Frazer Fearnhead, founder and chief executive of property development-focused peer-to-peer platform The House Crowd, reveals his highly effective approach to risk management…
Risk mitigation runs through the heart of the peer-to-peer lending community. It is the ‘secret sauce’ that gives some platforms an edge, while others simply take their cue from the regulators. But there is no deep secret to risk mitigation – at least according to The House Crowd’s founder and chief executive Frazer Fearnhead. For him, it’s all about hard work and an attention to detail from the earliest stage of the lending process.
“We start with Royal Institute of Chartered Surveyors (RICS) valuations,” he says. “Although, we have learned these can’t always be relied upon so we will always review them and – if appropriate – we will instruct an audit of the valuation by a third party.
“We use market-leading software to analyse a development loan proposal, plus we use a highly experienced new-build sales consultancy who will visit local agents and produce a feasibility study and sales appraisal.
“We have also come to realise that the borrower themselves is a crucial factor. Even if the security appears to be solid, we now conduct extra checks on the borrowers. If they are a developer, they must of course have a solid track record for the type and size of development they are proposing.”
The House Crowd’s risk mitigation approach is an ongoing process, which can evolve to meet the challenges of an ever-changing industry, and this means that the platform has often found itself going the extra mile to ensure that its investors’ money is safe. As a result of this approach, when the new Financial Conduct Authority (FCA) regulations were announced last year, The House Crowd found that it had very little to do in order to meet the new regulatory requirements.
“We have improved our credit policy and processes a little as a result of the FCA rules, but we had already started the improvement processes many months before the new regulations were announced,” he says.
“We have hired several senior staff members and employed a consultancy firm to work with us to improve all areas of our loan department.” Over the past six months, the platform has been focused on loan recoveries – specifically, reducing the time taken for the recovery of loans, and devising clearer strategies for the recovery of late loans.
New enforcement clauses have been added to loan documents to enhance the protection available for The House Crowd and its investors. The lending team also looks at the platform’s loan criteria and underwriting processes on a regular basis, with a view towards tightening up risk procedures where necessary.
“From 2020 onwards we will be focused very much on lending to professional property investors and property developers,” he says. “They will need to show a good track record, a well-researched market report and feasibility study and an attractive proposal with a detailed construction budget supported by suitable evidence, and a good sales and marketing strategy.”
By prioritising pro-active risk management, The House Crowd has been able to ensure that 100 per cent of capital has been repaid on all of its loans to date – a ringing endorsement of the platform’s commitment to mitigating risk through sheer hard work.