Think of it as a reverse eBay. Instead of describing a product, you describe your financial self and how you will pay the money back. In return users with money bid on your loan, and sign a standard contract.
For the first time we have a real academic research paper on how this is all working out. Utpal "Paul" Dholakia (Bombay '93) from Rice's Jones School of Management has studied Prosper and the results aren't surprising.
The borrower characteristics having a negative effect on auction funding success are, as anticipated, debt-to-income ratio and being a minority (African American).
When banks operate this way we can sue them. When individuals, on their own, make decisions tinged by racism, you can't force someone to make a loan.
But here's an idea. Competition. If sites are organized around specific types of lenders, or the search for specific types of deals, these problems may start to disappear.
In other words, minority investors pool resources just as Prosper does and go to market seeking good opportunities among minority borrowers.
Dr. Dohlakia wanted to see if open source lending democratizes the process. To an extent it does. But to another extent it doesn't.
So here's another experiment the Doc might want to try. Make two applications for the same loan, one under the name Paul Dolak, using the picture above, the other under the name Utpal Dohlakia using the picture on the Jones School site.
If open source lending is to work out the problem of racism must be fixed. How would you fix them?