Online Lender Prosper in Bank-Like Move to Package Soured Loans

Prosper Marketplace Inc., the second-largest online provider of consumer debt, is washing its hands of its least reliable customers by selling their loans to investors.

The company will pool together loans more than 120 days into default and auction them to a single buyer on a monthly basis, according to a statement posted on its blog Tuesday. The strategy is “aimed at delivering an increased level of return for investors,” Prosper said, as recoveries are expected to beat those of debt collectors.

Peer-to-peer, or marketplace, lenders set out to bypass big banks by directly matching borrowers with individuals who wanted to fund them. While companies like Prosper and industry leader LendingClub Corp. have loaned primarily to stronger-credit borrowers, they’ve been pressured by competitors and loan investors to finance riskier and higher-yielding applicants.

Now, with Prosper’s packaging of charged-off loans, peer-to-peer lending is starting to look more like traditional banking.

“Banks and other conventional lenders have been engaged in that practice for decades,” said Alan Kaplinsky, who leads the consumer-finance group at law firm Ballard Spahr LLP. Prosper will likely avoid regulatory costs and “enhance its bottom line” by doing so.

A spokeswoman for Prosper couldn’t immediately be reached.

For Pennies

This move comes as Citigroup Inc. prepares to bundle more than $300 million of loans originated through Prosper into securities, people familiar with the deal said, further tying the fortunes of the online industry to Wall Street. These securitized loans are set to receive A tier grade rankings.

As for the defaulted consumer debts, Portfolio Recovery Associates LLC and Encore Capital Group Inc. are two of the biggest buyers. Such investors buy charged-off debt from banks for “pennies on the dollar,” sometimes as little as four cents to six cents, said Margot Saunders, counsel for the National Consumer Law Center. She said she expects the value of bad consumer debts to rise as more information is required of the borrowers before a sale takes place.

The U.S. Treasury Department this week signaled it is scrutinizing the growth of online marketplace lenders with a request for information to help officials understand the different business models and products being offered. Operational practices such as collections were among things that the department asked about.