Collections charges for borrowers more than 90 days late
Today we are making some changes to our terms and conditions which cover charges for late paying businesses. Before placing your next bid, you’ll be asked to re-accept these terms. Further details are outlined below.
At Funding Circle, we have a robust credit assessment process in place to ensure that only creditworthy borrowers are listed on the marketplace. However, from time-to-time some businesses are unable to fully repay their loans, this is called bad debt.
When this happens our in-house Collections and Recoveries team work on investors’ behalf to help the borrower start repaying, or to recover funds by defaulting the loan and commencing recovery proceedings.
Bad debt is part of any form of lending, which is why we recommend investors diversify their lending across at least 100 businesses equally. As of June 2016, the bad debt rate across the platform was 1.6%, while our estimated bad debt rate was 1.8%. You can see our current marketplace performance on the statistics page.
We believe that we can deliver the best result for our investors when we carry out many of the tasks involved with the recoveries process directly, rather than outsourcing to a debt collection agency. Since we took our Collections and Recoveries team in-house in February 2014, the actual recovery rate on defaulted loans has risen from 14p/£ to 21p/£ in May 2016, and our estimated recovery rate has risen to more than 40p/£ over a five year period.
To cover the increasing costs incurred by the recoveries process, we are introducing a collections charge for some borrowers who are unable to clear their arrears.
How will the charges work?
Loans that are defaulted, or are more than 90 days late may be charged a collections charge, capped at 15% of the outstanding loan amount owed by the borrower. This will apply to loans originated on or after 6th June 2016. The collections charge is payable by the borrower, will not be deducted from what is owed to investors and will apply to all our loans, including property loans.
When a recovery payment is received from the guarantor or borrower, up to 20% of that payment will be allocated towards the collections charge. In situations where external legal costs may be involved, this figure may be higher, but will never exceed 40% of each recovery payment. As the charges are not deducted from what is owed to investors we estimate that the average repayment plan will take 10-15% longer to complete when the charge is applied.
The table below sets out the maximum amount charged to borrowers, based on the outstanding loan amount at the time of default.
The recovery charge will be collected in addition to the amount owed to investors. Approximately 80% of all our recoveries are from guarantors who pay the debt in full (plus interest). For the remaining cases, we will stop collecting the collections charge if it becomes certain that a full recovery will not be made, for example if the guarantor terminates a payment plan and enters an IVA or bankruptcy. In these cases there will not be a rebate of any collections charges that have been deducted. We will also not apply any collections charge if the loan is repaid in full within four months of the default date.
Why are we doing this?
We are committed to achieving market-leading results for investors and we believe that this charge will help us to do this by covering the costs incurred in the recoveries process, whilst also ensuring we are fair on our borrower community. By keeping our team in-house, we look to make as full a recovery as possible on every loan, therefore investors receive better results than if we were to outsource the recoveries process to a third party.
Updates to the Terms and Conditions
We have made some changes to our T&Cs (specifically clauses 8 and 12), clarifying when fees will be charged to borrowers. Our loan conditions have also been updated which means you’ll need to re-accept them before placing a bid, or, buying a loan part. Please view our updated terms and conditions, or contact a member of our team if you have any questions.
If you have any questions, please don’t hesitate to get in touch.
The Funding Circle team.