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Peer2Peer Finance News | July 23, 2017

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Industry urges for standard default definition

Industry urges for standard default definition
Marc Shoffman

Peer-to-peer lenders are backing calls for a standardised definition of defaults in the sector.

Although actual default rates are low, the definition of when a loan has failed is not consistent across all platforms, making it harder for investors to compare.

Members of the Peer-to-Peer Finance Association (P2PFA), such as Zopa and RateSetter, define a loan as being in arrears if repayments haven’t been met for more than 45 days. A loan is then declared as being in default, and recoveries started, if the amount owed becomes 120 days late.

All P2P lenders have their own management processes that can see a loan ended early or extended, but many non-P2PFA members have different definitions when it comes to putting a loan into default.

MoneyThing founder Ed Pearce says the business lending platform defines a default as when a borrower fails to repay for two consecutive months.

“An industry definition would be useful,” he said. “There may be issues though in the different ways loans are rolled up such as where interest isn’t paid right until the end.”

Read more: MoneyThing gains FCA approval after tweaking business model

Property lender Kuflink declares a default at three missed payments at any point in the loan period. Meanwhile, an asset-backed loan from Lendy, formerly known as Saving Stream, is in default if the amount owed is not paid within 180 days, which the platform calls a tolerance period.

Interest will still be paid to the lender for the first 90 days of the tolerance period, but after that it will be accrued but not credited until the underlying security is sold. The final interest credit will depend on the repayment secured from the asset sale.

The borrower may also get a loan extension if they are able to provide funds to pay the interest owed within the tolerance period.

“As a young, but growing industry, there is some variation between the default polices of the various P2P lenders, to reflect their own business models, and to strike the correct balance between certainty for their investors and tolerance for their borrowers,” said a spokesperson for Lendy.

“It may be that as the industry matures, certain approaches are seen to strike the correct balance become apparent and are then adopted more uniformly.”

Read more: Saving Stream updates default and secondary market rules

Despite the differences, the P2P rules are actually slightly more definitive than those in the mainstream banking sector.

The Council of Mortgage Lenders says all banks will have different definitions and most will focus more on addressing the arrears before declaring a default.

“Though arrears are related to defaults, lenders generally avoid simply conflating the two,” said a spokesperson.

“Generally a customer needs to be several months behind in their payments before they are considered to have defaulted, or they may have breached another condition while still being fully paid up.”

As an example, HSBC says it declares a default at 90 days past due. In contrast, Royal Bank of Scotland (RBS) told Peer-to-Peer Finance News that an arrears would generally be declared after one month of missed payment on a loan or mortgage, but its definition of a default is less prescriptive.

“A default may be filed when you are at least three months in arrears, and normally by the time you are six months in arrears,” said an RBS spokesperson.

“There are exceptions to this which may result in a default being recorded at a later stage, such as secured or long term loans such as mortgages, or if the product operates in a more flexible way such as current accounts, student loans, home credit.

“If an arrangement is agreed, a default would not normally be registered unless the terms of that arrangement are broken.”

Read more: GLI chief fears “car crash” of P2P defaults

It is not just P2P platforms that are calling for more clarity. Comparison website Orca says account should also be taken of how much capital is recovered after a default.

“The P2PFA has set out clear definitions for defaulted loans,” said an Orca spokesperson.

“The members of the P2PFA adhere to this standard, but the issue arises when you consider platforms out of the P2PFA who vary in their definitions.

Read more: RateSetter updates lender terms ahead of provision fund changes