If you have any defaulted loans you may have noticed that we now apply a RAG (Red, Amber, Green) rating system, also known as a Traffic Light system, in the Loan Comments on your dashboard. The purpose of the new system is to help you assess the quality of your defaulted loans, and your expected return over a certain period of time.
This post will give you a bit more detail about this new system, and how we are applying it.
Every fortnight each member of the Collections & Recoveries team review defaulted or late loans and (if appropriate) add in Loan Comment. We will add a comment where we have taken any steps in the recovery of the loan, or otherwise where there has been a significant development (such as a recovery or convening of a creditors’ meeting).
Where borrowers (and guarantors) are in a formal insolvency process the comments are likely be separated by 6 months or 12 months in accordance with the formal reports. We will explain timescales on these longer-term cases to keep investors updated.
Content of comments
The reason we are doing this is because you have told us you would like more information about the process of recovering bad debts. We think this new system should explain more about the progress and state of our negotiations.
Where we have agreed a payment plan, we will let you know where that payment plan will get you within 5 years from the date of the loan comment. If there is to be a full recovery within 5 years, then we will let you know how long it should take to get that result.
Whilst 90-95% of our recoveries come through the personal guarantee, we appreciate that investors are interested in why the borrower failed. Where possible, which may be when we receive a liquidator’s or administrator’s report, we will summarise the reasons for the borrower’s failure.
The RAG system relates to principal at default, but please note that we always try to recover all contractual interest (as it accrues), and if we consider it appropriate we will also try to recover any additional interest that may be payable on any outstanding principal after the end of the contractual term.
The RAG rating system
The parameters around the RAG system are as follows:
Red: This is where we expect no material recovery (i.e. less than 30p in the £ of outstanding principal at default within 5 years of the date of the comment), or where negotiations are at such a stage that we simply cannot estimate the likely outcome.
At the point of default, most loans will be Red, as we will be trying to contact the guarantors or in the midst of difficult and uncertain negotiations. As guarantors start to get their financial affairs in order we would expect the loan to move to Amber or Green, and we will update the RAG rating accordingly.
Amber: This is where we expect a partial recovery (i.e. less than 90p in the £, but more than 30p in the £, of outstanding principal at default within 5 years of the date of the comment). Often, Amber loans will end up Green, as a borrower or guarantor increases their monthly payments, or with the passage of time as a payment plan becomes a full recovery within 5 years.
Green: This is where we realistically expect a full recovery (i.e. 90p or more in the £ of outstanding principal at default within 5 years of the date of the comment).
In order to assess the estimated recovery in 5 years, we will primarily consider the terms of our agreed payment plans, and whether payments under that plan have been regular and in the amounts agreed.
If we are aware that a guarantor is remortgaging or selling a property, in our experience these loans end up as a full recovery within 2 years, and so we would give this loan a Green status.
We will take into account amounts specified in IVA proposals, and estimates provided to us by Official Receivers and Trustees in Bankruptcy. However, where we do not have any such proposals and are uncertain as to the level of recovery we will give the loan a Red status.
Please note that our estimates are non-binding and may change over time. We are not promising any recovery over any period, nor are we indemnifying you against any losses.
The information we provide will always be compliant with the Data Protection Act, and we will not give any information that we consider in any way prejudices the commercial interests of the borrower, guarantor or other creditors.
We hope that this new strategy provides you with greater information regarding late and defaulted loans, and will help you to understand the recovery process. If you have any feedback on how we could further improve the loan comments further, please let us know.
The Funding Circle team