We recognize the inconvenience this causes both borrowers and lenders and will keep Prosper members updated here as progress is made. Please check back for more information.

During the month of May, Prosper Marketplace, Inc. (“PMI”) welcomed a new member to its executive team. Ken Niewald joins PMI as the incoming Chief Financial Officer. Ken has also been named our Treasurer. Ken brings over 25 years of experience in the financial services industry including his time as partner at Marquis Advisory and Tatum as well as CFO for Wells Fargo Funds Management. Ken joined just as the headquarters moved to a new location in downtown San Francisco. The new headquarters offer some much needed space for PMI’s growing team at a cost savings.

Over the past couple months we have begun reconciling customer data regularly throughout the month rather than at the month end. This has permitted us to move lender statement distribution up from the 11th to the 2nd business day of the following month. We have accomplished this in both April and May, and intend to continue with this new process moving forward.

The month of May also marks our second month of the Whole Loans program. We understand that this program has generated a lot of discussion and comments from our retail lenders. I want to reassure this group that we are committed to creating a place on our platform for both institutional and retail lenders. In May, 54.2% of loan originations came from the standard loan pool while 45.8% came from the whole loan pool. The 54.2% that originated through the standard pool represents more than $13.5M in loans. This number nearly doubles what was originated in loans across the entire platform in January or February of this year, before the introduction of the whole loans program. We are happy with the performance of the Whole Loans program and the capability it provides in enabling a balance between institutional and retail lenders.

With the increased demand from our lender base in May, we recently launched the largest marketing campaign in the platform’s history. Our goal over the summer is to meet new lender demand by maintaining the consistent growth reported in March, April and May of this year. We have mentioned before that we’re looking closely at the borrower experience during onboarding. This is moving along nicely and we should have more progress to report soon.

For those of you following the improvements made to our collections services, we have made some great progress, and will provide a more comprehensive update in the middle of June.

I would like to thank you all again for your ongoing participation in these posts. Please keep the feedback coming!

Aaron Vermut
President, Prosper Funding LLC

Over the past week, many of you have asked about the changes in loan volume. We have seen two trends; first, there have been fewer B through HR rated loans available. Second, loan origination volume through Prosper’s platform has actually gone up, as you can see above. To explain these seemingly contradictory trends, I’d like to start by saying that I believe the industry has reached an inflection point. Peer-to-peer lending is increasingly accepted as a viable investment class. Both retail and institutional lenders are realizing that peer-to-peer loans represent a very interesting and potentially profitable way to obtain unprecedented access to investing in consumer loans. As a result, the industry (not just Prosper) is experiencing a spike in demand. We are aggressively ramping borrower marketing campaigns to generate more loan inventory to meet that lender demand. We are also looking closely at the borrower user experience and application process over the coming months.

All in all, these short term challenges are a positive development for the industry. As we grow, we will help more consumers get their loans funded and therefore offer our lenders more opportunities to expand their investments in consumer loans.

As I mentioned in my April update, we introduced a whole loans program in a beta period for our institutional investors. This has been going well – over $5.8M in loans originated through the whole loan pool in April. This makes up about 28% of loans originated through the platform in April and the remaining 72% originated through the fractional loan pool. On May 3rd we will officially add the whole loans pool as a permanent part of our service.

Here are some details on how it will work:

Prior to posting times, Monday thru Friday only, a subset of randomly selected loans will funnel into a whole loan pool, while all others will post normally into the standard, fractional loan pool. Those loans in the whole loan pool will remain there exclusively for a brief 45 minute period of time. If the loans are not purchased from the whole loan pool within 45 minutes, they will funnel into the fractional loan pool at regularly scheduled posting times, becoming available for funding on the standard Prosper platform. On Saturdays and Sundays all loans will funnel into the standard loan pool, giving our retail lenders the opportunity to bid on all loans available during that period.

This new process is in line with market conditions and enables us to offer whole loan buyers a solution to meeting their mandate and specifications without disrupting the retail lender experience. Additionally, for loans in the fractional loan pool, lenders will now be limited to 75% funding, ensuring that all retail lenders continue to have equal access to a large number of loan options.

Now back to April. In addition to a record month in terms of loan originations, we also made some great progress. We launched a new logo and identity. We would love to hear what you think. As promised, we increased the loan cap from $25,000 to $35,000. Many of you have noticed that this change also included removing our one year loan option. The reason for removing this is simple; one year loans are not in high demand by our borrowers. We will continue to make changes and enhancements like these to balance the needs of both lenders and borrowers.

We also welcomed back our Washington lenders. We appreciate your patience while we worked with the Securities Division of Washington’s Department of Finance to obtain approval and reopen peer-to-peer lending in Washington.

Finally, we are approaching the deadline to transfer to the new enhanced API service we introduced to our lenders back in March. The feedback on this has been tremendous and we are transitioning everyone over. The last day to transition to our new API for lenders is May 1st. If you’re interested in this, please email us at investorservices@prosper.com. If you’re already using it, great! A new password functionality in the settings section will be available in May. Stay tuned.

More exciting things are still to come over the next couple months.

• Improved collections: We are still very focused on increasing the success of our collections. We have made several changes over the past couple months to increase call intensity and work closely with delinquent borrowers. We continue to enhance this service and will keep you updated here as changes are made.

• Document Update Functionality: We have begun development on a tool that will allow our borrowers to upload documents directly to our site. This will help to streamline the borrower experience and allow our verification team to move more quickly on verification initiatives.

• Ramping Borrower Inventory: Over March and April we focused a lot of resources and attention on the lender side of our platform. This has allowed us to onboard a lot of eager lenders. As stated above, in May, we are ramping up our borrower marketing initiatives to meet these new lender needs and will be funneling more and more loans onto the platform.

We are really proud of the progress we’ve made so far, and have many more exciting updates to come as we work to make Prosper the best peer-to-peer lending platform. I’d like to thank everyone who commented on my March post for their thoughtful questions and considerate debate. I’ll be reading and responding so feel free to ask questions or add comments below.

Thank you,

Aaron Vermut
President

We also wanted to give our lender community an update on all state statuses. We are doing what we can to get approval in as many states as possible and to make peer-to-peer lending available to everyone. However, each state has its own set of regulations and restrictions along with a comprehensive application process.

For folks residing in Arizona, or North Carolina – each of these states has securities law requirements that we are unable to meet at this time. Unfortunately, we are not pushing forward with Arizona or North Carolina. In the event that anything changes, we will reassess this opportunity.

Many states have responded individually with a message that conveys a fundamental skepticism for peer-to-peer lending, and it’s unlikely we will receive approval without a shift on these views. These states include Arkansas, Indiana, Iowa, Maryland, Massachusetts, North Dakota, Pennsylvania, and Tennessee. If you reside in one of the aforementioned states and feel so inclined, you can reach out to your local governments encouraging their consideration of peer-to-peer lending platforms.

Similarly, several states who have communicated skepticism of peer-to-peer lending, have required us to withdraw our application when it became apparent that we could not overcome that skepticism in the near term. Thus, we have removed applications from Alabama, Kansas, Kentucky, Nebraska, New Jersey, New Mexico, Ohio, Oklahoma, Texas, and Vermont.

We will continue to push this on our end as peer-to-peer lending grows and becomes more widely accepted across the nation. We appreciate your support and feedback along the way.

I want to give everyone an idea of all the exciting things the Prosper team has been working on since bringing on the new management team. In February, we focused on building and launching tools and improvements vital to the platform’s performance. Our new API gives lenders the tools they need to customize their Prosper experience in ways never before possible, and Prosper Funding LLC provides increased security and protection for our lenders. We also extended our customer service hours to provide more one-on-one support for more hours of the day.

As we come to the end of March, we’re excited to report $15.1 million in loan originations, a 60% growth over February and our best month since October. We also project $25 million in new loan listings on the platform this month. In fact, at the time of this post, there are 200 new loans now available to lenders.

We have also been looking at various ways to improve our service and product offerings for our retail and institutional lenders, as well as for our borrowers. Here are some of the priority items that we’re focusing on over the next few months (in no particular order):

•   New Prosper Logo/Identity: Along with the technology enhancements to our product, on April 2nd we are launching a rebranded web experience including a new logo and identity. We have been working on this for a while and are excited about the changes. Let us know what you think.

•   Improved collections: Over the past several months, we have focused on improving collections by increasing call intensity, and working with our delinquent borrowers to be the payment of choice during tax refund season. As a result of these changes, we have had 3 consecutive record months of collections. Moving forward, we will be adding a new collections agency and will send delinquent accounts to collections at 16 days past due rather than 31 days past due. This will enable us to expand our call coverage and skip tracing capabilities, which will provide better results for our lenders.

•   Washington State (and more): We are currently engaged in communication with the Security Division of Washington’s Department of Finance and hope to reopen the platform to Washington lenders very soon. We apologize for the inconvenience to our Washington customers – the blackout is a result of the implementation of Prosper Funding LLC’s New Note Offering. With this implementation, we have also added West Virginia and Michigan, and plan to have several additional states join the platform in the near future.

•   Whole Loans: In April we are launching a whole loan product in beta for our institutional lenders, which will be separate from our traditional pool of fractional loans. The beta version of this product is in test mode and we will communicate more details as they develop.

•   Additional Improvements: Some of the many other things we are working on are a new IRA trading option on Foliofn, an increase in the loan cap on the platform to $35,000, enhancements to our Automated Quick Invest tool (AQI), and expansion to both our customer support and technology teams.

Steve, Ron and I are committed to creating a transparent relationship with our borrower and lender communities. This asset class and market place are changing rapidly. We will continue to make ourselves available to answer any questions. Please check back here regularly as I publish new posts with updates as well as gather questions and feedback from our community at large. We welcome any comments and/or questions below.

Thank you,

Aaron Vermut
President

As a result of launching this new API, effective May 1st, the existing API service will no longer be available. Over the next month, all lenders have the opportunity to convert and map their applications to the new API service, which offers a much more comprehensive set of data points, including access to raw listing data and enhanced data sets for analysis and reporting.

To obtain access to the new API for your lender account, please email us at investorservices@prosper.com. We always welcome your comments and feedback below as well.

The new API was developed in partnership with some of Prosper’s most active lenders, who have provided valuable feedback that has helped shape the features and tools available in the new API. Over the past month, these lenders have tested the API and worked closely with us to help improve its functionality so that we can provide the best experience possible for our lenders.

“The improvements to the new API are a game changer for Prosper and for lenders who are looking to build custom tools for managing their investments on the platform,” says Michael from Nickel Steamroller. “We are especially excited about the expanded data points as well as the speedier performance, which lets us build robust tools in less time.”

Key improvements and benefits to lenders through the new API include:

• Expanded access to credit profile data points. The new API offers more than 475 credit bureau variables and more than 550 data points total.
• Easy access to Notes, with a more comprehensive break down of principal, interest and other fees.
• Details down to the individual Note level, including specifics about payments and reason for default.
• Improved filtering and querying that make it easier to use specific criteria to search for Notes. For example, only C rated Notes less than $10,000.
• For lenders that want to build their own tools, they now have access to the data through a RESTful interface.
• The RESTful interface of the API supports OData filter query operations.
• Unique login credentials for API users restricted to reviewing and investing funds only. This means no access to bank information or account settings so you can keep your API tools separate from your Prosper account.

The new API is the latest in a series of recent enhancements for our lenders as we work to provide the best possible peer-to-peer lending experience. Most recently, we unveiled new protections for our lenders, and in December, we released new data enhancements, which included expanding investor data access as well as the underwriting information preview. Keep an eye out for future enhancements to our lender services coming soon.

If you are a lender on the Prosper platform, and are interested in learning more about the new API and obtaining access for your lender account, please email us at investorservices@prosper.com. We always welcome your comments and feedback below as well.

First, some details on how this works. A new legal entity called Prosper Funding LLC has been established, which is a wholly owned subsidiary of Prosper Marketplace, Inc. Prosper Funding LLC is now the owner of all loans and the issuer of all Notes on the Prosper Marketplace. As a result, all Notes (both new and previously issued) are now fully protected in the unlikely event of a Prosper bankruptcy.

In order to purchase Notes from Prosper Funding LLC, lenders simply need to agree to the new registration agreement. If you have not done so already, you will be alerted to accept this agreement next time you sign into your account. New lenders are automatically registered with Prosper Funding LLC. In addition, you can review a “Risk Factors” section in the Prospectus for information regarding the risks and benefits of this new offering.

Thank you for your continued participation on the platform. This new protection demonstrates our ongoing commitment to bringing best-in-class tools and services to our lenders.

Expanding Investor Data Access

First, we now support a CSV download format for a view of our loan performance data. For each loan, you will find a selection of credit attributes from the loan application as well as variables related to the performance of that loan, like final loan status and total principal and interest paid. By combining these sets of data, we have made it possible for investors to more easily construct and test their own investment strategies. This simplified data format will replace the more cumbersome XML format that we’ve used to date. Note that this means that certain types of data, including information related to group membership, member profiles, and bids, will no longer be available in the data export.

You can find the Loan Data Export file on our new Download page. (You can also access this page via the “Download Data” link on our Performance page while logged into your account.) This file will dynamically update on a daily basis.

Expanded Underwriting Information Preview

We are also working to make new sources of data available to guide your decision-making where we can. In 2011 we initiated a project to expand the amount of information considered when determining our Prosper Score. This expanded information will allow us to make better underwriting decisions across the platform, and we are also making it available to you today.

The first component of this data is the Expanded Underwriting Archive, also available on our Download page. The Archive file has a large number of application attributes and performance variables, allowing you to test and develop a wide variety of investment strategies.

Most of these variables are not yet available to investors through our API, however. To enable you to execute your new strategies based on the expanded dataset in the short term, we are also making available a Recent Listings Sample with Expanded Underwriting Data. This file includes a sub-set of recent listings for which we have these expanded bureau attributes.

Finally, we are releasing an Underwriting Archive Data Dictionary for use with the Archive and Listings Samples. There is a lot of data included in those files, but the Data Dictionary should make it easy to understand what you’re working with.

We are truly excited about these developments and believe that they provide our investors with far more information than any other investment platform. Thank you for continuing to invest with Prosper, and please contact us directly at investorteam@prosper.com or leave a comment below if you have any questions about the new data enhancements.

Buoyed by press appearances on CNBC and NPR, in October Prosper posted $27m in new loan requests from potential borrowers and signed on more than 750 new investors. Loan and risk performance also continued to be strong, as the platform delivered its 38th consecutive month of positive returns to investors. In aggregate, Prosper has now returned more than $37m in interest payments to investors since its registration with the SEC in 2009, a figure that grows more rapidly with each passing month.

ASSET MARKET TRENDS SUGGEST STEADY ECONOMIC GROWTH

Election results changed investors’ focus from who will run the country to how Washington will handle the impending fiscal cliff. In many economists’ opinions, an impasse over the fiscal cliff could result in a recession as the combination of increased taxes and reduced government spending suppresses economic growth. Obviously, such a scenario would cause concern regarding how an investor would allocate capital to different investments, including Prosper loans. Do recent asset market trends support the fear of many economists? What potential strategies can a Prosper investor enact if the underlying health of the economy were to deteriorate?
Below we attempt to answer these questions.

Notwithstanding recent equity market weakness, it should be noted that the S&P 500 has had a very healthy year-to-date return, up 11.8% as of November 12th. Additionally, all major world equity markets are positive this year, with the exception of Spain and China. In short, 2012 world equity performance suggests an underlying global economy strong enough to support equity prices. Corporate high yield bonds have also shown strong performance. The BA Merrill Lynch High Yield index is up 12.9% as of October 31st. Perhaps more importantly, this index’s yield has remained remarkably steady over the past three months, suggesting that fears of a weakening economy are misplaced. If economic strains were beginning to appear, high yield bond’s interest rates should be rising.

Finally, consider two-year US government swap rates. For those not familiar with swap rates, they represent the price where two parties agree to exchange interest rate cash flows. Without getting over-complicated  a high and rising swap rate indicates greater investor uncertainty about the course of future interest rates such that an investor pays more for a swap rate given this uncertainty. Note that swap rates rose prior to the beginning of each of the last three recessions (1990, 2000 and 2008) and are now back to levels not witnessed since 1993. The current level of swap rates seems to imply that fixed income investors are not overtly concerned about the direction of interest rates, or a recession. This suggests a slow but steady economic growth rather than any rapid increases or recessionary shocks. In other words, asset market data appears to suggest things will be ok.

Regardless, if investors are concerned about a recession they should look to the high credit grades of Prosper loans. Consider our back test analysis that estimates the potential variance of returns by Prosper credit grades throughout an economic cycle. Assuming an economic downturn one-third of the time in our simulation, we saw that steady performance, with little chance of principal loss, defines the likely performance of high credit grade Prosper loans. Of course, there is no free lunch, and an investor will give up additional yield by adding these to their portfolio. But the benefit of more stable returns could be exactly what the doctor ordered if tougher economic times were to prevail.

More information on October’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

Joseph L. Toms
Chief Investment Officer

¹To calculate the Annualized Returns on Principal By Monthly Loan Vintage, all payments received on borrower loans originated during that month (i) minus principal payments (ii) minus servicing fees (iii) minus chargeoff’s are aggregated and then divided by the average outstanding principal balance. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. Seasoned vintages are categorized as those vintages that are at least 10 months old.

With $16 million in originations in September, Prosper continues to focus on providing a high yield, short duration alternative for investors. Which brings us to this month’s commentary from our Chief Investment Officer, Joe Toms.

LOOKING FOR YIELD: DURATION RISK VERSUS CREDIT RISK IN FIXED INCOME

I recently came across an article that quoted Paul O’Brien, head of fixed income at the Abu Dhabi Investment Authority (with estimated assets under management of $627 billion), that we felt perfectly summarized the challenges confronting fixed income investors today. He writes:

“The return for bearing duration risk is the lowest it has been in our careers. The return for credit risk, on the other hand, is probably average. If you take the history as a benchmark, then it’s fair to say that the return from fixed income is probably better served by taking credit exposure, rather than duration exposure.”

We think this quote confirms the point we have been making over the past year, that short-duration, high-yield portfolios like Prosper’s allow investors the opportunity to generate yield while taking little interest-rate risk.

Consider the historical evidence of Prosper 2.0 vintages that are at least 12 months old. The data shows not only the stability of the different vintages but that, by the end of month 12, the vintages returned to the investor 50% of their initial investment. In other words, through the combination of prepayments, straight line amortization of principal and interest, investors receive a tremendous amount of cash flow early on in the investment.

This high cash flow provides a number of clear and substantive benefits. It reduces interest rate risk while providing tremendous flexibility to either re-invest in Prosper Loans and/or allocate to other promising investments. In short, it allows investors to earn a considerable premium in yield relative to most other fixed income investments with little interest rate risk while providing significant cash flows. While admittedly biased, we think that the combination of high yields, short durations and strong cash flows make a compelling investment case.

More information on September’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

Last week all eyes turn to the Federal Reserve. In accordance with what many economists predicted, the weak August jobs report contributed to the Fed initiating new quantitative easing at its September 12th meeting. Combined with the European Central Bank’s recent announcement of “unlimited” bond buying of shorter-term European sovereign debt, it looks as if interest rates will remain low for an extended time. In fact, recent forecasts indicate that the Fed funds rate will remain below 0.5% through August 2015.

Not surprisingly, given the benign outlook for interest rates, investors have poured money into fixed income instruments, driving prices higher and yields lower. A recent Morgan Stanley research report highlighted the risks of rising fixed income prices, citing that long-dated investment grade corporate debt may represent the “biggest risk” in the U.S. corporate bond market and that they could lose 25% in value if rates were to return to pre-crisis levels. In short, it is our (and many others’) opinion that the sustained period of low rates has indeed altered the traditional risk/reward relationship for many fixed income instruments.

Consider current yields, durations, and long-term weighted average default data for corporate grades in contrast with Prosper’s platform inventory. As the Morgan Stanley report identifies, it is clear that high grade corporate debt (AAA-A) yields are indeed extremely low and that the average duration of 6+ years place these grades at risk if yields were to rise.

What also stands out is that Prosper’s historical seasoned default rate of 6.86% is similar to the equivalent of a B-rated corporate bond. Yet the pre-default yield is currently 2.9 times higher than corporate B bonds. Further, the average duration is 60% lower! In short, we think the data makes a compelling case to consider the risks and opportunities that exist in fixed income today. In the case of corporate bonds it appears that investment grade debt, while avoiding default risk, could suffer significant price risk since yields can’t make up for the length of the typical duration. In lower grade corporate debt investors incur default risk but receive some compensating yield, albeit perhaps not enough to completely offset price risk. In light of these options we would argue that Prosper’s platform, while incurring default risk, offers investors the chance to earn substantive yields with less price risk since the durations are significantly below those of typical corporate bond portfolios. For that reason an allocation to Prosper represents not only a sound investment but also provides substantive portfolio benefits in this trying fixed income environment.

More information on August’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

¹Estimated return is the difference between the estimated effective yield and the estimated loss rate. Estimated effective yield is equal to the current yield (borrower interest rate minus the 1% servicing fee) (i) minus estimated uncollected interest on charge-offs, (ii) plus estimated collected late fees. The estimated loss rate is the estimated principal loss on charged off loans. All estimates are based on the historical performance of Prosper loans for borrowers with similar characteristics. The calculations of estimated return, estimated effective yield, and estimated loss rate require significant assumptions about the repayment of loans, and lenders should make their own judgments with respect to the accuracy of these assumptions. Actual performance may differ from estimated performance.

²To calculate the Annualized Returns on Principal By Monthly Loan Vintage, all payments received on borrower loans originated during that month (i) minus principal payments (ii) minus servicing fees (iii) minus charge-off’s, are aggregated and then divided by the average outstanding principal balance. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. Seasoned vintages are categorized as those vintages that are at least 10 months old.

³The current yield is based on the dollar weighted current yield for all loans originated in August of 2012.

⁴The Prosper Default figure of 6.86% is the “Seasoned” annualized loss rate associated with our annualized “Seasoned” return of 10.02%. To calculate the annualized loss rate, the net credit losses corresponding to eligible Notes are aggregated then divided by the average daily amount of aggregate outstanding principal for such loans providing a gross loss rate. To annualize the loss rate it is divided by the dollar-weighted average age of the portfolio in days and then multiplied by 365.

IMPORTANT DISCLOSURES:

Notes offered by Prospectus.

This presentation includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. You should carefully read the factors described in the “Risk Factors” section of the Prospectus for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements speak only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements above and in the Prospectus. We undertake no obligation to update or revise forward-looking statements that may be made in this presentation to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

July 2012 marks Prosper 2.0’s third birthday. Consistent loan performance over the past three years demonstrates the significant improvements made since Prosper’s pioneering 1.0 model. Over the past 36 months our investors have experienced 18 months of returns greater than 1%, 35 months of returns greater than 0.80%, and not a single down month.* Prosper 2.0’s performance underscores the fundamental durability of the returns available in consumer credit, a fact that remains greatly underappreciated by the majority of investors today.

Recently, TransUnion published a report on consumer credit trends. These indicate that U.S. credit card delinquencies continue to improve.  As we review the article alongside recent Federal Reserve data, we realize that the improvement in credit delinquency trends speaks volumes to the changes in borrower behavior brought on by the calamity of the 2008 financial crisis.  Consider the graph below that charts the history of consumer credit card delinquency and charge-off rates:

The charge-off data in this chart, reported since March of 1985, shows that the current reading of 4.25% ranks in the 40th percentile of this entire data range.  In other words, 60% of the time, charge-off rates have been higher. Good, but certainly not extraordinary. Now, consider the shorter delinquency data series in grey. Beginning in March 1991, the delinquency reading was almost 6%. The current reading of 3.07% is the lowest on record.

The implications of this conclusion are profound. Delinquency rates are traditionally an excellent precursor for future charge-off rates. Low and falling delinquency rates suggest that future aggregate credit charge-off rates for consumer credit will continue to improve. However, more startling is that these improvements are occurring in the weakest economic recovery on record since World War II.  This seems counterintuitive. One would expect to see improved credit performance during periods of economic growth like the boom of the mid-90s, for instance. Or the post-bubble period last decade. Instead, we see higher economic growth, lower unemployment and better income statistics, which should lead to improving credit performance. So what gives?

In our May Update, we discussed at some length the dramatic declines in net income and net worth experienced by American families since 2000.  We think that the answer to the above question lies in the combination of this data and scars of the 2008 Financial Crisis.  Very few experts dispute that throughout the remainder of this decade, we are likely to witness a massive deleveraging of the Western World’s balance sheet.  A consequence of this will be sub-par economic growth, an environment that Bill Gross, the CIO of PIMCO, has dubbed the “new normal”.

So what would responsible credit worthy borrowers do in an environment of little future income growth and uncertain job stability?  They would tend carefully to their debt – lowering interest costs where possible and insuring pay down of outstanding debt.  And perhaps above all, they would preserve access to credit by staying current on their bills. Seen through this prism, improvements in consumer credit behavior make perfect sense as a rational adaptation to the brave new world of deleveraging. The upside? As an investor in P2P you can take advantage of this secular trend, helping creditworthy borrowers to achieve their logical goals and benefiting from consistent returns.

More information on July’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

*Platform Monthly Return on Principal for All Vintages (Seasoned & Unseasoned) is the dollar-weighted average return of all the discrete loan vintage returns for a given calendar month based on outstanding principal at the beginning of the month. For a loan vintage to be considered in the calendar return, it must fall between July 2009 and the month prior to the reporting month (e.g. the December 2010 calendar return would be the average return of loan vintages from July 2009 through November 2010). The periodic return for calendar month and respective loan vintages is calculated by taking the net payments received on borrower loans (which are net of principal repayment, credit losses, and servicing costs for such loans) as a percentage of the principal outstanding at the beginning of the period.

**To calculate the Return on Principal by monthly loan vintage, all payments received on borrower loans (which are net of principal repayment, credit losses, and servicing costs for such loans) originated during the month are aggregated and then divided by the average amount of aggregate outstanding principal. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. To be included in the Seasoned Returns calculations, Notes must be associated with a borrower loan originated at least 10 months prior; this calculation uses loans originated through August 31, 2011. Our research shows that loan portfolios that have reached 10 months of age more accurately reflect the likely long-term performance as the loans have had sufficient time to experience the impact of potential defaults. Seasoned Return is not necessarily indicative of future performance of any Notes.

IMPORTANT DISCLOSURES:

Notes offered by Prospectus.

This presentation includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. You should carefully read the factors described in the “Risk Factors” section of the Prospectus for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements speak only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements above and in the Prospectus. We undertake no obligation to update or revise forward-looking statements that may be made in this presentation to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

Webster’s dictionary defines collaboration as the ‘act of working together’. Consumption is defined as ‘the act or process of consuming’ things. ‘Collaborative Consumption’ describes a cultural movement that is disrupting business models and user behaviors all over the world. Industries affected vary from borrowing and lending to sharing and renting and together they enable a kind of access and community for the everyday individual in a way that was never before possible.

In 2011, Time Money Magazine named Collaborative Consumption one of the top ‘10 Ideas That Will Change the World.’ In their book, What’s Mine is Yours, Collaborative Consumption experts, Rachel Botsman and Roo Rogers explore the rise of sharing in our world today. Botsman calls it a “rapid explosion in traditional sharing, bartering, lending, trading, renting, gifting, and swapping redefined through technology and peer communities.”

USA Today calls Collaborative Consumption “America’s new business model: sharing.” And it is. According to Mesh.it, there are over 7,107 companies across 136 countries that have adopted the sharing economy in one way or another. These industries vary from car sharing companies, like Zipcar or RelayRides, to services available like Taskrabbit, and loans like those offered through Prosper.

Peer-to-peer lending is one of the many industries that developed on the cusp of the Collaborative Consumption movement. Borrowing and investing among peers is not a new idea. In fact, peer-to-peer lending can be traced back as far as Shakespeare. But Collaborative Consumption alters the way we access this kind of lending. Now, it’s as simple as logging onto your computer, posting your loan application to prosper.com and watching as investors commit to funding portions of your loan.

Ten years ago, if you wanted to get a loan, your choices were banks, credit unions, payday loan services or the slight chance that you might be able to borrow from a friend or family member. Take that one step further and consider what your investment opportunities were ten years ago. Before peer-to-peer lending, investors had almost zero access to consumer loan pools. They were limited specifically to distressed asset segments, if at all in that sector.

Collaborative Consumption is a movement that is still growing every day. Those of us at Prosper are really excited to continue our contributions as society finds innovative ways to work together to provide unique access to new sharing opportunities.

Realizing he had “too many payments every month”, Leonard used a $10,000 Prosper Loan to pay off his credit cards. He points to two reasons for turning to Prosper for a personal loan:

1. Simplicity. Keeping track of multiple credit cards with outstanding balances is difficult and time consuming. Exchanging them for a single fixed monthly payment helped to reduce financial stress.
2. Community. Leonard didn’t have to walk into a bank to get his loan. In his words, Prosper’s peer-to-peer lending community “made [his] decision to borrow much easier”, adding that “lenders know what borrowers are going through”.

We think Leonard’s story is really heartening – and he is just one of thousands of borrowers who have used a Prosper Loan to take their first steps towards tackling their debt.