Kentucky regulators have reached agreement with Prosper Marketplace Inc. in a case involving hundreds of state residents and the sale of unregistered securities, the Kentucky Department of Financial Institutions announced Wednesday.
The department said Prosper operated a peer-to-peer lending service through its Web site, which has been shut down.
Lending "members" would offer to make loans at a certain interest rate. Borrowing members would apply for loans and Prosper would disburse the funds. In return, the lending member would get a "note" from Prosper, the department said.
Kentucky and other states "consider the notes to be securities that were not registered for sale, as required by law," the department said in a statement. "Regulators also were concerned that Prosper failed to disclose the true risks involved in the transactions."
Neither lenders nor borrowers knew one another's identities or how to contact one another, the department said. "The collection and disbursement of loan proceeds and payments was the responsibility of Prosper."
The company, based in San Francisco, agreed not to sell any new notes in any state until it complies with that state's laws, the department said. Prosper also agreed to pay a fine to several states, including Kentucky, totaling $1 million.
Kentucky officials said 310 lending members in Kentucky got notes for 10,843 loans with a total value of $855,517. More than $500,000 of those loans are unpaid and the notes for those loans will remain in force until the final payment, the department said.
From February 2006 until mid-October 2008, Prosper issued promissory notes with fixed annual interest rates of 7 percent to 36 percent, the department said. As of Sept. 29, Prosper had 810,000 members and $175 million in loans funded.