A long time downside of p2p lending was that each company used its own definition for defaults making it hard to impossible for all but experts to compare figures for different p2p lending companies. The Peer-to-Peer Finance Association (P2PFA), a trade organisation of British p2p lending companies, now addressed this issue with a new standard: ‘In future, all P2PFA members will calculate defaults on their loans in a standard way, helping consumers compare between platforms and to strengthen standards of industry disclosure. The new default rate calculation is currently being implemented and will be published on each individual P2PFA member’s website.’
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)
The three major UK p2p lending services Zopa, Ratesetter and Funding Circle are all members of the P2PFA.
Zopa already has a page with figures adhering to the new standard. Giles Andrews, CEO and Co-Founder of Zopa, commented on the news: ‘Clear information on default rates is vital for consumers who are considering peer-to-peer lending. I’m delighted to see a standard way of displaying this data within the industry. The standardisation helps consumers know which lending services are excellent or poor at managing risk. Zopa and I welcome this industry standard as we believe it is vital for building trust and setting expectations for lenders. It’s great to see the P2PFA introduce this new standard and I would hope other lenders outside the P2PFA will align themselves …’
Update June 24th: P2P-Banking.com contacted several other p2p lending services that are not P2PFA members to inquire if these plan to adhere to the standard. Assetz Capital, Landbay and Lending Works replied that they plan to publish figures according to the P2PFA standard in addition to other figures they already publish.
(Sources: P2PFA press release; other)