The Banker Next Door

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.