GREG BEQUETTE, A

slow-speaking man with a sly sense of humor, is an accounting specialist with the University of California, a volunteer firefighter, an amateur genealogist and not-so-born-to-be-wild biker. As if that's not enough, he recently added a fifth avocation to his repertoire: banker. Since last summer Bequette has loaned $750,000 of his personal cash to 157 strangers around the country, including $1,338 to a goatee-wearing salesman to buy an engagement ring, $6,211 to a California woman looking to market her new "all natural" skin and nail supplement, and $3,000 to a Kansas City couple to upgrade their tanning salon.

His clients call him "Pensioner" that's his handle on Prosper.com, a web site that serves as a sort of eBay for loans. On Prosper, folks ranging from teenage moms to CEOs post listings on the site explaining why they need to borrow money; consumers looking to make loans bid with interest-rate offers as high as 30%. Bequette fell hard for the concept when a coworker showed him the site last summer. He loves analyzing the borrowers' credit data and reading their colorful essays. "It's even more fun than picking stocks," he says. By fall, he'd cashed in his mutual funds and loaned half a million dollars, including $4,800 to a beef-jerky maker and $12,000 to an Alabama pet groomer. When that stash was gone, he got a $250,000 second mortgage and loaned that out too.

At first, everyone thought he'd lost his mind: "My wife was almost angry," he says. "But now she sees the money rolling in." His interest rates are high 24.5% on average and he's earning a 15% return after accounting for bad loans. If all goes well, Bequette, 55, hopes to retire on his pension and Prosper earnings he imagines himself lounging on a cruise ship deck with his laptop, managing his online loan portfolio.

Bequette's investment strategy may sound odd, but he has lots of company. Since Prosper launched a year ago, it's attracted 150,000 members who have done $36 million in loan deals. And no wonder with no bank playing middleman, lenders earn higher interest rates than they'd get on a bank deposit; the site-wide return, after accounting for loan losses, is 7.5%. Most lenders fund $50 and $100 portions of larger loans, so if a few of those loans go bad, it's not the end of the world. Then there's the sheer entertainment value of the site. Not only do would-be borrowers post detailed credit and income data, many include photos of themselves surrounded by grinning children, floppy pets, American flags and, in the case of one biology student seeking help with tuition, a dissected lab rat. Some write long essays detailing their dreams for the future and oh-so-good intentions. Prosper's mostly male discussion forums, meanwhile, are packed with gossip, analysis, tips on female borrowers with hot photos ("her credit information looks amazing!") and sarcastic screeds ridiculing the day's most absurd loan requests.

The man behind all this is Chris Larsen, a 46-year-old entrepreneur with the low-key confidence and pleasant visage of an airline pilot. He dreamed up Prosper in the late '90s, when he was still running the consumer-friendly online mortgage outfit E-Loan (it was the first to give customers a peek at their own credit scores). With Prosper, Larsen hopes to combine the efficiency of data-based lending markets with the social pressure found in informal, trust-based Asian lending networks. Will it take off? Not surprisingly, banks say consumers are happy with the wide selection of loan products already on the market. And while Dan Schatt, banking analyst with financial-services research firm Celent, predicts peer-to-peer lending sites will account for $5 billion by 2010, that's little more than a rounding error in the $2 trillion U.S. consumer loan market. But Larsen, never one for excessive modesty, says outfits like his may someday displace banks as the middleman in personal loans. He's sharply critical of the banking industry and thinks consumers are hungry for an alternative. "You should be able to sell your money directly to people who want to buy your money," he says.

Everyone agrees that it's a clever idea. "The basic concept is appealing," says Jack Guttentag, professor of finance emeritus at the Wharton School. "It brings lenders and borrowers together and takes the hassle out of it." But the first year has been bumpy. Lenders testing new strategies often suffer disappointing results; some have been shocked by borrowers who've never bothered to make a single payment. Critics say borrowers don't seem to feel especially beholden to lenders they've met online. And just about everyone complains that there aren't enough decent loans to fund. So far, Prosper is more of a giant banking petri dish than a threat to conventional lenders. "It's an experiment," Bequette acknowledges.

STILL, LARSEN MAY

When Gazula first encountered Prosper, he trod carefully, investing just a few thousand dollars in a series of small loans. But as he studied the ins and outs, he became convinced that it was a legitimate way to diversify his million-dollar portfolio of stocks and mutual funds. "It's great, provided you know how to play and understand the risks," Gazula says. Over time, he has developed a strategy that he says earns a steady 12% return: Using Prosper's screening tools, he finds high-risk borrowers who have few prior delinquencies. Then, usually during his lunch break or just before he turns in for the night, Gazula spends 20 minutes sifting through those listings to find folks looking to build a credit history or consolidate high-interest loans. "Once you get into it, you start to see patterns," he says. "It gets very easy."

Many Prosper lenders are the first to admit they have no special knack for credit analysis. But that doesn't mean they're winging it. Prosper has lots of tools and charts to help lenders assess risk, including a performance table showing how loans to different types of borrowers fare over time. The web site also caters to data geeks by making a complete file of all Prosper transactions available for a free download; amateur credit wonks have gone to town slicing and dicing the numbers to uncover new lending strategies and trends. Already, a sort of online ecosystem has sprouted around the site: There are dozens of blogs, stat sites and online calculators developed by and for Prosper lenders.

But other lenders are in it just for kicks. Half have loaned less than $1,000, and more than a few compare Prosper lending to a game of online poker or consider it a quirky social experiment. One is 25-year-old Nick Page, an Oberlin history student who made a mini fortune in real estate and sports betting. Last fall he loaned $350,000 to a seemingly random series of high-risk borrowers at low rates sparking amused speculation within the Prosper community that he was lending while intoxicated. Page, who goes by the handle "MuleShoes," says he was simply satisfying his curiosity. "I just wanted to jump in and see how it worked out," he says. In some cases, he even gave borrowers extra money with the caveat that they use it to become Prosper lenders themselves. The results, not surprisingly, have been god-awful. Page says he'd be pleased at this point just to break even. "But I've learned a fair amount about human nature," he says.

Unfortunately, even some of Prosper's more cautious lenders were surprised at the losses they encountered early on. While Larsen hoped Prosper's default rate would undercut the bank-industry average, it's actually higher. Losses on loans to borrowers with average credit, for instance, were averaging 3.1% 50% higher than the 2.1% enjoyed by banks. And despite Prosper's use of collection agencies to track down deadbeats, folks lending to the riskiest borrowers were typically losing a projected 18% of their money. Skeptics say Larsen's dream of a trust-based lending community isn't panning out. "It's really just a bunch of anonymous people on the Internet. It's not your mother and brother," says Eric Petroelje, who tracks Prosper activity on his popular stat site Eric's Credit Community.

Not surprisingly, Prosper is trying to quell the notion that it's a breeding ground for ne'er-do-well borrowers. In February it announced a minimum-credit-score requirement for borrowers, along with plans to have them submit references from real-life friends. Now if a borrower falls behind on payments, Prosper will email his friends and tell them he's a deadbeat. But that won't fix everything: As a whole, Prosper's lender community is still more subject to irrational whims and emotional behavior than professional credit analysts. Sanjeev Kumar, a doctoral student at the University of Michigan's Ross School of Business, analyzed six months of Prosper activity and found that quantitative data such as credit scores and borrower income explain just a third of bidding behavior. "Everything else is subjective, like whether there is a photo of the kids," he says. Rice University marketing professor Paul Dholakia, who did his own analysis, found that many lenders simply chase the most popular listings while perfectly good alternatives are ignored. "There's a strong tendency to herd," he says.

BUT IN ALL THAT

bad loan picking lies opportunity, at least if you believe Greg Harvey. The 40-year-old San Jose IT director, known online as BigGulp, has a new calling: Prosper loan manager. He's taken to meeting potential borrowers in person and combing through their financials. Once he's approved a loan, he invites the borrower into his Prosper group, a signal to other lenders that it's a good bet. He takes a small cut of every transaction using Prosper's "group rewards" system; if he builds a good track record, he could develop a large following of lenders who rely on his loan-picking prowess. With only nine deals under his belt, he's hardly raking in the cash, but he already feels like a big shot. "In a sick kind of way, it's fun to pick who to help fund or not," he says. "I'm like a fat-cat banker sitting behind a desk saying, 'Yes, no, no, yes, no.' Except I'm not fat."

There are lots of Greg Harveys on Prosper. Borrowers can align themselves with more than 2,800 groups that employ entry criteria ranging from the practical (Microsoft employees) to the political (Libertarians) to the fanciful (lovers of Turkish coffee). In theory, groups like Harvey's that employ an especially rigorous screening process will develop a good track record on the loans they vet, leading lenders to offer lower rates to its members which in turn will attract still more borrowers. So far, that's not happening. Instead, borrowers are flocking to so-called megagroups groups whose leaders do lots of promotion, zero screening and rake in lots of cash from their swelling ranks. One notorious megagroup has repeatedly changed its name in an effort to fool lenders familiar with its sordid reputation.

For serious group leaders like Harvey, it's been an uphill battle. At times he's put in 40-hour weeks visiting prospective borrowers and lenders, chatting on the forums (he's made 6,100 posts) and organizing meet-and-greets. And then there's the pressure to maintain his group's reputation. When confronted with his first late loan, Harvey, who is 6-foot-5 and 260 pounds, hopped in his Corvette and paid a personal visit to the 21-year-old borrower, a flagrant violation of Prosper's ban on contacting deadbeats (Harvey says he's not a rule breaker because he didn't actually demand the money). The confrontation was anticlimactic. "I have a job interview next week!" the kid promised. The loan remains unpaid. "If I was a crazy person who didn't care about breaking laws, there's so much that could be done," Harvey sighs. Still, despite the long hours and low pay, he is trooping on. If he perseveres and Prosper takes off, he could be collecting 2% a year off a multimillion-dollar portfolio. "It could be a huge windfall," he says.

Recently, Harvey met three Prosper lenders at Tia Juana, a cheap Silicon Valley Tex-Mex joint. For two hours they picked at their burritos, groused about the clueless borrowers, traded horror stories and gossiped about the other lenders Can you believe that Armenian guy who wanted money to flip houses in Russia got funded? But in truth, they don't seem too concerned. After all, they were cognizant of the risks when they got started. The point, they say, is that they are pioneers, and if the going is rough, at least the territory is new. "Are we early adopters, or are we suckers? I don't care," says Harvey. "We're in on the ground floor."