Prosper Bidding Guidance Changes 4-14-08

On Monday there was another major update to Prosper’s Bidding Guidance (BG). The most significant change is that the BG went from 67 to 103 credit segments. Wow!

Credit grades were sliced even further than before based on loan request size. Here is a summary:

(the following are for credit grades AA-D, non-autofund listings only)

AA – From 4 to now 8 segments:

Loan size segments were:
$0 - $9,999
$10,000+

Now:
$0 - $4,999
$5,000 - $10,000
$10,001 - $15,000
$15,001+


A – From 5 to now 12 segments:

Loan size segments were:
$0 - $7,499
$7,500+

Now:
$0 - $4,999
$5,000 - $7,499
$7,500 - $10,000
$10,001 - $15,000
$15,001+


B – From 6 to now 14 segments:

Loan size segments were:
$0 - $7,499
$7,500+

Now:
$0 - $4,999
$5,000 - $10,000
$10,001 - $15,000
$15,001+


C – From 6 to now 16 segments:

Loan size segments were:
$0 - $7,499
$7,500+

Now:
$0 - $5,000
$5,001 - $7,499
$7,500 - $10,000
$10,001 - $15,000
$15,001+


D – From 4 to now 10 segments:

Loan size segments were:
$0 - $9,999
$10,000+

Now:
$0 - $2,999
$3,000 - $7,499
$7,500 - $10,000
$10,001+


In our time on Prosper before the Bidding Guidance was launched in October 07 *, the Experian default rates provided to us were based on credit grade only (and for loans with less than 20% DTI). Unfortunately, many lenders were under the impression that the default probability for each loan was the same regardless of loan size. As a result, too many loans funded that were too big for the borrower to pay back.

To see the effect the Bidding Guidance is having by segmenting risk into loan size slices, take a look at this month’s Market Survey. In March 2007, the average loan size was $6,935, while last month, March 2008, the average loan size was $6,536.

Ok, it’s not a huge drop, but it’s significant since the makeup of the “average” loan has also changed. In March 07, 29% were considered Prime loans, while 14% were considered Sub-Prime loans.

Here in March 08, a full 39% of loans are Prime, while only 5% are considered Sub-Prime. So, while the average creditworthiness of borrowers has increased over the past year, the average loan size has decreased. We have the Bidding Guidance to thank for that.


Before LendingClub shut down, I had briefly joined to check them out. The one thing I really liked about the way LendingClub set interest rates is that loan size had an automatic affect on interest rate (LendingClub set the rates based on a number of criteria. There was no auction like Prosper.) This was going to be one of the many points I planned on blogging about regarding the differences between LendingClub and Prosper. But then LendingClub had to go into it’s “quiet period”. They have no idea how much time they saved me… :-)

This recent change to the Bidding Guidance is a great improvement over the very narrow loan size ranges offered before by the Bidding Guidance (and is light years ahead of where we were prior to the BG). By slicing up each credit grade by various loan size ranges, the Prosper lender can now clearly see how much impact loan size has on default probability. Of course it’s not the only factor, but it’s still very important.

Next, we'll speculate on some of the interesting loan size ranges selected for this Bidding Guidance revision.



* I should note that when the Bidding Guidance was introduced in October 2007, there was no segmentation by loan size. Loan size was not introduced into the BG segments until January 2008.