We have finalized a new bankruptcy-remote legal structure that is suitable for EU and non-EU investors, both natural and legal entities (incl. non-financial legal entities). The new structure will reduce compliance and operational risks for investors on the platform. The new structure will be rolled out by end of August and a separate notification sent prior to the final roll-out.
Under the new legal structure the loan originator shall be Bondora (isePankur AS), meaning that Bondora shall conclude loan agreements with borrowers and then assign the loan claims deriving from loan agreements to the investor. The claims deriving from the loan agreements are assigned to the investor through a broker entity immediately after the loan agreements have been concluded.
According to the claim assignment agreement, Bondora will continue to service the loans in its own name as it is currently. In case of default of the customer the ownership of the claim is assigned back to Bondora as it is currently. The claim will be secured in favour of the investor until the claim has been assigned back to the investor. If Bondora receives any payment as a fulfilment of claims it forwards payments (minus fees payable to Bondora or third party collection companies) to the investor.
After the launch of new structure we do not have right to charge customer a penalty rate in case of late payment but instead the interest will accrue even after the loan goes to default. Consumer credit regulations in force across our markets allow a consumer lender to either charge a penalty (typically approx. 8% per annum) or continue to charge the original interest rate. Penalty rate will not be charged as in most cases the interest rate is higher than the maximum statutory penalty rate.
Other changes are related to the improvements made in our debt recovery process. We have started using collection companies since companies we have now shortlisted have been able to prove their ability to recover debt faster than through courts.
Very unclear how much less investors will get. Can you share few simple examples? At this moment if there is default then in long or less period we get 100% of principal+Interest(+in some countries penalty). Please share few examples how it will look for different countries in future. Thanks!
Hi Andrei, thanks for your question.
Previously there was no option to work with success-fee based collection companies because we always have the claim open until 100% is(was) recovered. In many cases, even with going through court and waiting, this has not resulted in any returns. In the ideal world, we’d like the collection company to add their fee to the claim, but it is not allowed in Spain, has a cap in Finland and from 1st of October also in Estonia, so not many options there. So to try to reach the goal of receiving more or at least same amount of recovery, but earlier, we are testing out this option of success-fee based debt collection agencies. Their offers range from 10-45% of total claim on the money they actually collect. So we are testing out different companies and decide who would provide best net return rate.
Hello. What will happen the borrower when even collection agencies can’t get any recovery? Are you going to court or not?
When are you put back the borrower, court and bailiff messages that you removed some months ago?
Hi, there are several options to go forward, based on the feedback that we get from the DCA. One option is also to go to court and also we have agreements in place with DCAs that they can go to court on behalf of us, if we decide to do so – each case will be evaluated individually.
This is a very interesting part “Since in different countries the regulations governing consumer debt collection vary, there might be a need to deduct third party debt collection fees from recovered cash flow whilst the claim is reduced by the full amount paid by the debtor to the collection company. ”
In most European countries you as a company have the right to add and charge debt collection fees to cover debt collection actions. I would appreciate seeing how my money and the legal debt collection fee is distributed per country. Also, when I signed up as an investor I was under the impression that the investors would not have to pay for any debt collection actions, but now it seems as we might have to pay for it ourselves.
“have right to charge customer a penalty rate in case of late payment .”
for me it will push peoples to make late payement.
“And there might be a need to deduct third party debt collection fees from recovered cash flow whilst the claim is reduced by the full amount paid by the debtor to the collection company.”
For me we will have higher overdue and less recovery, but for bondora it is good because they need less cash flow. Can we refuse this?
“Penalty rate will not be charged as in most cases the interest rate is higher than the maximum statutory penalty rate”. Bondora should know the maximum for each country.
Hi, All the steps in the recovery process are implemented with the aim of increasing the recoveries. If after initial period of testing we find that the added steps have not resulted in increased returns, we adjust the process accordingly.
Just one point from my side, you use statements like “The LGD parameter used in risk pricing already accounts for such deductions as it uses net cash flows from defaulting customers as basis of the calculation”.
But you forget that very many loans were issued before you actually started to evaluate risk properly using LGD and PD. Therefore there are actually many loans in our books which have never had a chance to be profitable! So given those loans the above adjustments will mean even further dig into negative numbers :(
There was any announcement about changes of LGD for amortization of loss of collection. Even worse, many loans are getting better rating(interest) compare with rating they had few month ago. So, 1st – we will pay form our pocket for collection of current loans and 2nd in future we will get less profit as collection will come from our profit?
Compensation – possible better collection. But we do not know how much it will cost. Yes?
Based on our estimates, the improved collection will at least offset the cost of collection in decent portfolio. So for an individual loan you may get loss, but if you take a good number of loans together the additional recovery from other loans should compensate for it and in long term provide better recovery or at least faster one – even for the “old” loans.
What will happen to existing loans? Please answer for loans before LGD was introduced not only for loans after LGD was introduced. Will Bondora continue to both cover the costs and make debt collection with no lower quality than has happened in the past? Will penalties continue to be charged to the borrower and paid to the lenders when this is in the contracts?
For new loans after this takes effect, what will happen to the level of charges made by Bondora and any differences between the loan interest rate and the interest rate paid to lenders? Bondora is passing new collection costs to lenders, so is Bondora going to reduce its charges to compensate in the interest rates paid to lenders?
What is it about the new structure that means that a penalty rate cannot be charged, compared to the situation before this announcement?
Thanks for your question.
Please see above. Also, bear in mind that until beginning of June, we sent all defaulted loans to courts. Those are still being processed as they were and recoveries are also happening on those loans. In other words, majority of new defaults are actually “new” loans with applicable risk rating.
There will not be any changes currently regarding interest rates, everything that is charged is passed on to investors. There is of course the market supply as well as regulatory changes risk that are driving the interests down (or effectively capping them), so in longer run we’ll probably see the interest levels gradually decreasing across the board.
The new structure means that we will now be subject to Consumer Credit Regulation(s) and that prohibits to charge both, so we chose to continue charging interest, as this is usually bigger than penalties allowed (again, for CC providers).
How does this change reduce compliance risk for investors using the platform?
How does this change reduce operational risk for investors using the platform?
Which risk exposures change and how?
With the new structure investor will not be direct lender and doesn’t have the risk that the activity might be interpreted as lending. As for the operational risks- in the near future we will introduce also the backup service provider.
Not interpreted as lending? That is very worrying because it is important that it is considered to be lending.
Does using new structure mean that the loans still qualify as a “36H loan” and will Bondora continue to be an FCA regulated P2P platform? Article 36H is “operating a loan-based crowd-funding platform”.
The relevance of those questions is the special income tax rules for bad debt and special tax wrapper, the Innovative finance ISA that are being introduced for P2P lending. Both of these are important for British investors.
“With the new structure investor will not be direct lender and doesn’t have the risk that the activity might be interpreted as lending” – as a lawyer I would say this is a bold statement. Are you certain that this is the case for investors in all countries? To construct a corporate setup in order to avoid being covered by law or regulation is often not that easy.
[…] 1. Bondora teeb muutusi viiviste arvestamisel. […]
Bondora will continue to operate a
loan-based crowd-funding platform. The structure we used was not similar to other platforms regulated by FCA. Now it’s more uniform. The structure is modelled based on US asset-backed securities investment industry standards. The key benefits of the new model are: (1) companies can buy these assets, (2) we can set up a backup servicer to manage portfolio administration in case of our default, and (3) potential to securitise the assets. First adds liquidity, second reduces operational risks and third makes it easier and more tax efficient for investors to buy the loans (e.g. packaged as a bond).
We have analysed the legislation in all loan countries to make sure it works. Lender country specific taxation and compliance has not been analysed.
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“With the new structure investor will not be direct lender and doesn’t have the risk that the activity might be interpreted as lending.”
In that case there should not be any defaulted loans for investors as all the lending is done by Isepankur AS? The actual default rate just affects the annual returns for investors (between some preset limits)?
Or am i getting it wrong?
isePankur AS concludes loan agreements with borrowers and then assigns them to investors with all rights, liabilities and loan claims. If loan is defaulted, then it’s assigned back to Bondora. Even though the loan is assigned back to Bondora, the monetary claim will stay with the Investor meaning that investor will bear the risk of default. So the default rate will still affect the annual returns for the investor.
Ok, thank you!
It’s difficult to understand what is the real difference for the investor then?
This way I think that you are selling unsecured, illiquid securities. And this is a whole new category! In Europe I think that you can’t sell a product like that to non professional investors without complying with http://ec.europa.eu/finance/securities/isd/mifid2/index_en.htm
[…] Legal structure: What are we changing? […]
A quick question that came up: Why aren’t you mentioned in “finantsinspektsioon” as you are a credit provider now?
Can’t find anything about bondora/isepankur/sõbralaen.
Can you maybe explain a little more about, who is lending to whom and who is buying what?
From queries to and answers from Estonian tax office i start to get a feeling that if you would be actual legal credit provider, “investeerimiskonto” might be a possible option to invest in bondora as individual. (You might be in the same bucket as interactive brokers or any other brokerage company in that case)