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struggling to keep their homes. They are decent people who want to remain in the house and maintain it. All they need is a little relief from their banks. But instead of helping their customers out, the banks are only too happy to evict them. Often, the house remains vacant and the bank has to pay for up-keep. The property erodes. And instead of taking in some money (albeit a reduced amount) for the house, they lose any flow of income. And some family finds itself out on the street. A family that probably shouldn't have qualified for the loan in the first place but that was granted it because of the bank's own predatory lending practices. Or a family whose head-of-household has simply been laid off and fallen on hard economic times. I spoke the other day with a female friend -- a single mom -- whose ex-husband has hidden assets from her to avoid paying his fair share in child support and alimony. She works three -- count 'em, three -- jobs in an attempt to keep a house that is home to her and her four children -- all of them college-aged, all of them not getting any financial assistance from their father for their educations.    She has tried to utilize the programs that are supposedly available to help her keep her home. But the system is far stronger than her. It has beaten her down. Now, this is a tough woman who has successfully battled cancer. She's someone I admire because she has been doing all of the "right things" to provide for her family without outside assistance. She probably could have gone on welfare rather than work three jobs, but that's just not her nature. And the improvements she's made on this house over the years -- it has an amazing garden and yard, the result of long hours of her tender loving care. Of course, none of this mat up to the counter and said, 'I'd like this one,'" Duvall recalls. The sales clerk asked Duvall a series of questions to assess his credit-worthiness: Was he employed? How long had he lived in his home? (As it happened, he'd recently moved.) The answers were not satisfactory. "They said, 'We can't give you that phone. You don't meet our requirements for a loan.'" Duvall's story expresses the idea that animates person-to-person lending: Good people are being overlooked. Traditional creditors use a trove of data to assess us all, thoroughly scrutinizing our financial records and giving each of us a score. But because these scores are determined by algorithm rather than human beings, they invariably miss important aspects of our financial lives. In Duvall's case, the mobile phone shop's credit program overlooked the money he had in the bank. For Duvall, the cellphone incident was a spark of inspiration, one of the reasons he hit upon the idea for Zopa, a person-to-person lending site that opened in the U.K. in March 2005. Duvall, who's now the CEO of Zopa, says the firm now has 70,000 members, and has made millions of dollars in loans. A U.S. version of the site will open this summer, serving, at first, only California. On Prosper, it's common to find borrowers who claim that traditional credit agencies have overlooked some meaningful measure of their finances. To put up a loan listing on the site, borrowers determine the amount they're looking for and the maximum interest rate they're willing to pay. (You can borrow up to $25,000 on Prosper; depending on what state you live in, you might face a minimum loan amount as well.) Borrowers give Prosper a few bits of personal information -- annual income, bank account number and Social Security number -- and authorize the site to collect financial data from credit agencies. Prosper shows potential lenders the data it collects, including a credit grade, the number of credit lines the borrower has opened in the last decade, the number of delinquencies he's had, and his ratio of debt to income. Often, though, borrowers will argue that these numbers don't tell the whole story. Sometimes, they have a point. If I told you about Person X, who had a credit rating of H.R. -- "high risk," the lowest rating -- a string of recent delinquencies, and a 20 percent debt-to-income ratio, you'd probably conclude that she was heading straight to bankruptcy. Lending this person money would be about as profitable as throwing it into a fountain and waiting for your wish to come true. But what if I also told you that this person, Suzy, had accumulated her debt while she was studying at Harvard Law School? And what if I mentioned that she had just graduated with honors, and had accepted a job at a Manhattan firm with a starting salary of $140,000 a year? She only needs a loan to tide her over until she starts work. Now I tell you that she's willing to pay a 20 percent interest rate on your money. Would you take a risk on her now? To be sure, things on Prosper, as in real life, are not always so clear-cut. You won't usually find the Harvard Law student with a guaranteed future salary looking to pay a high rate for a loan. But there are many whose future incomes look assured, and who appear to be much better credit risks than the numbers would suggest. William Bulck is a 26-year-old student in Milwaukee, Wis. Prosper gives Bulck a credit grade of C, which is about average; according to Experian, a credit reporting agency, there is a small but not insignificant chance that someone with this credit score will default on a loan. Bulck has a debt-to-income ratio of 10 percent, which is not terrible, but not great either. When Bulck went in search of a traditional bank loan to help him pay his way through school, he met with one rejection after another. "I have a friend who is a bank manager, and when I talked to him, the first place he said to try was Prosper." Early in May, Bulck put up a request for a loan of $2,800, offering an interest rate to lenders of 13.9 percent. "This loan is probably the hardest thing I have had to ask for in a very long time, and I appreciate your help," his listing began. Bulck went on to describe his situation. He receives financial aid, he said, but his next disbursement doesn't come until August, and he'd have a hard time until then. But he assured possible lenders that his future looked bright. He's in his last year of school, and he expects to find a job soon. "I don't anticipate any problems paying this loan back," he wrote. Despite his assurances, a risk-averse investor would have found much to be wary of in Bulck's listing. His chosen field of study is creative writing, not a major known for the swiftness with which it places graduates in steady employment. There's a more basic problem, which is whether you can trust him. Bulck posted a photograph -- he's seated at a desk, writing, a cat perched nearby -- and though he looks decent enough, it would have been impossible for any lenders to know for sure that Bulck was really a student due to get a financial aid check in August, and was not, instead, just practicing his creative writing to get some quick cash. As it happened, people believed Bulck's story, and he got his loan. But that's not the case with everyone. Lending money on Prosper is no different from lending money in real life -- it's possible, and some might say likely, that some people aren't who they say they are, and that they won't pay you back. Prosper is explicit with lenders about this risk, and it advises people to get around it by diversifying. If you have $5,000 to invest in Prosper, the site encourages you to spread your money among many people. Every loan on Prosper lasts for three years (borrowers face no penalty for paying the loan early). If you give $50 to 100 people who have a credit grade of C, chances are that over the course of three years, some people -- about three, according to Experian -- will default on their loans. But if you get a 14 percent return on your money from those who do pay you back, you'll make more than $1,000 on your $5,000 investment, enough to cover your losses. To understand why Prosper has the potential to become a blessed alternative for many borrowers, it helps to understand the enormous changes that have occurred in the American financial service industry during the past three decades. The story begins in 1978, when the Supreme Court handed down a unanimous decision that revolutionized the credit industry, and consequently laid the foundation for the dismal state of American households' finances. In Marquette National Bank v. First Omaha Service Corp., the court essentially invalidated state usury laws -- the laws that set a legal limit on the interest rates banks could charge for credit. The court decision allowed companies like Citibank to provide Americans with credit cards at sky-high rates, a deal that proved attractive both to customers, who were willing to pay for what looked like easy money, and to the bank corporations, which cashed in on the appetite for credit. (The PBS program "Frontline" has put together an excellent history of the industry.) Some economists argue that the surge in easy credit was good for the economy, as Americans began to spend at an increased pace. But the rise of credit cards also caused a consequent rise in credit debt. American consumer debt now totals more than $2.1 trillion, and it is growing rapidly. Moreover, says Michael Stegman, a management professor who directs the University of North Carolina's Center for Community Capitalism, the credit card industry usurped the market for traditional, lower interest-rate bank loans. The unsecured loan business -- that is, loans made to people who don't put down an asset, such as a house, as collateral -- dried up. "Today you can't walk into a bank, even with good credit, and get an unsecured loan for, say, $15,000," Stegman says. "And if you've got any kind of impaired credit, forget it." Many people, that is, have no alternative but to borrow money using credit cards. For Americans with the lowest incomes, another dangerous force emerged in the 1990s: the payday loan industry. These retail centers offer money at high cost on a short-term basis -- they'll give you cash on Tuesday in return for a promise of payback on Friday. As Jeanne Ann Fox, who studies the payday loan industry at the Consumer Federation of America, points out, loan centers don't make the true costs of such loans clear to customers. A typical two-week loan will cost you in the neighborhood of $15 or $20 in interest per $100 in principal. For people who need money immediately -- and studies show that many payday loan customers are using the cash for food and other necessities -- such a fee might sound reasonable. What the loan centers don't say is how much these loans work out to on a long-term basis. A $20 fee for a two-week, $100 loan represents an enormous annual interest rate -- a 521 percent APR. The long-term rate is important because studies show that people who take out short-term loans are often repeat customers, borrowing a steady flow of money from several payday centers over the course of a year. Twelve states currently have laws on the books that effectively ban payday loan centers; of the rest, the state that has kept the closest watch on the industry is Colorado. Last November, Paul Chessin, one of the state's assistant attorneys general, published a comprehensive study of how payday loan centers operate in the state. Chessin found that the average payday loan customer in Colorado obtains about nine payday loans per year. In a given year, this average customer, Chessin wrote, "pays a total of $477.16 in finance charges and is indebted for a total period of just over five out of twelve months." People who study the payday loan industry have a name for the hole in which these repeat customers find themselves -- the "payday loan trap," or "debt treadmill," which describes the cycle of taking on payday loans just to keep financing previous loans. Chessin found that repeat customers are quite lucrative to loan centers. In Colorado, people who borrow 12 or more times per year account for two-thirds of the payday loan business in the state. (You can read Chessin's study in PDF format here.) One curious feature of the payday loan business is its almost complete lack of price competition. The industry has seen explosive growth in recent years, with loan centers dotting urban and suburban storefronts across the land. In Colorado, there were fewer than 200 loan centers in 1997; by 2005, the number had grown to more than 600. Economists predict that intense competition leads to lower prices -- in this case lower interest rates for loans. But Chessin found that the average APR on loans has remained virtually steady (at slightly under 400 percent). "We have not seen price competition in this industry," says the Consumer Federation of America's Jeanne Ann Fox. "Even when there's a lender on every corner, you don't find that." A representative for the Community Financial Services Association of America, the payday loan industry association, did not respond to my inquiries. The industry has maintained, however, that it needs to charge three-digit interest rates because it is offering extremely risky loans. This would seem to make intuitive sense -- after all, these companies are lending money to people who have low incomes, and they do not take any collateral in return for the money. If a substantial number of their customers are likely to default, you'd expect payday loan firms to charge rates high enough to keep their business profitable. But Chessin's study undercuts that argument. He points out that between 1996 and 2004, payday lenders in Colorado reported an average "charge-off rate" -- the rate of loans that weren't paid back -- of 3.34 percent. Chessin notes that this is comparable to the loss rate for most bank loans. "For the same period, the charge-off rate for all consumer loans made at commercial banks was 2.69 percent; for credit cards, it was 5.15 percent," Chessin writes. What this means is simple: Payday loan customers aren't deadbeats -- indeed, they may be good credit risks. All this data builds to a compelling conclusion about the credit industry today. Financial institutions appear to be making exorbitant profits from loan products -- payday loans and credit cards -- that are by all measures overpriced. The high interest rates are tenable only through a lack of transparency. Customers don't really know the true price they're paying, and don't have any real alternative to these products. Such a market, though tremendously profitable, is ironically also vulnerable to competition from a more nimble, inventive upstart. That is exactly the role that sites like Prosper aim to play. I met Chris Larsen, Prosper's co-founder and CEO, at the company's austere headquarters in a small office space on the first floor of an old building in San Francisco's financial district. Larsen, who in 1996 co-founded E-Loan, one of the first Internet loan brokers, is an understated fellow, and when he talks about the credit industry, he doesn't sound especially impassioned about the possibility that his company might transform it. Still, there's no mistaking that Larsen, who has long been feted for his consumer-rights advocacy -- in 2003, he spent $1 million of his own money to push California to adopt a tough financial privacy bill -- is on a mission. "My opinion of the consumer credit industry is that it works well in the formation of credit, but it's really a problem by the time it gets to the consumer," he says. "You have consumers being misled, it's too expensive, not very transparent, and not very open." He adds, "Access to credit is right up there with healthcare and education in terms of being fundamental to a society. You have so many bad things going on in the current system, so many bad things." Shane Garza, a 29-year-old information technology manager in Grand Rapids, Mich., might be the sort of customer that Larsen has in mind when he describes the difficulties some Americans have with credit and debt. At the same time, Garza, a serial borrower, illustrate