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Prosper Borrowers: Buy My Endorsement For A Better Loan Rate

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Note to Reader: I intended the following to be a piece of satire in the same idea of Jonathan Swift's A Modest Proposal. Since I've written about 17 million words being a Prosper "fan boy", I thought it would be fairly obvious that I wouldn't hurt the marketplace by actually selling my endorsement. From the comments, it seems as if I was wrong. I wanted to make Prosper aware of the issue while trying to advance my writing skills.

I had another goal as well, I hoped people would pick up on the debate of social capital having monetary value vs. money being able to buy social capital. Seth Gitter, Assistant Professor of Economics, says the concept may make an excellent economics paper. You'll want the read the last paragraph of that post where he mentioned that Michael Jordan's paid endorsement for Nike is very similar. This is the kind of valuable discussion I wanted to explore. And now for the unedited article:

As some of you know, I've been lending money on Prosper since February 2006. I've been intrigued by P2P lending for at least these two reasons:

  1. It makes available an asset class not heavily correlated with stocks, real estate, or commodities
  2. It provides an opportunity for a more efficient marketplace for loans by opening it up to everyone

Some people disagree with these statements. That's fine, there's definitely some room for discussion on either side of the fence.

When I went to Prosper Days to learn more about Prosper, one of biggest things the company talked about was social capital. There's real value to connections that can be financially rewarding. As cold and heartless as that sounds it's true. I'm not saying that social aspects are not worth it alone, but if there's a bonus of a financial reward for both parties, why not take advantage of that?

Prosper found out some interesting things when they allowed friends to endorse loans. Netbanker recaps in more detail, but here's the executive summary. Lenders realize that borrowers don't want to let their friends who endorsed them down and thus see them as a better risk for their dollar. Specifically:

  • Loans with one bidding endorsement are performing 35% better than similar loans without that endorsement
  • Loans with more than one multiple bidding endorsement are performing 50% better

Using this information, it becomes clear that borrowers have a lot to gain by getting an endorsement from a bidder. One could reason that the higher the bid the stronger the endorsement. So a borrower could get an endorsement by trying to get a friend to sign up for Prosper as a lender, but many friends aren't going to be willing to go through all the trouble of opening an account and giving up their social security number to yet another financial institution.

Buy My Endorsement

Another way to get an endorsement is through me. It's pretty simple really. Contact me and let me know how much you want your endorsement for. Give me that money plus 50% and I'll bid on your loan. If you end up paying off your loan, I will return the value of your endorsement. The 50% extra is my fee for making your loan more attractive to lenders. This gives you a better interest rate which usually would be worth much more than my fee. Here's an example: You want a $50 endorsement on your loan. You contact me, we talk, and you send me $75 through PayPal. I bid $50 of that money on your loan with an endorsement and keep $25 for my time. If you make good on your loan and pay it off on time, I'll give you the $50 endorsement value back. If you default, I keep the $50 (this protects me from potentially losing on the loan). With the endorsement your interest rate may go down 3% (hypothetical example), which over three years, should add up to more than the $25 fee I'm requesting for this service. You'll want to do the math to make sure that it makes sense for your loan.

Why Am I Doing this?
If you think it sounds dirty, you are right. I'm putting on a grey hat in this case. I want to see how Prosper reacts to such a proposal. They've blurred the line by adding the social element to the loan marketplace. I want to blur it more. I want Prosper to look at endorsements and say, "Is this really the right model? Can we make it better?" Innovation occurs when  a potential problem is exposed. Perhaps "buying an endorsement" doesn't qualify as a problem in Prosper's eyes. If that's the case, that's worth knowing as well.

Lastly, I think it's a great way to demonstrate the power of social capital. A smart borrower gains with a lower interest rate. A lender (I won't call myself smart) gains with a unique idea. If there's a bonus of a financial reward for both parties, why not take advantage of that?

Last updated on July 29, 2011.

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23 Responses to “Prosper Borrowers: Buy My Endorsement For A Better Loan Rate”

  1. Kenneth LIn says:

    I was at Prosper days too. I found the endorsement numbers to a great advantage for lenders who are paying attention.

    What you are suggesting maybe grey but it may not be all bad. I believe one can argue the borrower who actually does contact you is slightly less risky because they are putting up money ($75) and taking the time to make their loan less risky. With that said, I think fraud is another story and not covered by my comment.

  2. WealthBoy says:

    An intriguing idea. For a second there, I wasn’t sure if I was reading a RateLadder post or a LazyMan post. ;)

  3. Tokyo Joe says:

    This does indeed sound illegal…

    Are you giving the borrower any paperwork?

    Do you have a license?

    Do you really thing that $75 will stop me from defaulting on a $20,000 loan, dragging your name in the mud in the process?

    It’s a definite TOS violation.

    Not smart…

  4. Tokyo Joe says:

    Come on! You really didn’t understand that sentence?

    Okay, I’ll explain it to you:

    Your name will be dragged through the mud as an endorser as soon as the loan you endorse goes bad. If you endorse several that go bad, your name will becaome synonymous with promiscuous endorsing for profit…

    Like I said, if I needed 20 grand as a cash-out, why would I care about the $75 I sent you, or your reputation? I’d take the money and laugh.

    Assuming this scheme ever gets off the ground.

  5. Tokyo Joe says:

    Why do you keep deleting my website from “my website”??

    It is a field you ask for when you post comments, and that’s my website.

    That isn’t very nice, or ethical-looking…

    Prosper put you up to it?

  6. anonymous says:

    “It makes available an asset class not heavily correlated with stocks, real estate, or commodities”

    Are you sure? I’d bet that prosper loans are very heavily correlated with other consumer debt, such as real estate.

  7. Mike says:

    Based on your lendingstats profile, I have to say, empirically there is only one asset class your investments have not been correlated to: commodities!

    If you want to go long consumer debt, go buy a bank stock.

  8. Step3 says:

    So much hate in so few comments. I’ll admit I was a little angry when I first read the post, but once I saw what Lazy Man was trying to do, I fully applauded the effort. I’m new to prosper, and LM’s idea of selling endorsements made me angry because I just bid a some loans for that very reason. As near as I can see from the website, Prosper does not track the history of endorsements. LM’s scheme illustrates a flaw in the system that needs to be addressed to make Proper a better marketplace.

  9. JustGuy says:

    I’d love to see someone buy an endorsement from you.

    Just one more reason Prosper will never get a secondary market off the ground. Too much room for fraud for the SEC to ever allow the stuff to be traded.

  10. Ryan says:

    Proseper has a looooooong way to go before mainstream investors even consider it as a slice of thier portfolio. Just like any new idea (especially e-commerce) it may be one of those things that the uneasy end up kicking themselves over not being more involved at the onset.

    This is a good discussion though. The fact that there are so many polarized opinions means that Lazy Man does have something going here. If prosper (of the gamut of bloggers who love it or hate it) seem to think this is immoral, or illegal, it it up to them to fix it. (the ebay model is an excellent example of people keeping each other honest).

    The quote I love in here that really pertains is “Innovation occurs when a potential problem is exposed.”. That is what is happening here.

  11. Yankeefan says:

    Ok- I believe you’re writing satire. Good satire, however, needs to be beyond reality, and, unfortunately, this blog idea is only barely outside what we have seen already on Prosper.

    The idea does point up a need for such things as a way to view all endorsements made by individual members.

  12. Lazy Man says:

    I never said that I write good satire ;-). I think the best is when you keep it as close to reality as possible.

  13. Matt says:

    I don’t like this at all.

  14. Lazy Man says:

    Sorry Matt, I try to make systems better. I think it’s how we evolve to better products. The alternative is to just stick with what we have. I’d rather improve.

  15. Matt says:

    I don’t get it, what you want to do is against the terms of agreement and is illegal. [Editor’s note: this is false, see my full comment below…] Why are you making it seem like this is a loophole? If you want to be a criminal why don’t you just steal somebody SS# and use it to take a loan out. To make yourself feel better, “Mr Grey hat”, you can give half the money you stole to some charity.

  16. Lazy Man says:

    Matt, what makes you think this is illegal? Where is the law that says buying an endorsement is illegal?

    Also, the terms of agreement specifically relate to bidding. It doesn’t relate to the endorsing. I receive no compensation for bidding (other than the standard interest that anyone else does). I would receive compensation for the endorsement.

    It’s a moot point anyway, because I don’t really want to do this. I want to make Prosper aware that this can be done. There are probably people doing behind closed doors already. I want to get it into the open so that action can take place and fixed it.

    Anyone accusing me of any wrong-doing here has misinterpreted the style of writing I chose to use to make my point.

  17. Seth says:

    In some sense selling endorsements might help indentify good borrowers. The are other possibilities too, but if you were going to take the money and run you would be less likely to pay upfront for an endorsement. So by paying you show you are a better borrower.

    Sorry if this is gosh, but I tried to provide a more detailed explaniation here.

  18. Geoff says:

    This is just similar to the company that paid individuals to add strangers to their credit cards so that their credit score would go up allowing them to get better loan rates.

    That forced a change, but it only came about when more an more people started doing this.

  19. Lazy Man says:

    Good comparison Geoff. Hopefully, it’s easier to get Prosper to change their policy than the credit card industry’s. Since Prosper is smaller and more nimble, I like to think it will.

  20. pfodyssey says:

    Sorry Lazy…I think probably a non-starter. I also felt the post gave me a glimpse of the “dark side” of Lazy-Man. I say that not in a critical or attacking way (we are all looking for ways to make a buck, no?)…just a different tone / tact than I’m accustomed to from the Lazy one. In general, the whole concept gives me the same feelings as a payday loan joint (kinda sleezy).

  21. phreddy says:

    You say that your plan does not violate the terms of service because it only relates to bidding, but you state, ” It’s pretty simple really. Contact me and let me know how much you want your endorsement for. Give me that money plus 50% and I’ll bid on your loan.” above. Looks like you are bidding on laons in this scheme.

  22. Lazy Man says:

    Maybe I bid of my own volition unrelated to the payment for the endorsement.

  23. Lazy Man says:

    Sorry for those who mean to leave useful comments on this post. It seems that some trolls enjoy hanging out on this post attempting to tell me what I was intending to do.

    As I don’t believe in feeding the trolls and no meaningful discussion is coming from this, I’m closing the comments here.

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