A student of mine studying peer-to-peer lending ran across an interesting provision in the securities filings of Prosper Marketplace, one of the two main peer-to-peer lending sites. (The other is Lending Club.)
Here is one of the risk factors in Prosper’s filings:
In the unlikely event that PFL receives payments on the Borrower Loan corresponding to an investor’s Note after the final maturity date, such investor will not receive payments on that Note after maturity.
Each Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding Borrower Loan remain due and payable to PFL upon the initial maturity date, in which case the maturity of the Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding Borrower Loan still due and owing to PFL on the final maturity date, PFL will have no further obligation to make payments on the related Notes, even if it receives payments on the corresponding Borrower Loan after such date.
To understand how this works, you need to understand a little about how the Prosper site works. When a loan is funded by the peer-to-peer lenders on Prosper's site, the borrower signs a note payable to Prosper. Prosper, in turn, issues notes to the peer-to-peer lenders, but Prosper promises to make payments only to the extent that the underlying borrowers pay their notes to Prosper. In other words, Prosper is essentially just passing through any payments made by the peer-to-peer borrowers, with no additional recourse against Prosper. But, because of the limitation quoted above, Prosper won’t even pass through all loan payments. It’s free to keep any payments made after the final maturity date.
Prosper is, of course, free to structure its contracts in any way it wants, and I can understand why a provision like this would be useful. Prosper does not want to maintain records on these loans and lenders in perpetuity, and the final maturity date is a convenient cut-off point.
However, this limitation produces a potential windfall to Prosper. Payment after the final maturity date may be unlikely, but surely some borrowers will make payments after that point. If a conscientious borrower decides to pay later, Prosper pockets all of the money.
I would think the peer-to-peer lending sites, eager to attract the “crowd” to their sites, would bend over backwards to demonstrate their fairness to potential lenders, even if it does increase their administrative costs. Apparently not.