Estimated Loss Rates

Prosper uses two scores to estimate expected loss rates on Prosper borrower listings: a custom Prosper Score and Experian's Scorex Plus score. The actual performance of Prosper accounts are used to determine the estimated loss rates. The loss rates are not a guarantee and actual performance may differ from expected performance.

The matrix below provides an example of how the system works. Each score is divided into 10 segments and each cell indicates an estimated loss rate based on the intersection of the two scores. The score ranges were chosen based on loss rate differentiation. Both the ranges and the loss rates will be updated as more performance history is obtained.

	Experian Scorex Plus Score
Prosper Score	600-619	620-639	640-679	680-699	700-729	730-769	770-799	800+
1	34.5%	34.5%	34.5%	34.5%	34.5%	34.5%	34.5%	34.5%
2	25.0%	25.0%	25.0%	25.0%	25.0%	18.0%	18.0%	18.0%
3	25.0%	25.0%	25.0%	25.0%	18.0%	18.0%	18.0%	18.0%
4	19.0%	19.0%	18.0%	18.0%	18.0%	18.0%	8.5%	6.2%
5	19.0%	19.0%	18.0%	18.0%	18.0%	18.0%	8.5%	6.2%
6	14.7%	14.7%	14.0%	14.0%	10.0%	10.0%	7.0%	1.5%
7	14.7%	14.7%	10.0%	10.0%	10.0%	10.0%	7.0%	1.5%
8	14.7%	14.7%	10.0%	10.0%	8.0%	5.0%	2.1%	1.5%
9	14.7%	14.7%	6.5%	6.5%	2.1%	2.1%	2.1%	1.5%
10	14.7%	14.7%	6.5%	6.5%	2.1%	0.6%	0.6%	0.6%

Estimated net loss rates for the cells are based on historical performance of Prosper loans that fall into given cells. Note that some cells are combined due to small volumes and/or similar behavior. For example, a borrower listing with a Prosper score = 9 and a credit agency score = 715 has an estimated loss rate = 2.1%. The 2.1% loss rate equates to a Prosper Rating = A. A loan model was developed to simulate the future performance of the loans based on past performance data, and to calculate the estimated loss rates over the life of the loans.

Calculating Average Balance

To calculate the average balance for each period, we used the amount of loan principal on loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each loan declines over time. It is assumed that borrowers that are making scheduled payments on these loans do so according to their amortization schedule.

When a loan is paid off early, it is no longer included in the outstanding balance for subsequent periods. Historical payoff rates were used to project the monthly payoffs and these rates were assumed to remain constant throughout the life of the loans. Similarly, once a loan has been charged-off, the principal associated with this loan is considered a credit loss and is no longer included in the outstanding periodic balance.

Estimating Delinquent and Charged-Off Loans

To estimate the number of current and delinquent accounts on a monthly basis, we applied roll rates to each group of given loans. We first calculated the historical roll rates of accounts in particular cells and then applied the historical rate to the given loans. A roll rate measures the percent of loans within a particular payment status that "roll" to the next late payment status if the loan is not paid. For example, a current account that is not paid "rolls" to a new payment status defined as 1 to 30 days past due. Similarly, an account that is already 1 to 30 days past due and does not make the next payment then "rolls" to a status of 31 to 60 days past due. An account is considered to be a loss, or charged-off, when it reaches 121+ days past due. The average historical roll rates were assumed to be constant for the life of the loan term.

Estimating Loss Rates

The estimated monthly dollar charge-offs are calculated by multiplying the estimated number of accounts that reach 121+ days past due in that month by the average balance of loans in that month.

Collection expenses and recovery payments are applied to gross losses to calculate net losses. When an account becomes more than 30 days past due, it is referred to a collection agency. Collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule. Payments collected by the collection agency reduce the amount of principal that is repaid to lenders. This expense is added to losses in the month the payment is made.

In addition, once an account has been charged-off, any subsequent payments received or proceeds from the sale of the loan in a debt sale are considered recoveries and reduce the amount of principal lost. Recovery assumptions are based on historical recoveries through January 2009 on accounts that were 121+ days past due as of April 2008. The recovery rate assumptions were:

• Score: 680+ = 0.75% annual rate
• Score < 680 = 2.7% annual rate

To calculate the estimated average annualized net loss rate:

1. Calculate the monthly net loss rate:
   
   Net principal charge-offs in month X
   = Outstanding principal balance in month X
2. Calculate average annualized net loss rate:
   • annualize the monthly net loss rate
   • calculate balance-weighted average of the monthly rates over the life of the loan

For each group of loans, the average loan amount for charged-off accounts was compared to that for good loans; if there was a significant difference, the ratio of average charged-off loan amount to average good loan amount was applied to the expected loss rate to account for this differential.

Estimated loss rates determine the Prosper Rating.