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Fintech lender Prosper to pay $3 million fine for misleading investors

Settles SEC charges that it reported inflated returns

Prosper, a longtime player in the personal lending space, announced plans in November to enter the mortgage arena with a digital HELOC product that promised to disrupt home equity lending.

But there’s a chance these plans could be put on hold.

The Securities and Exchange Commission announced Friday that Prosper has agreed to pay a $3 million fine to settle charges that it misled to investors by reporting inflated returns.

According to the SEC, the penalty settles allegations that the San Francisco-based fintech lender was “miscalculating and materially overstating” its net returns to retail investors and other stakeholders.

The order alleges that from 2015 to 2017, Prosper excluded certain non-performing loans from the returns it reported to more than 30,000 investors. The SEC also said Prosper posted the inflated return figures on the individual account pages of its website and shared it in emails soliciting additional investments.

The SEC said that some investors identified the miscalculation, notified Prosper, and decided not to make an additional cash commitment, but despite this, Prosper failed to investigate and correct its error.

“For almost two years, Prosper told tens of thousands of investors that their returns were higher than they actually were despite warning signs that should have alerted Prosper that it was miscalculating those returns,” said Daniel Michael, chief of the SEC Enforcement Division's Complex Financial Instruments Unit. “As this case shows, we are committed to holding fintech companies to the same standards applicable to other participants in the securities markets.”

Prosper agreed to pay the fine to settle the charges without admitting or denying the allegations.

HousingWire reached out to the lender for comment but had not heard back as of publication time. This story will be updated should we receive comment.

Prosper, which launched in 2005, aims to appeal to Millennial borrowers with its speedy, digital loan process, making access to student and personal loans quick and easy.

The company says it has originated more than $13 billion in personal loans for more than one million customers.

But fintech lender has had its struggles.

After failing to drum up the investor cash it needed to service its peer-to-peer lending model, the company decided to offer investors company shares in proportion to the loans they agreed to back. It was a novel idea, but it did not work out so well, leading to a net loss of $115 million in 2017 and a steep 70% plunge in the company’s value.

But in 2018 Prosper said its earnings had rebounded, reporting a 12% year-over-year uptick in the second quarter of last year, which perhaps inspired its promised leap into the HELOC space.

The company said its HELOC offering will allow customers to use its platform to digitally apply for a HELOC within minutes and receive an instant pre-qualification offer, shaving weeks off the process.

The product was set to launch in early 2019, but it remains to be seen if the latest development will delay its plans.

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