Common sense would tell you that if there were subprime lending woes in the market – Prosper would be no exception. Apparently, there is currently a flight away from the D, E, and HR. Lenders are now allocating resources in their portfolio towards less risky investments in the AA, A, B, and C rated loans.

It wasn’t too long ago that I hinted my concern for these lower credit borrowers. In response I have begun lending to only AA, A, and B borrowers. In the graph below you’ll notice that of my 66 loans, only 57 are current.

In the past month alone eight out the nine late loans are “C” rated borrowers.

I also give you a picture of my current portfolio distribution. Obviously I invested heavily in the “C” range, which accounts for a little over 50% of my entire portfolio.

The fact that many of these “C” rated borrowers were late had me worried, so I decided to go on a little fact-finding mission to see if there was a common flaw in each of these loans. Remember that for all of these loans I used a standing order with specific lending constraints/criteria and did not personally select which loans to lend money to.

Here are the five loans labeled as being one month late:

Late Loan One
-One current delinquency***
-56% debt/income ratio
-Bank account not verified***
-Employed one month***
-Bankcard utilization (12%)

Late Loan Two
-Two current delinquencies***
-5% debt/income ratio
-Bank account and home verified
-Employed nine months
-Bankcard utilization (0%)

Late Loan Three
-Four current delinquencies***
-20% debt/income ratio
-Bank account and home verified
-Employed five years & nine months
-Bankcard utilization (0%)

Late Loan Four
-No current delinquencies
-20% debt/income ratio
-Bank account verified
-Employed three years & five months
-Bankcard utilization (89%)***

Late Loan Five
-No current delinquencies
-35% debt/income ratio
-Bank account and home verified
-Employed five years & one month
-Bankcard utilization (18%)

Note: *** Represents Unfavorable Statistics

It seems that the underlying trouble with these loans stems from the fact that these borrowers either have a history of delinquency or carry too much credit card debt.

Perhaps Prosper will build their standing order screen to include those will no current delinquencies. I believe this function alone would reduce all late loan by half. Lending to those who actually care about their credit score makes sense.

Any thoughts?