jlend
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Post by jlend on Jul 11, 2018 10:34:21 GMT
There is some particularly questionable math going on at Ratesetter at the moment. Apparently a capital coverage ratio of 259% would mean losses would need to be 259 times larger than forecast before I lose any money. Similar story on the interest coverage numbers. You would hope investors don't pay too much attention to this nonsense but as a regulated business with the obligation to be "fair, clear and not misleading" it is a bit of a swing and a miss. No, actually. 1% = 1/100 100% means 1x 259% means 2.59x The target is 3x coverage I have only seen a target quoted for the interst coverage ratio of 125% to 150%. Where is the 3x capital coverage ratio target mentioned?
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jlend
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Post by jlend on Jul 11, 2018 18:03:34 GMT
RS have confirmed the error on the website is a missing decimal point. It should read 2.59 times not 259 times Exactly, thanks jlend They have corrected the website now for the interest and capital coverage Interest coverage ratio is still too low, bobbing along below their minimum target, with the odd day at the minimum 125%. They really need to be putting more in the PF to be able to cope with any downturns.
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dandy
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Post by dandy on Jul 30, 2018 9:44:01 GMT
I am sure this little nugget from the FCA may be causing concern at RS towers
4.68 In some cases, the implied and actual funding of the contingency fund also varies in an unacceptable way. For example, the size of the contingency fund communicated to investors may have been inflated by including future payments that have not yet been received.
If RS had to stop doing that then the coverage ratio would be below 100%.
Provision Fund cash £12,062,669 Expected Future Losses £25,242,380 Interest Coverage Ratio 47.78%
yikes ...
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jlend
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Post by jlend on Jul 30, 2018 10:19:22 GMT
I am sure this little nugget from the FCA may be causing concern at RS towers 4.68 In some cases, the implied and actual funding of the contingency fund also varies inan unacceptable way. For example, the size of the contingency fund communicated to investors may have been inflated by including future payments that have not yet been received.If RS had to stop doing that then the coverage ratio would be below 100%. Provision Fund cash £12,062,669 Expected Future Losses £25,242,380 Interest Coverage Ratio 47.78% yikes ... In the first few years RS took the PF fee all up front from borrowers to fund the PF rather than drip fed through the life of the loan. Many lenders questioned the revised approach at the time. It sounds like they may need to revert to this model in the future which should be fairly easy to do given they have done it in the past.
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Post by WestonKevTMP on Aug 2, 2018 21:37:56 GMT
The question is, do you want to attract quality borrowers?
Lower risk customers don't expect their loan to include any fees, just an interest rate. Where a loan is advertised with a fee up-front (even one they technically don't pay as its rolled into the original balance) alongside an interest rate it is biased self-selected to higher risk applicants.
So it was always the right choice for a bigger robust platform to take the provision funds over the lifetime of a loan, and not up front. If it was my choice, all loans and 100% of credit fees would be over the lifetime.
Kevin.
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wapping35
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Post by wapping35 on Aug 4, 2018 8:47:14 GMT
I see the quarterly update on the PF was announced, a little quietly, yesterday. members.ratesetter.com/noticeboard/quarterly_expected_loss_update_q2_2018Coverage is now back down to 124%. ========= Yesterday, we updated the Expected Future Losses figure which forms part of the calculation of the Provision Fund Coverage Ratio. This followed a meeting of our Executive Credit Committee which meets monthly. In its meeting it assessed the credit performance of the whole RateSetter portfolio of active loans up to the end of Q2 2018, and looked at the Provision Fund’s ability to cover any non-performing loans (known as Expected Future Losses). The result of this update was a three percentage point decrease in the Provision Fund Interest Coverage Ratio, taking it from 128% to 125%. This was driven by weaker performance of loans written in 2018 to date, due to a different mix of borrower profile compared to other years, slightly offset by an improvement in the performance of consumer loans written between 2014 and 2017. The expected future losses of loans written to date in 2018 have been revised upwards to 4.49%. Overall, loans written to date in 2018 are expected to contribute positively to the Provision Fund (year to date, 2018 is projected to contribute a surplus of 21%). As we write new loans, we are continuing to adjust our risk-based pricing to grow the Provision Fund. The Provision Fund Interest Coverage Ratio has been on an upward trend since autumn last year and we expect this will continue.
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Post by propman on Aug 4, 2018 10:06:48 GMT
Call me a cynic, but whenever it is necessary to revise up the defults expected on a year they manage to offset the majority of the difference by reduced default expectations of other periods. Couple this with a history of initially under estimating defaults to show a large surplus for the current and (at least when this is small due to low loans accumulated) previous period before the defaults accumulate and the coverage ratio doesn't give me much comfort beyond that they are actively reviewing it! That siad, they have to date managed to sell off the defaulted loans held by the fund to raise additional funds and this has often followed periods of reduced "net" default expectations. So maybe they have plans for a further sale as a result of the increased defaults and this is what has actually occurred. I say this as I believed that the expected future defaults were based on the performance of a particular cohort of loans and so should impact all periods (subject to loan mix). It seems that they estimate the default rate on outstanding loans monthly and apply this for the following month, so the expectation variation in month is merely the difference between defaults occurring and the expected percentage on the loan repayments made. Accordingly the actual defaults does not effect the monthly reassesment only the change in the expectation of undefaulted loans as a result of loans that have defaulted.
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ashtondav
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Post by ashtondav on Aug 10, 2018 10:59:30 GMT
Call me a cynic, but whenever it is necessary to revise up the defults expected on a year they manage to offset the majority of the difference by reduced default expectations of other periods. Couple this with a history of initially under estimating defaults to show a large surplus for the current and (at least when this is small due to low loans accumulated) previous period before the defaults accumulate and the coverage ratio doesn't give me much comfort beyond that they are actively reviewing it! That siad, they have to date managed to sell off the defaulted loans held by the fund to raise additional funds and this has often followed periods of reduced "net" default expectations. So maybe they have plans for a further sale as a result of the increased defaults and this is what has actually occurred. I say this as I believed that the expected future defaults were based on the performance of a particular cohort of loans and so should impact all periods (subject to loan mix). It seems that they estimate the default rate on outstanding loans monthly and apply this for the following month, so the expectation variation in month is merely the difference between defaults occurring and the expected percentage on the loan repayments made. Accordingly the actual defaults does not effect the monthly reassesment only the change in the expectation of undefaulted loans as a result of loans that have defaulted. OK, cynic! why is the PF coverage so volatile. Two weeks ago it was 127%, now 122%!
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jlend
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Post by jlend on Aug 17, 2018 6:41:37 GMT
The question is, do you want to attract quality borrowers? Lower risk customers don't expect their loan to include any fees, just an interest rate. Where a loan is advertised with a fee up-front (even one they technically don't pay as its rolled into the original balance) alongside an interest rate it is biased self-selected to higher risk applicants. So it was always the right choice for a bigger robust platform to take the provision funds over the lifetime of a loan, and not up front. If it was my choice, all loans and 100% of credit fees would be over the lifetime. Kevin. That is a fair point. I dont have the knowledge to know either way what is best. I just want a PF that is appropriately funded for each cohort of borrowers that RS lend to, taking into account the volume of lending to that cohort, likely default rate of that cohort, when they are likely to default and the likely recovery rate. RS by their own admission have come unstuck for whatever reason with some cohorts. Personally i am less bothered about up front or over the life of the loan PF fees, although if possible i think many lenders would like to see less reliance on over the life fees if at all possible. The PF coverage ratio below the target range also doesnt help instill confidence in the PF right now even though it has a great track record in paying out. There is always a trade off in not putting too much money in the PF, but having committed to a target range it would be good to see the PF well within that range at this stage in the economic cycle. I have been since 2010 and remain a relatively big lender in RS for the time being at least.
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pikestaff
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Post by pikestaff on Aug 17, 2018 7:17:52 GMT
The question is, do you want to attract quality borrowers? Lower risk customers don't expect their loan to include any fees, just an interest rate. Where a loan is advertised with a fee up-front (even one they technically don't pay as its rolled into the original balance) alongside an interest rate it is biased self-selected to higher risk applicants. So it was always the right choice for a bigger robust platform to take the provision funds over the lifetime of a loan, and not up front. If it was my choice, all loans and 100% of credit fees would be over the lifetime. Kevin. That is a fair point. I dont have the knowledge to know either way what is best. I just want a PF that is appropriately funded for each cohort of borrowers that RS lend to, taking into account the volume of lending to that cohort, likely default rate of that cohort, when they are likely to default and the likely recovery rate. RS by their own admission have come unstuck for whatever reason with some cohorts. Personally i am less bothered about up front or over the life of the loan PF fees, although if possible i think many lenders would like to see less reliance on over the life fees if at all possible. The PF coverage ratio below the target range also doesnt help instill confidence in the PF right now even though it has a great track record in paying out. There is always a trade off in not putting too much money in the PF, but having committed to a target range it would be good to see the PF well within that range at this stage in the economic cycle. I have been since 2010 and remain a relatively big lender in RS for the time being at least.
If the FCA's comment is aimed at RS, I think it is wide of the mark. RS's methodology makes sense to me and they have always been fully transparent about it. There might (I don't know) be other platforms who are not so transparent. But I agree the coverage is a bit low for this stage of the cycle.
WestonKevTMP If the FCA were to insist on stated coverage being limited to amounts funded upfront, RS would not have to change their lending model to charge all borrowers upfront. They could fund the PF themselves, with a subordinated loan to be repaid as the lifetime fees come in, or they could do a mix of the two. Of course this would come at a cost, which would ultimately be borne by lenders.
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jlend
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Post by jlend on Aug 17, 2018 9:48:07 GMT
Just FYI
There was a discussion on the blog on the ratesetter website when the change from up front funding was introduced.
This was for all/most of the monthly fees from borrowers to go into the PF during the early months of the loan, with RS taking their fees from later months.
RS thought it was an interesting idea at the time and didnt rule it out for the future.
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kaya
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Post by kaya on Aug 17, 2018 14:13:58 GMT
Just a little missing point here, a little number manipulation crunching there....
All makes me wonder....a risky game is this.
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ashtondav
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Post by ashtondav on Aug 17, 2018 22:33:43 GMT
Just a little missing point here, a little number manipulation crunching there....
All makes me wonder....a risky game is this.
Er, can you elaborate on this?
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Post by propman on Aug 19, 2018 15:28:30 GMT
Call me a cynic, but whenever it is necessary to revise up the defults expected on a year they manage to offset the majority of the difference by reduced default expectations of other periods. Couple this with a history of initially under estimating defaults to show a large surplus for the current and (at least when this is small due to low loans accumulated) previous period before the defaults accumulate and the coverage ratio doesn't give me much comfort beyond that they are actively reviewing it! That siad, they have to date managed to sell off the defaulted loans held by the fund to raise additional funds and this has often followed periods of reduced "net" default expectations. So maybe they have plans for a further sale as a result of the increased defaults and this is what has actually occurred. I say this as I believed that the expected future defaults were based on the performance of a particular cohort of loans and so should impact all periods (subject to loan mix). It seems that they estimate the default rate on outstanding loans monthly and apply this for the following month, so the expectation variation in month is merely the difference between defaults occurring and the expected percentage on the loan repayments made. Accordingly the actual defaults does not effect the monthly reassesment only the change in the expectation of undefaulted loans as a result of loans that have defaulted. OK, cynic! why is the PF coverage so volatile. Two weeks ago it was 127%, now 122%! The differences are caused by actual defaults. I have been away so can't comment on this change, but 5% (even ignoring rounding) is #1.2m of defaults. This is offset a bit by the expected percentage of the amounts repaid, but that is small over a short timescale. The balancing (which is not exact) is done when they reassess the % of outstanding that is expected to default, usually monthly.
- PM
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arby
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Post by arby on Aug 25, 2018 8:12:14 GMT
For those that think the provision fund should be stronger, what sort of cut in return would you accept to achieve that? 0.5%? 1%? And at that rate would you still favour RS or look elsewhere? I don't have any hidden agenda, just trying to get a feel of people's risk appetite.
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