On February 15th, Prosper implemented an adjustment to its prices and loss rates. This adjustment was done in order to increase returns for investors on our platform. The move demonstrates our commitment to operating a marketplace that fairly balances the economic incentives for both our borrower and investor communities.
Since August of 2015, Prosper has been increasing prices and loss rates for borrowers as a direct reaction to increasing forward interest rates and widening spreads in the debt capital markets. These proactive changes to the Prosper product over the past several months (which are a direct result of forward looking credit market and interest rate expectations) are a necessary step towards continuing to provide a fixed income product that is compelling relative to the many alternatives available to our investor community.
The rate increase on the Prosper platform was not connected in any way to the announcement made by Moody’s that it was putting certain Prosper loans on downgrade watch. In that announcement, Moody’s increased its expectation of cumulative losses for Prosper loans supporting various securitizations, moving from around 8% cumulative loss to around 12%. Unfortunately, this announcement has caused confusion in the market about Prosper’s performance and expected loss rates. Moody’s original estimates of loss were significantly below Prosper’s internal forecasts. Moody’s recent changes bring its estimates of cumulative loss to a level that is closer to (i) Prosper’s own original estimates ranging from 9.5-11% for loan vintages in this period, (ii) independent estimates by the rating agency Fitch, which were 11%.
The Moody’s announcement is not a reflection of the loan quality or performance of Prosper loans, but rather an adjustment to estimates that were too low from the onset.
Prosper Pricing Change Impact (January 2016 Loan Simulation):
The table below summarizes the impact of the Prosper price changes as simulated on the January booked loan portfolio. While the exact portfolio composition going forward will be a result of future marketing mix and borrower reaction to the increased prices, we believe this is a fair representation of the potential impact of the changes.
It’s important to emphasize that the pricing changes have been made to preserve the relative competitiveness of Prosper loans versus other comparable and publicly traded assets. Prosper’s loans continue to deliver solid credit performance.
We take pride in our ability to forecast our loan performance. We are always looking at the current environment and calibrating our assets appropriately, which we believe is evidenced by the strong track record we have developed.
As the gross cumulative loss curves below show, since making major changes to our model in 2013, Prosper has delivered a solid credit product to its investor community that has been performing consistently.
While Prosper does not believe that recent market volatility has had a materially negative impact on our loan portfolio, we are cognizant of the fact that wider credit spreads impact the relative attractiveness of our product versus potential substitutes. In addition to the pricing and loss changes that we began making in August of 2015 and continued with our change on February 15th, Prosper has been proactively making major investments in its servicing and collection capabilities. We believe these investments will help ensure that we continue delivering solid returns to our investors in the event that recent market volatility spreads to the real economy and the American consumer.
In July of 2015 Prosper began executing debt sales that provide an immediate return of 7% to investors on any charged off principal. In October of 2015 Prosper began to onboard a second pre-charge-off collection agency to ensure that collection capacity is resilient to any unexpected changes or service provider interruptions. In the coming months, Prosper will begin a program with its bankrupt loans that will return 20% of principal to investors on any Chapter 13 loans.
These servicing and collection improvements are above and beyond the expectations communicated to investors when they made their purchase decisions but, just like the pricing change, we believe they are excellent examples of Prosper’s commitment to providing an extremely high-quality consumer credit asset to its investor community.