cost of dishonesty? These are the questions that bring us a true understanding of incentives.

Gaming the Altruists . Dubner applauded the Prosper crowd for its apparent altruism. He then launched into the research on altruism in humans, taking us from "conventional wisdom" that says humans are innately altruistic (I am not sure how conventional that wisdom is, myself; I do not think humans are innately altruistic and don't know that I ever have) through the "Dictator Game" and beyond, to conclusions that, surprise surprise, vary with the rules of the game - the way the research is designed.



Who done it. The results of a research project are also affected by the person(s) doing the research. That is, the persons who interact with the research subjects. It turns out that no matter how well-designed the project is, the greatest cooperation will be obtained when requested by blonde women. I guess we all knew that already, though, didn't we?



Unassuming. Dubner kept coming back to the questions we ask and those we don't. Sometimes we have to ask questions in different ways at different times to separate ourselves from our own assumptions. Sometimes we don't think to ask the simple questions.

All of these elements affect the value of research. It's a mistake to rely upon research until you have reviewed how it was done and by whom.

Dubner's speech drew upon elements of the next book he and Leavitt plan to publish in about a year. Throughout his talk he referred to works by others, notably Predictably Irrational: The Hidden Forces that Shape Our Decisions, by Dan Ariely. Dubner's message, overall, was to question not only authority but also conventional wisdom when trying to predict the behavior of others or, for that matter, ourselves. We don't always or even often behave rationally. Perhaps by knowing some of the motives behind our own behavior we can prevent ourselves from making serious mistakes.

Saturday, March 1, 2008

Prosper transparency

Another apparent theme at the Prosper Days conference was "transparency" - the term that has come to mean a willingness to share the guts of an operation openly. Prosper's most obvious claim to transparency is the availability of its programming and data. By making this resource available to third parties, Prosper expands its own visibility. Several developers have taken advantage and are offering different ways of viewing and using the data.


Software engineer Eric Petroelje

Eric was tapped as panel leader or member more than once at Prosper Days. His expertise in software development allowed him to take advantage of the Prosper API (application programming interface) to indulge his other passion: investing in stock and real estate as well as Prosper lending. Eric created ericscc.com (Eric's Credit Community), a source of market information and lending statistics for lenders, and fantasy prosper, a market simulation tool for lenders. Tools like Eric's give investors additional information on how Prosper is doing in general as well as information on individual lenders and borrowers (not by real name but by Prosper member name). I was able to look up the difference between the number of bids I make and the number I win, for example. I just noticed that Eric has posted a list of the 25 borrowers with the greatest number of endorsements. It might be a good idea for me to use this list for bidding.


Carnegie Mellon Professor Doctor Robert Hampshire

Dr. Hampshire offered a glimpse of the academic uses of Prosper data. He is leading a team, including a doctoral candidate we met the first day, in developing statistics on Prosper lenders. He offered some glimpses at the results so far, in the form of charts.


This chart shows the "tipping point" when a loan is expected to "go all the way". When bids on loans are tracked through time, those that reach 40% of funding tend to go all the way to 100%. In other words, when lenders see that a loan is 40% funded they are likely to bid on that loan and bring it all the way up.


Chief technology Officer and Co-Founder John Witchel and Chief Financial Officer Kirk Inglis

At most or all of the sessions, Prosper executives hung out at the rear of the room. They spoke up if someone on a panel gave out the wrong information and they readily answered questions. Prosper members are not a lightweight group - I don't think most of us would do this sort of thing if we didn't have the guts to take a chance on an idea - and often members would ask pointed questions that revealed more about the company than the presentations did. I was pleased to see how easily and openly Prosper executives fielded the questions. I think the reason they did not have to hesitate or obfuscate is that they rely on member experiences, questions, and recommendations to improve the way Prosper works.

I have attended many conferences for many different reasons over the years. The transparency of this company really stood out in my mind.

Friday, February 29, 2008

The Group Phenomenon


One of the central ideas behind Prosper is groups. Whoever heard of a borrowing group? Or a lending group? Especially a group of middle-Americans, not high-flying Wall Street investors?

The initial idea was, as I understand it, to encourage the formation of groups of borrowers and lenders that would support each other. A borrower who belongs to a group could gain some additional credibility from that group as well as assistance in requesting a loan. Groups can be formed on just about any basis - people who ride bicycles, for example.

In addition to the groups, Prosper created open forums. Members can ask questions, offer advice to others, get to know other members here.

Both of these elements contribute to the "web 2.0" slant of the company.

Now that Prosper has been around an amazing two years, it's possible to find out how the group thing is working. It turns out that the larger groups offer no real benefit to members while the smaller groups offer significant advantages. It makes sense intuitively. It also turns out that many people do not join groups, being perhaps of an obstinate loner nature like me. Some aspects of groups have changed along the way, including the provision of incentives for group leaders (group leaders have gotten tiny percentages from loans in the past but this incentive may not be retained).

One way that groups can be especially helpful to borrowers is in the provision of endorsements and particularly endorsements with bids. When group members provide endorsements of borrowers and also bid on their loans, they are showing confidence in that borrower. Of course a borrower can get endorsements from any other Prosper member, not just group members, but chances are probably better if the borrower is a member of a group.

My own experience with groups is small. I joined Prosper initially as a borrower. I requested a loan and the request failed (no bids. none.). During the time my listing was active and after it closed I received many messages from group leaders. They offered suggestions to improve my listing and invited me to join their groups. I didn't find a compelling reason to join so I didn't and therefore cannot comment on what it's like to be in one. I do believe, though, that this concept is unusual - unique, probably - in the lending industry. It will be interesting to track it over a longer time period.

Thursday, February 28, 2008

Term of the Days: Social Capital

If there was a theme to the Prosper Days conference, it was "social capital".

The opening page of the prosper website currently says "Get great rates and help fellow Americans". Prosper CEO Chris Larsen described different types of investors in his keynote address as "George Baileys" (from A Wonderful Life) and "Gordon Geckos" (from Wall Street). Bailey is the bleeding heart who wants to lend to deserving people while Gecko looks to line his pockets with the hard-earned money of those same deserving people ("Greed, for lack of a better word, is good"). Larsen, co-founder of Prosper, said Prosper tries to serve both types. When it comes down to it, it doesn't matter to Prosper what people's reasons are for investing. Nevertheless, the company has from the beginning promoted community involvement; people helping people. And some of the recent changes to Prosper have again brought "social capital" to the forefront.


Prosper CEO Chris Larsen

Portfolio plans.
Lenders can create portfolio plans that target specific types of loans - conservative or aggressive, with interest rates over a certain number, for example. Once the plan is created, the plan will automatically seek out loans that meet the lender's criteria, and bid on them. The lender doesn't even have to be there.

Larsen highlighted changes in the portfolio plan options. Lenders can now choose from several "social criteria" as well: whether the borrower has endorsements from friends; whether those friends are "verified" (proven to be separate people from the borrower), whether any of those endorsers have bid on the loan. Statistically, borrowers who obtain endorsements from verified Prosper members who then actually bid on the borrower's loan do stand a better chance of being funded - and those borrowers are more likely to honor their commitment to repay the loan than those in similar circumstances who do not have endorsements by bidders.


Group leader Marilyn Paguirigan

And then there was Marilyn. Marilyn Paguirigan spoke at at least four Prosper sessions. She is the leader of Malana Ohana, a Prosper borrower-and-lender group, based in Hawaii, that has unique characteristics. Primarily of interest is that its leader knows all of the members personally. It is essentially family-and-friends who support each other. Marilyn's group exemplifies the community aspect of Prosper and she spoke highly and often of the benefits of social capital. Her group has a high rating (four out of five stars), indicating its borrowers rarely default. The success of the group indicates that community support and associated social pressure has value.

The "people helping people" aspect of Prosper is attractive to a great many people. Many of us feel good when we can actually see (and sometimes even know) who is getting the money we lend, and we feel even better that we are keeping the loans out of the hands of the greedy lender industry. Prosper funds, however, are housed in Wells Fargo Bank, which tells us that the industry is still getting its cut.

Monday, February 25, 2008

Prosper People


Last Monday and Tuesday my daughter Elaine and I attended the Prosper Days conference. It was enlightening in a number of ways. One of the surprises for me was the people we met.

The conference was on the fourth floor of the Parc55 hotel in San Franciso, a rather ugly newer hotel that provides all the amenities for such conferences. Spread around the open area were circular tables and chairs, where we sat between sessions and when we ate breakfast and lunch. This arrangement encouraged the meeting of others, and Elaine and I did meet new people each time we sat at one of these tables. People came to the conference for different reasons and brought with them very different experiences and intentions.



We met Sam at the breakfast on Monday. Stan is a doctoral candidate at Carnegie-Mellon University in Pittsburgh. He is doing research on Prosper lender patterns - what types of loans lenders prefer, when they bid, a number of other quantifiable patterns. He asked me my preferences and how I went about lending on Prosper and my answers were very much in line with "typical" lenders. To do this research he and his advisors are using Prosper-provided data that is freely available on the Prosper website. Prosper provides open access to its programming and data (not including, of course, actual Prosper member identification by name), known as its API (application programming interface). One of Stan's advisors was on a panel on API usage, illustrating the academic purposes for which this resource can be used.



We met Stanley a number of times during our time there. He is a gregarious, friendly guy who is disenchanted with his retirement plan. He is looking to find other ways to invest that provide a better return. After attending the Prosper keynote session he realized another way he could use Prosper: to lend money to his sons. They can register as borrowers, asking a ridiculously low interest rate, and he could be the only bidder. Keeping it all in the family. This way there would be clear records of his loans to his sons and if they pay them back on time they will establish credit for themselves. Win-win all around.


The Scotts were also interested in finding better ways to invest their money. Michael already had an account with Prosper and was knowledgable about the company and the experiences of others. His wife came along for the ride, essentially, and is considering investing some money of her own but wants her capital to be more liquid. She doesn't want to wait for the loans to be paid off to be able to use the money again. At this conference she learned that the loans are paid back month by month and many people pay off their loans early so she is looking at it more seriously.

We met other couples similar to the Scotts, where one was already a member of Prosper who wanted to introduce the concept to the other. One man we met is actually in the lending business and has taken an interest in bringing it home. When I commented on the outrageous interest rates banks and credit card companies charge he was ominously quiet.

The friendly and open nature of the other conference attendees we met turned out to be indicative of the group as a whole and of the company as well. And no, I wasn't paid to say this - although I freely admit that my attendance at the conference was free, because I registered as a blogger.

Sunday, February 24, 2008

Off to Prosper Days

I am leaving for San Francisco this morning. I want to be in my hotel in the afternoon, able to scope out the route to Prosper Days by cable car or trolley.

So far my investments in Prosper borrowers have made over 16% interest. That's not the long-term average for loans, mainly because once in a while a borrower defaults, so I don't expect to maintain it. But by making small ($50 each) loans I have indeed diversified so if one defaults it isn't going to be a biggie. I also don't have a huge investment in Prosper overall, so I am not getting rich.

I will be reporting on what I learn here.

Thursday, January 10, 2008

portfolios on prosper

With the extra money I received in December, I did several things: I put a substantial amount onto my house loan, I put some into a college savings account for my grandson, I bought some camera equipment to replace what was stolen last June, I paid off all my credit cards, I set aside enough money in savings to pay off my car.

I also transferred a smallish amount to prosper (see link on right) so I could do more lending and earn decent interest. Prosper now offers "portfolio plans". A member can create up to four portfolio plans, choosing to make loans to persons with credit records that range from conservative to somewhat risky. I put different amounts of money into each risk portfolio and chose $50 as the loan amount for each.

The way it works is that whenever I have sufficient funds in my account bids are placed automatically, according to the maximums in each portfolio, until the portfolio is full. As loans are paid off and more money accumulates in my account the portfolios automatically refill themselves. At least that's the way I like to put it.

By doing this I am able to keep bidding on loans even when I am not anywhere near a computer. And my portfolio has a mix of risks in it. Obviously, the higher-risk loans bring higher interest, so I have put a fair amount of my money in the top two levels. I figure if one defaults, that is $50 at most that I am out - and probably less, because a collection agency steps in and part of the loan may have already been repaid. It isn't likely many will default - even though the default history of high-risk borrowers is higher than that of lower-risk borrowers it is still rather low as a percentage of loans.