The UK Peer-to-Peer Finance Association (P2PFA) has embraced a new measure to improve standards in the peer to peer lending market. Going forward, all P2PFA members will calculate defaults on their loans using a defined standard calculation thus helping consumers effectively compare between platforms. This new standard is designed to strengthen the transparency and process of industry disclosure. The new default rate calculation is currently being implemented and will be published on each individual P2PFA member’s website.
The P2PFA recognizes the need for standardization and is acting a proactive manners to help support industry trust and growth. This is one of a number of steps being taken by the P2PFA to strengthen consumer information disclosure. Default rates in the sector have been very low to date, but the P2PFA see it as crucial that default information is fully disclosed in a meaningful way, especially as the sector grows and matures further.
“Information on loan default rates is crucial information for consumers looking to lend on peer to peer lending platforms. Having a standard measure helps ensure that this important data is presented in a transparent and fair way and ensures that loan default data is honestly presented. Consumers can trust P2PFA members to uphold high standards and treat them fairly. If you want to lend on a peer-to-peer lending site you should look for the P2PFA logo.”
The P2PFA is a trade body that maintains rules and operating principles that must be adhered to by all member organisations to protect the interests of all their consumer and small business customers. Peer-to-peer lending became regulated by the Financial Conduct Authority in April of this year. The P2PFA’s current membership includes Funding Circle, RateSetter, Zopa, ThinCats, LendInvest, Madiston LendLoanInvest, Wellesley & Co. and MarketInvoice.
P2PFA definitions of Non-Performing Loans and Defaults:
Definition of Non-Performing Loan:
A loan should be considered to be a ’Non-Performing Loan’, ‘Impaired’ or in ‘Arrears’, where the relevant borrower of the loan is:
(a) more than 45 days overdue in an interest payment; or
(b) more than 45 days overdue with a principal repayment; or
(c) legal action for enforcement of the loan has commenced; or
(d) the loan is being or has been renegotiated with a borrower, or
(e) the loan has not otherwise been in full compliance.
The amount of arrears is the amount overdue for payment in a) and b) above.
Definition of Capital Losses (Default):
A capital loss should include:
(a) any portion of a loan that has not been repaid, 120 days following the original loan repayment date;
(b) all costs incurred by the lender in relation to the enforcement of a Non-Performing Loan, where such costs are not recovered in full from the relevant borrower;
(c) any loan amount where there is a reasonable expectation that the borrower is not going to repay the loan on the original loan repayment date (ie the borrower has gone bankrupt etc).
To be reported on a 12 monthly calendar basis (Jan to Dec);
1) Actual arrears (as a percentage of all outstanding balances from loans made in the calendar year of the loan)
2) Expected defaults (as a percentage of lifetime default rates of amount lent in the calendar year of the loan)
3) Actual defaults (a percentage of the total lent by the platform in the calendar year of the loan)