RATESETTER has published updated lender terms as it prepares to tweak its provision fund.
The new terms have been published on Thursday, one month ahead of the changes to the fund to address concerns that it is too “binary.”
Under previous rules, if the provision fund were no longer able to cover expected defaults, all loans would be assigned to the fund and losses would be distributed equally.
“For some time now we have gathered feedback that…the provision fund is too “binary”: either delivering all interest and capital perfectly on time or winding down with a seemingly unquantifiable loss,” said RateSetter when announcing the changes last November. “We have listened to this feedback and agree with it. So today we are announcing how we propose to build flexibility into the provision fund consistent with the interests of our investors.”
Under the new terms, RateSetter will be able to divert interest and capital into the provision fund if it thinks losses are becoming uncomfortably large.
As well as continuing to display the amount in its provision fund, RateSetter will also display a capital coverage ratio.
This will measure the provision fund’s ability to cover expected bad debts and is worked out by dividing its size by the expected level of future losses from active loans and expected future income from open loans.
Lenders with active investments can withdraw before 1 March 2017 if they are unhappy with the changes.
“We believe that a more flexible provision fund is an improvement that is in the interest of investors,” said RateSetter in a blog post on its website on 1 February 2017.
“But we understand that any change can be unsettling. Therefore, if anybody with an active investment is not comfortable with this change and wishes to withdraw before 1 March, we would be happy to waive the early exit fees.”
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Under the new terms, if RateSetter believes the fund won’t have sufficient coverage there will be a “stabilisation period” where the platform can apply an interest or capital reduction.
These reductions will be applied if RateSetter reasonably believes the provision fund coverage ratio is or will imminently be below 100 per cent.
“If there is a capital reduction, you agree to assign your right to the amount of the capital reduction to the provision fund,” said the updated terms. “For example, if you have £1,000 matched on the exchange and there is a capital reduction of 1 per cent, you agree to assign the right to £10 of capital to the provision fund.
“You will then no longer have any right to that amount of capital or any interest accruing on that capital. When the borrower next makes a payment of capital (whether or not that is during the stabilisation period), £10 of the payment will be automatically deducted and paid into the provision fund.”