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Post by oldatheist on Jul 16, 2014 20:25:04 GMT
Without active management, some would receive all their money back and those with loans that fail later would get nothing which would certainly not be fair.
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Post by mattr on Jul 16, 2014 21:20:42 GMT
3 and 5 year loans get a higher rate of interest, I naively thought that this was partly due to the higher risk of the PV running out. I am not sure that I like the sound of Active Management. How can we know that we are being treated fairly? Your concern for fairness is admirable, but you were just talking about disproportionately dipping into a provision fund which was built up from fees on both 1 year and 3+year loans! I think by far and away the biggest reason 3 and 5 year loans get a higher interest rate because they are locking money away for longer - that's worth more. The borrower gets longer to pay back (with certainty of interest rate) and the lender bears all the risk of interest rates rising in the future. As I see it, the point behind the provision fund is to (within reason) heavily reduce or eliminate the risk of borrower default. Otherwise no one in their right mind would use Ratesetter - you get zero visibility on the creditworthiness of your would-be borrower, and very little faff-free Zopa-style diversification, and no Wellesley-style security. So why would you take the plunge for 5 years when your borrower could be a complete no hoper? (one hopes not of course, credit checks etc. etc. but let's game this out). Principles behind the provision fund are here: www.ratesetter.com/lending/provision_fund.aspxMatt
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Post by westonkevRS on Jul 16, 2014 22:07:44 GMT
The thoughts on this thread are correct, and the key phrases are "In the unlikely event of a significant run of claims that threatens the capitalisation of the Provision Fund, the Fund will transfer to Active Management" and "To provide the most equitable management of the Fund in the interests of all affected Lenders".
These principles were documented when RateSetter launched, and arguably could be updated now the position is more robust with over £6m in the Provision Fund.
5-year loans do pay more, principally because you have to lock up your money for longer. But it is obviously true that lending over longer periods brings other risks. So a higher return is fair.
For our lenders who wish to restrict themselves to shorter lending that's their perogative. I think if defaults did start to rise, with £6m in the fund you could easily stop lending well before active management was even being considered.
And even 5 yr lending actually has a much shorter average term of capital (say 3 years) if you stop reinvesting. With a large Provision Fund you only need periodic cursory glances to know everything is good.
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webwiz
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Post by webwiz on Jul 17, 2014 4:43:48 GMT
Suppose there are losses of one million. Loans with an outstanding period of a year or less could be compensated in full and still leave 5 million in the PF. Would this trigger Active Management? It could be a blip or it could turn out to be the start of Apocalypse. Unless AM is resorted to at a very early stage I think that the risk of PF failure must be lower for short term loans and is compensated for in the rate, so is fair.
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pikestaff
Member of DD Central
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Post by pikestaff on Jul 17, 2014 7:39:27 GMT
Unless there is a sudden drastic rise in defaults, we are unlikely to see any of this happen. RS can manage the cover ratio by adjusting the rate at which the provision fund is topped up. If the cover ratio gets too high, contibutions can be reduced. If the cover ratio gets too low, or if RS see stormy times ahead, they can be increased. I don't expect RS to disclose any of this activity to us, unless they want to. But I'm sure it will happen.
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spiral
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Post by spiral on Jul 17, 2014 10:43:12 GMT
Suppose there are losses of one million. Loans with an outstanding period of a year or less could be compensated in full and still leave 5 million in the PF. Would this trigger Active Management? It could be a blip or it could turn out to be the start of Apocalypse. Unless AM is resorted to at a very early stage I think that the risk of PF failure must be lower for short term loans and is compensated for in the rate, so is fair. I believe that currently RS repay a loan in default but I would suspect that in the event that its coverage dropped below a trigger level, 1 for example , they would continue to meet the repayments on a monthly basis as if the loan was still being repaid rather than repaying. This would have 2 benefits, firstly there isn't an immediate drain on funds and secondly would enable them to use the ponzi effect of using tomorrows provision fund for today's defaults in the hope/expectation that it could correct itself.
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Post by geoffrey on Jul 17, 2014 14:45:25 GMT
I think liquidity would dry up well before RS went into "Ponzi" mode, and lenders would jump ship. Remember YS... But, I don't think any of this is likely to happen as RS has the most cautiously run compensation fund of all the P2Ps and P2Bs that have copied the model, and they have the advantage of being able proactively to monitor and adjust ratios on new loans if they notice a rising trend in defaults. Unless the economy jumped to hyper-inflation and hyper-interest rates, in which case all the debt will be worthless anyway, the apocalyptic scenarios seem remote.
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Post by GSV3MIaC on Jul 17, 2014 17:54:26 GMT
It's due to the risk/certainty of interest rates rising in the next 3-5 years, nothing to do with the PV fund at all. You see the samr thing on bank deposits or bonds.
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Post by geoffrey on Aug 13, 2014 8:45:11 GMT
IMHO, it would be good if RS could indicate to a lender when the Provision Fund has compensated us, as well as when a borrower has "really" repaid early. I don't think RS would have anything to worry about in doing this. On the contrary, I think it would make lenders even more appreciative of the protection that the fund provides. (I've written this on the understanding, gleaned from elsewhere in this forum, that some early repayments are PF payments, and some are borrowers who no longer need their loan, or wish to refinance on better terms.)
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Post by westonkevRS on Aug 13, 2014 12:00:38 GMT
Geoffrey,
I think many of the early P2P adopters (largely because of their experience elshwhere, and they tend to be active financially literate individuals) might find the bad debt to early repayment data interesting. On the other hand this could provide uncertainty, too much communication and worry for the less committed. Generally people don't want emails about bad debt, they just want to know their money is safe and earning a return.
Therefore a choice was made to adopt the larger mass appeal option, you quite simply get the rates without having to worry about the detail.
I suppose a more sophisticated option would be to have a setting specifically on this. But honestly this would be a lot of work that can be considered a "nice to have" for a few.
That said, I have had direct emails asking about this ratio. It's easily calculated, I've just never bothered. Perhaps when I'm back I'll run the numbers and communicate in a fair fashion.
Kevin.
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