Recent default rate experience

I believe their recent problem has been lack of liquidity on the retail investor side (which they are purposely shrinking, but still need some liquidity at least).  It makes sense for them to mark as much as possible as defaulted as they can then hand it over to third party agencies and lock in an immediate ceiling on how much time and effort they will put into recovery, rather than have their own people endlessly chasing wild geese.  The T&Cs state that when something is marked as defaulted they can give it to an agency and charge up to a max. of 40% of the amount recovered for third party fees.  Therefore the quicker they get things defaulted, the quicker they stop running up costs on their own account, and the quicker they transfer those costs onto you.  I know what I would do if I was struggling to get my business to show a profit.....

Whenever they default they give you this standard comment:


Defaults are an expected part of lending to a portfolio of businesses, and defaulting a loan enables our highly experienced Collections & Recoveries team to take steps to minimise your potential losses. The process starts with a legal step called novation where we transfer the relevant loan parts to a subsidiary company of Funding Circle. This enables us to enter into fair and affordable payment plans with the borrower/guarantor, or commence legal or formal insolvency proceedings. We will transfer into your Funding Circle account all recoveries that are allocated to you in accordance with our Terms & Conditions. You don’t need to do anything, as we’ll manage this for you. However, please be patient as the recoveries process varies from case to case and may take several months before payments start. You can be assured that we work hard to get a sustainable arrangement in place and payments in as quickly as possible. We will keep you up to date with our progress in this comments section.

What this novation does it removes your 'ownership' over the loan and transfers it to an entity called "FC Trustee" which holds it on trust for investors.  In other words, you lose your legal position wrt to the loanand they are appointed as your attorney.  They then are free to sell it to a debt purchasing company, use third party agents, whatever "in their absolute discretion".  If you read T&Cs 13.3, they can appoint a collections agent whose fees take priority, and then FC can take up to 40% of any amounts recovered to cover other third party costs.

So say you are owed 100, and FC incur 30 of court fees or whatever, then give up and hand it over to a collections agent.  The agent spends 50, and 70 finally gets recovered.  So out of that 70, the agent takes 50, leaving 20 for the investors, and then FC can take 40% of the 20 i.e. 8 to cover their 30, so investors would end up with 12 of the original 100.