Online Lender Prosper Says System Error Overstated Returns

(Bloomberg) -- Prosper Marketplace Inc., one of the largest U.S. online-lending platforms, notified the majority of the investors that buy its loans that it had overstated their annual returns due to a system error, a spokeswoman said.

The error has been fixed, according to spokeswoman Sarah Cain. Some of the investors that were affected saw their annual returns fall in half, but in most cases returns fell less than 2 percentage points, Cain said. The issue has been going for “several quarters,” she said.

The glitch didn't affect the cash that investors received, tax documents, expected future returns, or any other information the startup provided to loan buyers. In a small number of cases, returns were understated, Cain said.

The systems problem drew attention to a difficulty that the online-lending industry as a whole has faced recently: returns on loans are falling, and convincing investors to buy loans from the platforms is getting harder. Online consumer loans' total returns were 3.95 percent in 2016, compared with 6.93 percent the year before, according to Orchard Platform, a technology and data provider to the industry. 

“The investment story -- based on the index data -- is not as compelling as it has been in the recent past,” Bill Ullman, Orchard's chief commercial officer, wrote in a note last month on the company's website.

Slashed Workforce

Prosper, based in San Francisco, last year slashed its workforce as funding for loans grew pricier. The company posted $118.7 million of losses for 2016, according to a filing. The company helped pioneer peer-to-peer lending, matching borrowers initially with individual investors who wanted to fund loans. Over time, institutional investors began buying more and more of the loans, as well as bonds backed by the loans.

Investors including affiliates of Jefferies Group LLC, New Residential Investment Corp. and Soros Fund Management LLC, recently inked a deal to buy up to $5 billion of Prosper's loans. Some of the loans may be bundled into securities to be sold to bond funds this month, according to Michael Nierenberg, CEO of New Residential, on an earnings call this week. “The results on those loans, so far, has been terrific,” Nierenberg said. Levered returns after losses on the loans could be more than 20 percent, he said.

The systems error stemmed from the formulas the company was using, which failed to incorporate some inputs, according to Prosper's Cain. The wrong numbers will have no impact on bonds linked to Prosper loans, the spokeswoman said. Investors concerned about the matter can contact the company at a dedicated email address:  investorquestions@prosper.com.

To contact the reporter on this story: Matt Scully in New York at mscully17@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins, Kenneth Pringle