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Post by pelerin on Sept 10, 2015 9:03:15 GMT
There was an interesting article recently on the loan affordability criteria that Ratesetter uses when assessing potential borrowers. (WestonKev- if this was written by you, thanks for the article ) www.p2p-banking.com/countries/uk-transparency-in-credit-management-risk-management-at-ratesetter/In this article the author referred to the "CATO Current Account Turnover data" information provided by banks. I see that Experian also refer to using this data, but I can't find any more information about what data is supplied. The name Current Account Turnover seems to imply that incoming and outgoing transactions are visible, but I've only seen references to CATO as an aid to verify declared income. Anyone know more about this?
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Post by westonkevRS on Sept 10, 2015 12:21:27 GMT
Hi, yep this was me.
The thing with this data is that its supply by the banks to the bureaux is relatively new (just a couple of years) and everyone is still getting to grips with how to use it.
Also there is the whole question of its predictiveness which is still unproven. It is backward looking and doesn't tell us much about a customers willingness to pay, whereas hard-core old risk managers such as myself prefer credit scoring. Regulators, compliance managers, pay-day lenders and less statistically minded prefer "affordability" and income checks....
The raw data includes all current account transactions data, in and out, and matched across all linked accounts. I believe, however as RateSetter isn't a member of the BBA we have limited access and can only use a limited version of the income verification tool. You really need to ask a banker to know exactly what data is available.
I understand CallCredit were the leaders in collecting this data initially followed by Equifax. I don't have many interactions with Experian (you have to buy me a pint to have that explanation....), who also have the data but I don't know how advanced their offerings are.
Kevin.
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Post by pelerin on Sept 10, 2015 14:42:54 GMT
Thanks WestonKev for your quick reply.
I take the point that the data is backward-looking.
I had imagined that the CATO data might give an indication of whether a potential borrower was sailing close to the wind with his existing commitments.
Although the full data is only available to BBA members, it is good to know that Ratesetter have some access to the income verification tool .
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Post by westonkevRS on Sept 11, 2015 19:36:07 GMT
Affordability, or someone " sailing close to the wind" is very difficult to determine either in person or by computer. Take myself, all my money leaves my current account 100% every month. But I'm not on 0% affordability, I just invest the cash in P2P ! Besides prime borrowers usually have the opportunity to amend spending habits, Lidl instead of Waitrose, Centre Parcs and not ClubMed. RateSetter is a prime lender, not a high risk short term lender where this data tends to be more effective. Income verification is also interesting, as it doesn't tell you if someone has just lost their job or about to. Interestingly when we ran a " retrospective" of our entire book against CATO data and matched against default rates - the results were startling. Firstly the large majority of people told the truth in that their self stated income matched within 10% the CATO data. However customers that " lied" by over stating their income had a better default performance than the average - so basically if your income wasn't all in one place and found by CATO, perhaps you had multiple income streams, you wee a better than our average risk. Applicants that under stated their income, e.g. taxi drivers who are notoriously famous for not wanted to tell the world how much they really earn, had a higher default rate. So basically contradictory results to what a statistician might expect - there is always a human behaviour aspect to consider. So hard to use the data, as I don't think Compliance would let me positively rewards applicants who lie! westonkevRS
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Post by pelerin on Sept 12, 2015 19:27:19 GMT
Thanks again for your interesting insights WestonKev. I can't imagine the banks giving the public this level of detail on their lending policy. I seem to remember reading somewhere that bank bad debt rates run typically at about 3 to 5% , and are quite a bit worse than P2P. (Don't have a source for that other than Wikipedia on their P2P page.) Maybe P2P providers take greater care with the data they have available !
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Post by westonkevRS on Sept 12, 2015 19:46:39 GMT
Always happy to be transparent, although I'm not really giving away any of our policies. I'm just talking general things of interest really. We still need to maintain any competitive advantage we have, and I'll never divulge our approval or pricing criteria. I would however dispel the idea that a bad debt of 1% is somehow better than 3-5%, or higher. It's all about risk appetite and ensuring the income (or in our case the Provision Fund contributions) are higher than this by a reasonable tolerance. The fact the RateSetter bad rates are lower than traditional banks (and perhaps higher, historically, than our competitors) doesn't mean we are any better or worse, we just had a different target risk appetite. Hitting the tolerance margin is what's important. In fact you could argue that a too low default rate is bad because you aren't lending optimal volumes. Platform profitability is very important, in fact I think the biggest danger to lenders. westonkevRS
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sl75
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Post by sl75 on Sept 14, 2015 23:37:06 GMT
Surely a "current account turnover" would include items such as bouncing money between different investment accounts, pulling funds in and out of savings accounts to aid cashflow, payments made to re-imburse company expenses, and other non-income items.
Except for the most passive users, it would generally be much higher than income. In my own personal case, I'll often be moving funds through the current account totalling several times my monthly income... albeit an account with a bank that, last I checked, didn't supply data about current account usage to the credit reference agencies. In any case, the phrase "surprisingly modest of their higher true income" suggests that RS falsely believe CATO to be a measure of "true income"!?
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james
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Post by james on Sept 27, 2015 23:07:50 GMT
sl75 I think that CATO reflecting true income is the standard expectation for those with simple financial affairs and modest or low incomes. I think that westonkevRS has made it clear in the posts here that he and RateSetter know that it isn't necessarily so and is particularly unlikely to be so for their most desirable potential customers. I still think that RateSetter would decline me if I applied for a loan, even though there's a complete lack of missed/late/default stuff on my credit record. But maybe not. The holistic picture he wrote about could well be fine unless they object to stoozing-based P2P investing leverage. The sort of thing that makes just number-based CATO not so useful might be the sort of thing I and I suspect a fair number of others who post here do: 1. Pension contributions of something around half of work potential non-bonus income, and likely to rise to 3/4 of it soon. (Pay is split between base and flexible benefits that can be taken as income if desired, including a non-trivial "car allowance" component wrapped into it) 2. Unsecured credit of around 90% of base salary, with it all on cards that are at about 71% of utilisation (though 76% of visible utilisation). 3. Significant P2P income, enough anticipated now to cover my normal basic spending needs. 4. Actually correctly declared to HMRC. Expressions of shock and horror not needed, I suspect most of us do this. 5. Enough money invested to pay off a small mortgage and all unsecured debt a couple of times over. But this normally completely ignored in underwriting decisions. 6. And yet more in pensions for a person not far from being 55. 7. So much invested inside and outside pensions that the person expects that they could meet all costs for life even if never working again. 8. CATO? With 20-30 times net pay going into and out of current and/or investment accounts each month? 9. Why borrow? That's easy: it's cheaper than selling P2P investments to pay for things! That sort of stuff would prompt laughter from typical underwriting, I expect. As a human I think westonkev has made it pretty clear that he knows that someone who's putting so much of their pay into pension contributions just isn't likely to be much of a risk.* But underwriting rules and such are interesting beasts. *ignoring for the moment the cases of those who are planning to do it then become bankrupt in the hope that the pension transactions can't be unwound, so they can default with impunity, which wouldn't apply to those with lots of still-vulnerable assets
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Post by westonkevRS on Sept 28, 2015 5:55:05 GMT
james, nice email, although one small error on your chances of approval. Our underwriting process has the IP and email address of all forum members. Anyone that has ever "liked" a westonkevRS post is a given an extra 1,000 credit rating points! westonkevRS
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james
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Post by james on Sept 28, 2015 7:45:01 GMT
But what about the "never lend to posters called James" underwriting rule? Actually, underwriting "just say no" business rules are another potentially interesting topic.
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Post by oldnick on Sept 28, 2015 18:09:04 GMT
james, nice email, although one small error on your chances of approval. Our underwriting process has the IP and email address of all forum members. Anyone that has ever "liked" a westonkevRS post is a given an extra 1,000 credit rating points! westonkevRS Surprising that only five forumites have registered for the extra credit rating points! You never know when your circumstances might change for the worse.
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Post by moneyball on Oct 3, 2015 21:59:29 GMT
sl75 I think that CATO reflecting true income is the standard expectation for those with simple financial affairs and modest or low incomes. I think that westonkevRS has made it clear in the posts here that he and RateSetter know that it isn't necessarily so and is particularly unlikely to be so for their most desirable potential customers. I still think that RateSetter would decline me if I applied for a loan, even though there's a complete lack of missed/late/default stuff on my credit record. But maybe not. The holistic picture he wrote about could well be fine unless they object to stoozing-based P2P investing leverage. The sort of thing that makes just number-based CATO not so useful might be the sort of thing I and I suspect a fair number of others who post here do: 1. Pension contributions of something around half of work potential non-bonus income, and likely to rise to 3/4 of it soon. (Pay is split between base and flexible benefits that can be taken as income if desired, including a non-trivial "car allowance" component wrapped into it) 2. Unsecured credit of around 90% of base salary, with it all on cards that are at about 71% of utilisation (though 76% of visible utilisation). 3. Significant P2P income, enough anticipated now to cover my normal basic spending needs. 4. Actually correctly declared to HMRC. Expressions of shock and horror not needed, I suspect most of us do this. 5. Enough money invested to pay off a small mortgage and all unsecured debt a couple of times over. But this normally completely ignored in underwriting decisions. 6. And yet more in pensions for a person not far from being 55. 7. So much invested inside and outside pensions that the person expects that they could meet all costs for life even if never working again. 8. CATO? With 20-30 times net pay going into and out of current and/or investment accounts each month? 9. Why borrow? That's easy: it's cheaper than selling P2P investments to pay for things! That sort of stuff would prompt laughter from typical underwriting, I expect. As a human I think westonkev has made it pretty clear that he knows that someone who's putting so much of their pay into pension contributions just isn't likely to be much of a risk.* But underwriting rules and such are interesting beasts. *ignoring for the moment the cases of those who are planning to do it then become bankrupt in the hope that the pension transactions can't be unwound, so they can default with impunity, which wouldn't apply to those with lots of still-vulnerable assets 90% of base salary? Chicken feed... try 210%
Nice post. Many of these are similar to myself however, the big difference being our approach to pensions. I know this somewhat age relevant (Im a couple of decades younger) and I acknowledge the (alleged) tax advantages but.... you really trust pensions?
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james
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Post by james on Oct 3, 2015 22:39:15 GMT
90% of base salary? Chicken feed... try 210% I admit that I am a severe underperformer compared to that and in my defence offer the observation that in the coming year I anticipate my sadly lacking level of borrowing to still make me almost enough money to live on.
Nice post. Many of these are similar to myself however, the big difference being our approach to pensions. I know this somewhat age relevant (Im a couple of decades younger) and I acknowledge the (alleged) tax advantages but.... you really trust pensions? Pensions are just a tax wrapper and I trust what I can put into pensions. What's the difference between the same P2P loan outside any tax wrapper, inside an ISA or inside a pension? Just the access rules and better tax treatment inside the ISA and pension. You can't do the ISA today but you can do the pension if you have a big enough pension to make the fixed costs worth it and otherwise qualify for the pension concerned. The tax advantage of a pension isn't alleged. In the P2P case you get to keep 100% of the P2P interest until you take money out of the pension. You get the compounded growth on the part that would have been taken as tax. Then 25% of it is tax free and the rest taxed at the appropriate rate. That appropriate rate can today be zero up to the personal allowance and zero for those who are resident in Portugal. On some of my basic rate work income I'm even getting tax benefit of 40% income tax plus 12% basic rate range NI saving plus 6.9% employer NI split, a total of 58.9%. That's because I'm salary sacrificing in the basic rate range but the non-work income is still in the higher rate income tax band. Not an insubstantial effect when non-work income might be as say £10,000 a year. How does getting say £10,000 into a pension for a net cost of £4,110 look to you? Given that I can take out £2,500 tax free in a few years than pay at most 20% income tax on the rest if I've retired before taking it. That's £4,110 paid in to get £8,500 out. Plus whatever I can make in P2P or other investing while the money is inside the pension. A pretty nice deal. Consider a person who retires early and has their income mostly coming from P2P inside ISA, VCT tax free dividends and pension. With much of the money coming from the non-pension part the whole personal allowance can be available for the money coming out of the pension, making it tax free and the pension tax relief and its compounding on interest over the year a pure tax gain. Or consider a person who today has retired and has an income well below the personal allowance. They can put £2880 into a pension and a few weeks later once the tax relief has arrived take out £3600 tax free, a pure gain for them of £720 a year, every year until they reach age 75 or the rules are changed. The potential tax gain for a person well below age 55 is higher with VCTs. That's because you can take the VCT initial 30% tax relief then sell in five years and by another VCT then repeat every five years until you die. At 30% a time, less any capital losses. Along the way you can get as much as 11% tax free income from around half-secured VCT lending or around 10% from nearly 100%. But that tax gain doesn't necessarily make VCTs a better choice, just means that it's possible to get well over 100% tax relief given enough time.
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Post by moneyball on Oct 3, 2015 23:10:30 GMT
90% of base salary? Chicken feed... try 210% I admit that I am a severe underperformer compared to that an in my defence offer the observation that in the coming year I anticipate my sadly lacking level of borrowing to still make me almost enough money to live on.
Nice post. Many of these are similar to myself however, the big difference being our approach to pensions. I know this somewhat age relevant (Im a couple of decades younger) and I acknowledge the (alleged) tax advantages but.... you really trust pensions? Pensions are just a tax wrapper and I trust what I can put into pensions. What's the difference between the same P2P loan outside any tax wrapper, inside an ISA or inside a pension? Just the access rules and better tax treatment inside the ISA and pension. You can't do the ISA today but you can do the pension if you have a big enough pension to make the fixed costs worth it and otherwise qualify for the pension concerned. The tax advantage of a pension isn't alleged. In the P2P case you get to keep 100% of the P2P interest until you take money out of the pension. You get the compounded growth on the part that would have been taken as tax. Then 25% of it is tax free and the rest taxed at the appropriate rate. That appropriate rate can today be zero up to the personal allowance and zero for those who are resident in Portugal. On some of my basic rate work income I'm even getting tax benefit of 40% income tax plus 12% basic rate range NI saving plus 6.9% employer NI split, a total of 58.9%. That's because I'm salary sacrificing in the basic rate range but the non-work income is still in the higher rate income tax band. Not an insubstantial effect when non-work income might be as say £10,000 a year. How does getting say £10,000 into a pension for a net cost of £4,110 look to you? Given that I can take out £2,500 tax free in a few years than pay at most 20% income tax on the rest if I've retired before taking it. That's £4,110 paid in to get £8,500 out. Plus whatever I can make in P2P or other investing while the money is inside the pension. A pretty nice deal. Consider a person who retires early and has their income mostly coming from P2P inside ISA, VCT tax free dividends and pension. With much of the money coming from the non-pension part the whole personal allowance can be available for the money coming out of the pension, making it tax free and the pension tax relief and its compounding on interest over the year a pure tax gain. Or consider a person who today has retired and has an income well below the personal allowance. They can put £2880 into a pension and a few weeks later once the tax relief has arrived take out £3600 tax free, a pure gain for them of £720 a year, every year until they reach age 75 or the rules are changed. The potential tax gain for a person well below age 55 is higher with VCTs. That's because you can take the VCT initial 30% tax relief then sell in five years and by another VCT then repeat every five years until you die. At 30% a time, less any capital losses. Along the way you can get as much as 11% tax free income from around half-secured VCT lending or around 10% from nearly 100%. But that tax gain doesn't necessarily make VCTs a better choice, just means that it's possible to get well over 100% tax relief given enough time.
Although I have done no checking on your numbers, I have no reason to doubt your maths and subject knowledge here. I especially like the Portugal residency bit by the way (a relatively unknown angle out there - I raise my glass to that one)....
But I ask again...
...you really trust pensions?
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james
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Post by james on Oct 3, 2015 23:24:11 GMT
...you really trust pensions? Yes, for the time that is relevant to me.
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