Estimated Loss Rates
The estimated loss rate for each listing is based on the historical performance of Prosper loans with similar characteristics. The base loss rate is determined by two scores: 1) a custom Prosper Score and 2) the FICO®08 score. Adjustments can be made to the base loss rate based on additional characteristics, such as the presence of a previous Prosper loan. Any adjustments are added to the base rate to get the final loss rate, which then determines the Prosper Rating. The loss rates are not a guarantee and actual performance may differ from expected performance.
Base Loss Rate
The matrix below provides an example of how the base loss rate is determined. The FICO®08 score is divided into 12 distinct bins and the Prosper Score is divided into 11 distinct bins. An applicant’s base loss rate is determined by the intersection of the relevant FICO and Prosper Score bins. For example, a borrower listing with a Prosper Score = 7 and a FICO®08 Score = 730 has an estimated base loss rate = 3.74%, as shown in the table below. Both the ranges and the loss rates will be updated as more performance history is obtained.
Final Loss Rate
Adjustments can be made to the base loss rate that increase or decrease it based on additional characteristics, such as the presence of a previous Prosper loan (i.e., the borrower has already taken out at least one Prosper loan). Any adjustments are added to the base loss rate to get the final loss rate. The applicant’s final loss rate determines the Prosper Rating.
Here is an example of how the final loss rate and Prosper Rating for a loan listing are calculated:
– Borrower FICO®08 score = 730 and Prosper score = 7
– Borrower has a previous Prosper loan
|Base Loss Rate:||3.74%|
|– Previous Loan:||-0.50%|
|Final Loss Rate:||3.24%|
Loss rates for a particular group of 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 Prosper loans, the largest driver of the loss rate is the rate at which a group of loans becomes delinquent and charges off. A loan becomes “charged off” and is considered a loss when it becomes 121+ days past due.
Modeling Loss Rates. The loss rate is the balance-weighted average of the monthly loss rates for the group of loans over the term of the loans. The gross loss rate is adjusted for principal recovery net of collection expenses to arrive at a net loss rate.
Estimating Losses. We determine the loss component of the loss rate calculation by analyzing losses for historical Prosper loans and adjusting 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 loans, and so changes in loan 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 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.
When a 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 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.
Collection Expense and Recovery Adjustments. 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. 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