Julian Cork, Landbay COO, explores the 5 points you should consider before stepping into the peer-to-peer lending world as a lender.
So far we have been discussing individual loans. It is also important to understand a platform’s whole portfolio and, fundamentally, how much of the revenue from that portfolio is being passed on to you as the ultimate lender.
Can you work out how much cut the platform is taking? Is their loan book publicly available? Landbay was the first platform to do this back in 2014. Some others now show theirs but mostly only once you have already become a lender.
Is the platform appropriately regulated? Full FCA regulation will come after the summer- and only for the platforms which have made it through this rigorous screening process.
Is the platform transparent about the risks involved? This relates to all areas. Of course you need to understand who you are lending to, the underlying assets and how diversified you are. But in the peer-to-peer world, we need to look at other items and the mechanics behind the platform too.
FSCS: Lenders and borrowers on all peer-to-peer platforms, including Landbay, are not currently covered by the Financial Services Compensation Scheme. Landbay offers lenders the opportunity to lend on a secured basis directly against property, and as such all loans should be considered as loan investments, not deposits.
Liquidity: How accessible is your capital? Is there is a risk that you cannot access your capital? Is the platform transparent about this? What happens when loans are paid off early?
Due Diligence: The first blog post in this series discussed the “Five Cs”. Be sure that you know can find out how the platform completes the appropriate Due Diligence; comprehensive identity, fraud and credit checks on the borrower and independent professional valuation on underlying security property/asset.
Defaults: Understand how missed payments will be pursued, how any protection fund works. Be clear on when a missed payment moves to a formal default and how a platform deals with this. At Landbay, our Security Trustee will move to repossess a property on behalf of the lenders in order to expedite the return of capital or implement direct rent collections. In the established world of BTL mortgages these are both well understood processes.
Platform Failure: In the peer-to-peer world it is important that you understand what happens in the case of a platform failure. Are client assets in segregated client accounts? Has the platform complied with CASS 7 FCA client money rules? And have appropriate procedures been put in place with administrators to continue operations should a firm hit insolvency?
Landbay ring-fences any unlent funds on lenders’ behalves in trust in a segregated bank account with Barclays PLC so they do not form part of our assets (and would not be available to our creditors in the event of our insolvency). The Security Charge over properties is also held in trust for the benefit of our lenders.
Our third-party loan administration contract is structured to ensure the ongoing margin from our mortgages is sufficient to cover the costs of administering them during any winding-down process, should Landbay cease trading for any reason.
Diversification: Is your lending diversified over a number of loans? Is it easy for you to understand the loan parts that you are in?
Many platforms are committed to transparency and for members of the P2PFA it is a mandatory. Every lender on every platform is taking some risk. They must understand that risk and be compensated for it. Platforms must be open and educate their users. Platforms can’t operate like quasi collective investment schemes without being clear about who they are lending to.
Like a few other platforms, we publish our key lending statistics at Landbay. We showcase the diversification, security and income coverage for our loan book as a whole.
Landbay also publishes our full, detailed Loan Book – itemising the individual rates (both borrower and lender) as well as the additional detail about the underlying security (value, LTV, rental coverage, Location). Our current statistics can be viewed here, alongside the opportunity to download our full loan book.
The information contained in this blog post should not be used by consumers to make financial decisions. Consumers have a range of different financial needs and requirements and as such should always seek independent professional financial advice before making an investment decision.