(Slate) — Things were looking so good for Prosper.com five years ago. To most people, the economy appeared to be functional, dot-com nightmare stories had faded from memory, and the time seemed ripe for Web 2.0 to take over the world of personal loans. Prosper and several other “person-to-person lending” sites operated like an eBay for credit: Prospective borrowers put up requests for loans, disclosed their credit rating and the reason they needed the money, and tried to make a case for lenders to take a chance on their dream—at attractive premiums. Though the idea of perfect strangers trading money seemed surreal, several personal-finance experts said they hoped that companies like Prosper could free borrowers from onerous terms set by credit card companies and, worse, payday loan stores. “Looking at it from 10,000 feet, this is a great idea,” Elizabeth Warren, the Harvard Law School professor who is now setting up President Obama’s Consumer Financial Protection Bureau, told me when I first wrote about Prosper in 2006. “It could have the wonderful effect of making markets work the way they should, driving down the amounts charged for loans to the true marginal cost.”
But that didn’t happen. Instead, in 2008, the Securities and Exchange Commission shut Prosper down. Regulators charged that the site was offering investment securities without having formally registered with the SEC. Prosper and its competitors, including Lending Club, were forced to get permission from the government for their operations. Prosper was closed for nine months, and by the time it went back up, the financial crisis had destroyed the public’s appetite for financial innovation. Worse, there were signs that Prosper’s model was fundamentally flawed. As Ray Fisman wrote in Slate in 2009, lenders on Prosper seemed to be swayed by factors that didn’t live up to the claim of democratizing finance—pretty women got cheaper loans than homely ones, and lenders were more likely to lend to white people than black people.
