I met Chris Larsen, Prosper's co-founder and CEO, at the company's austere headquarters in a small office space on the first floor of an old building in San Francisco's financial district. Larsen, who in 1996 co-founded E-Loan, one of the first Internet loan brokers, is an understated fellow, and when he talks about the credit industry, he doesn't sound especially impassioned about the possibility that his company might transform it. Still, there's no mistaking that Larsen, who has long been feted for his consumer-rights advocacy -- in 2003, he spent $1 million of his own money to push California to adopt a tough financial privacy bill -- is on a mission.
"My opinion of the consumer credit industry is that it works well in the formation of credit, but it's really a problem by the time it gets to the consumer," he says. "You have consumers being misled, it's too expensive, not very transparent, and not very open." He adds, "Access to credit is right up there with healthcare and education in terms of being fundamental to a society. You have so many bad things going on in the current system, so many bad things."
Shane Garza, a 29-year-old information technology manager in Grand Rapids, Mich., might be the sort of customer that Larsen has in mind when he describes the difficulties some Americans have with credit and debt. At the same time, Garza, a serial borrower, illustrates how Prosper may not work for everyone, and how tough it can be to determine whether someone who's made bad decisions with money deserves any more.
"My problems started with these payday loans while trying to get caught up on my rent," Garza wrote on a Prosper loan request he posted in mid-April. Garza has an extremely poor financial record. According to the credit information on Prosper, his credit grade is H.R., he has a debt-to-income ratio of 8 percent, and he has opened 29 credit lines in the last seven years, with two current delinquencies. He posted a list of the various sums he owed to payday loan firms: Magnum Cash Advance, $700. Sonic Cash, $400. Payday 2day, $400. Mr. Cash, $300. NE Cash, $200. 10 Dollar Payday, $300. My Cash Now, $400. CPD, $300. Cash Advance Net, $500. "I have been paying the minimum amount for over 4 months and I can not take it any longer," he wrote on Prosper. "I get paid biweekly and they take over 500 each pay period. If I can just get these consolidated, I will be in the clear."
But this loan was not the only request that Garza had posted. From the middle of March to early May, he put up about a dozen requests, withdrawing many of them within a couple days. His story was not exactly consistent in each of these postings -- he varied the amount he was requesting, varied his tone (sometimes he was terse, sometimes verbose, sometimes he was solicitous), and even changed the photos he used. In some listings he included a photograph of himself, while in others he put up a picture of a woman dressed in a tight shirt, and in one he used an image of a cute puppy. On the Prosper message boards, one user asked, "What is up with the different pictures? Some are a guy and some are a girl ... what is up with that? Are you trying to go for sex appeal or something?"
For lenders, deciding whether to give money to people with bad credit isn't easy; a poor financial record arouses all kinds of suspicions -- Is this person lazy or just unlucky? -- and the suspicions are hard to overcome. In many respects, Garza looks like someone who needs to be saved. Were you a lender with a deep sense of social mission, you might give him money just out of charity. But he also looks like someone who needs some serious financial discipline. Giving him more money might only make his situation worse.
"The truth is I am addicted to debt, and I don't know why," Garza tells me on the phone. He says he learned this fact about himself on Prosper, as a consequence of his loan requests. Each time he posted a listing, people would ask him some very basic questions about his financial life -- "If you're in debt, why do you want to borrow more money?" -- that he says awakened him to the destructiveness of his behavior. The Prosper message boards are peopled with some extremely savvy financial experts, "and they make it a point to call you out on certain things you mention in your loan request," Garza says. He spent three years in credit counseling, but it was only on the Prosper message boards that he'd learned some of the very basic facts about money -- "Don't spend money on things I can't afford," Garza says. He explains that he's been paying off his various debts diligently since he came on to the site. "The fact that there's this site changed the way I think about money. Everything I learned about money is due to Prosper."
I don't know whether to believe Garza's tale of conversion-by-Prosper. It will be some time, perhaps, before it's possible to tell whether the site made any difference to his financial life. But early in May, Garza posted his final loan request on Prosper, asking for just $1,000 at a rate of 23.75 percent. "I would like to take out this loan to help my credit. I have a very bad rating and I am not going to blame anyone other than myself for it," he wrote. Twelve people got together and funded his loan.
At the moment, this is a rarity on Prosper -- people with credit ratings of H.R. seldom find funding. Some observers think this might be a permanent feature of the marketplace. "There are some consumers who have no credit or extremely bad credit who will be hard-pressed to find anyone on Prosper who'll take a risk on them," says Jennifer Tescher, director of the Center for Financial Services Innovation.
Some lenders I spoke to said they were opposed to Prosper becoming a haven for people with low credit scores. They were afraid other lenders might flee if borrowers with low credit ratings continue to obtain loans and then default on their commitments. (When borrowers default, Prosper contracts with a collection agency to try to get back the money.) There is some logic to this. At the moment, the idea of trading money with strangers might sound, to many people, fairly scary, and maybe the best way to encourage lenders to put their money in Prosper would be to keep people like Garza away from the site.
Prosper has taken many measures to combat fraud and mischief. The company complies with state lending laws that set maximum interest rates lenders can get for their loans -- the rate runs from a low of 6 percent in Pennsylvania to a high of 24 percent in several states; you can't charge someone a payday-loan-comparable 400 percent rate on Prosper. Prosper is also subject to regulation by the Federal Reserve and the Federal Trade Commission, and must also comply with the federal Truth in Lending Act and the Equal Credit Opportunity Act, which prohibits racial and gender discrimination.
Larsen has faith in what he thinks of as Prosper's main asset -- the sense of community it fosters between lenders and borrowers. In fact, the site attempts to cultivate community by encouraging both lenders and borrowers to join affinity groups. On Prosper, you can declare an affiliation to any number of organizations -- there are Prosper groups for Harvard alumni, for people from Guam, for Christians, for people who love Apple computers, and many more. Larsen points out that you can get better rates on your lending and borrowing if you belong to a group, but if you default on your obligations, your actions will adversely impact others in the group. This is meant to keep borrowers in line. The idea is that people who belong to a group will feel an enhanced obligation to pay back a loan to remain in the good graces of their fellow Apple users or Harvard alumni.
This sort of peer pressure has long been used as a tool to goad borrowers into paying back micro-loans in the developing world. It reflects, says Elizabeth Warren of Harvard, an axiom of money lending. "Making decisions about whom to repay when you're in financial trouble is less about law and more about social relationships," she points out. Every one of the Prosper borrowers I spoke to agreed on this point. They were all so grateful to the people who'd taken a chance on them that they put their Prosper loans ahead of any other debt they had to repay.
And that goes for Garza. "I swear to God, it's been a revelation to me," he says of his experience on Prosper. "I swear, it's the best thing that's happened to me on the Internet."
About the writer
Farhad Manjoo is a Salon staff writer.
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