LUK Leucadia National Corp.

Online lender Prosper Marketplace Inc. is in advanced talks with a group of investment firms to sell them roughly $5 billion worth of loans over the next two years, people familiar with the matter said.

If finalized, the deal would help resolve ongoing concerns that Prosper, like its peers including LendingClub Corp., has faced about how to fund lending after a difficult start to 2016. It would also emphasize the major role that traditional financial players will continue to have in what was once seen as a disruptive "peer to peer" online lending model.

The buyers in the talks include Fortress Investment Group LLC or an affiliate, Soros Fund Management LLC and Third Point LLC, along with investment bank Jefferies LLC, the people said.

The loans would be bought at face value, but the firms are also in discussions to receive equity warrants in Prosper as they make the purchases, the people added. The potential buyers are also talking to banks about borrowing money to support their loan purchases, and a deal could wrap up in the coming weeks, they said.

In addition to the deal with the four investment firms, Prosper has also started selling loans to BBVA Compass, the U.S. regional-banking unit of Spanish lender Banco Bilbao Vizcaya Argentaria, according to a bank spokeswoman. BBVA's venture-capital arm took an equity stake in Prosper last year.

Questions have swirled around Prosper since it suffered a 12% drop in lending volume in the first quarter, sparking layoffs of about 28% of its workforce and discussions with bankers at J.P. Morgan Chase & Co. and Financial Technology Partners about how to secure future funding.

Prosper, like others, was hit by a series of adverse developments in online lending this year, including the forced resignation of LendingClub CEO Renaud Laplanche related to falsification of some loan data, which shook confidence of loan buyers across the market.

These lenders have sought to upend the existing bank model by making loans entirely online, powered by fast-decision algorithms, then selling the loans to investors rather than using customer deposits to finance lending.

While Prosper, founded in 2005, was the first to begin matching loans to consumers with individual buyers, the company, along with LendingClub and others, in recent years turned to hedge funds, banks, and money managers to fund explosive growth that resulted in billions of dollars of loans. Those big buyers began backing away this year amid concerns about U.S. consumer credit, combined with questions about the ability of lenders to maintain loan quality and secure funding as they grew larger

Now, Prosper's deal to sell loans at face value would provide a measure of validation of investors' confidence in its underwriting ability. It also may give it a leg up on bigger rival LendingClub. It had previously held early talks for billions in loan-buying commitments with some of the same funds, including Soros and Third Point, but didn't finalize a deal, the Journal earlier reported.

In July, Moody's said that it wouldn't downgrade its ratings on some bonds tied to Prosper loans, after the ratings firm warned earlier it might do so on fears of higher-than-expected defaults. That warning weighed heavily on a poorly-received sale of Prosper loans by Citigroup Inc. in the spring.

Prosper and LendingClub have raised rates they charge to new borrowers over the past few months. Loans sold in June by Prosper were expected to yield 7.4% on an annualized basis and taking into account expected losses, according to the company. That is short of 8.5% on such loan portfolios in 2013, but is still chunky when compared with U.S. Treasurys and other fixed-income asset yields at or near record lows.

Although new buyers would be a sign of confidence in Prosper, the equity warrants being discussed may lead to dilution of existing investors, including those who bought in the fundraising round valuing Prosper at $1.9 billion last year. Prosper hasn't raised money since, while shares of publicly traded LendingClub have fallen 76% in that time.

Prosper lending in the second quarter is expected to dip sharply again from $972 million in the first quarter, which was down from $1.1 billion in the fourth quarter of 2015, according to people familiar with the company. Earlier this year Prosper cut back on marketing to new borrowers, as did other platforms, the Journal reported.

Write to Telis Demos at telis.demos@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

August 04, 2016 11:25 ET (15:25 GMT)

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