Share on StockTwits

Prosper.com revealed that they plan on eliminating their automated plan system by the end of June in a recent filing with the SEC. The disclosure in their 10K form states that they plan on replacing the automated bid system with a new loan search tool that allows lenders to find loans based on criteria that they select.

The company hasn’t made any announcements to investors about the change in its bidding system, but the company disclosed that 55% of the bids made since its relaunch were made by its automatic bidding system. When Prosper eliminates its automatic bidding system, it could see an immediate decline in bidding. Although many peer-to-peer lending enthusiasts enjoy looking through individual loan listings, not everyone does. The elimination of the automatic bidding system could create an exodus of investors that bid on automatic loans to its competitor Lending Club, which does offer automatic investing options.

The company did not explicitly state why they would be eliminating the system, however, the company did make the following cryptic statement in their 10k filing: “Prosper’s administration of the automated bidding plan system and its new loan search tool could create additional liability for Prosper and such liability could be material.” Some have speculated that Prosper does not want to be seen as being an investment advisor to lenders, which could require Prosper to have fiduciary responsibility for investors that use automated plans. If that were to happen, and this is only speculation, investors that think Prosper made poor loan choices for them could sue the company for violating their fiduciary responsibility.

Here’s an excerpt from Prosper’s 10K form that discusses the change:

On June 30, 2011, we intend to replace our automated plan system with a new loan search tool.  Beginning on that date, lenders will no longer be able to create automated plans, but will instead be able to use the loan search tool to identify Notes that meet their investment criteria. A lender using the search tool will be asked to indicate (i) the Prosper Rating or Ratings she wishes to use as search criteria, (ii) the total amount she wishes to invest and (iii) the amount she wishes to invest per Note. If she wishes to search for Notes using criteria other than, or in addition to, Prosper Rating, she will be able to use one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio and credit score.

The search tool will then compile a basket of Notes for the lender’s consideration that meet her search criteria.  If the aggregate principal amount of the Notes that meet her criteria exceeds the total amount she wishes to invest, the search tool will select Notes for her basket based on the principle of first in, first out, i.e.,  the Note with the corresponding listing that was posted on our website earliest will be the first included in her basket, then the Note with the next oldest corresponding listing will be included, and so on, until the aggregate principal amount of Notes in her basket equals the amount she wishes to invest. To the extent available Notes that meet the lender’s criteria are insufficient to fill her order, the lender will be advised of this shortfall and given an opportunity either to reduce the size of her order or modify her search criteria to make her search more expansive.

If the lender’s search criteria included multiple Prosper Ratings, the search tool will divide her basket into equal portions, one portion representing each Prosper Rating selected, and then attempt to fill each portion in the manner just described.  To the extent there are insufficient Notes available with a particular Prosper Rating to fill that portion of the lender’s basket, the search tool will attempt to make up the deficit by including additional Notes with the other Prosper Ratings selected in equal proportions. To the extent available Notes with these other Prosper Ratings are still insufficient to fill the lender’s order, the lender will be advised of this shortfall and given an opportunity either to reduce the size of her order or modify her search criteria to make her search more expansive.