Interest Shortfall over 50%

Evening all

I just wanted to say a few things before trying to address the various queries which have come up on this and other similar threads.

I participate on this forum on an ad-hoc basis, primarily to try to help investors by clarifying certain areas of interest. I don't believe I've been any less active recently than in previous months, however the activity on this board has obviously been greater than usual. I contribute in my spare time and rightly declare my affiliation with Lending Works, as a co-founder, however this forum is not an official communication channel and the level of my activity should not be taken as a proxy for the extent to which the business values any given topic/thread/post. 

You will note from the many other threads on this board that I am more than happy to address any topic, however challenging, whether it be credit risk, portfolio performance or customer service issues. I will always answer queries as comprehensively and honestly as possible. 

To address directly the queries within this thread...

Calculation of interest shortfall charges

As most of you know, interest shortfall charges arise when the current rates payable on loan chunks being sold are lower than the current rate advertised to new investors (currently 4.0% or 5.4% depending on product).


As a worked example:

- Loan chunk being sold which is currently yielding 4% p.a. (say 6.5% p.a. minus 2.5% Shield adjustment)
- Current target rate on Growth product of 5.4%, giving rise to a delta of 1.4% (5.4% minus 4%)
- Interest shortfall is calculated based on the chunk amount at 1.4% for the remaining term


The interest shortfall is paid to the new investor upfront and ensures they receive their 5.4% (the actual repayments on the loan will be at 4%).

Each cohort of loans is assessed independently in respect of credit performance, Shield contributions and expected losses. On 1 January 2020, we made adjustments to each cohort of loans in order to ensure the Shield remains adequately funded at all times, in the interest of all investors. These adjustments are most prominent in January but will be tapered back over the coming months in line with the required profile of claims to be covered by the Shield. We will provide a further detailed update on this next week, which should help. These adjustments have all been modelled over the lifetime of the loans to provide the expected returns within your Dashboard, which we believe should be the primary KPI. We acknowledge this process could have been explained better in the November update and apologise for that.

Pooling event versus variable interest rates

In our opinion, the variable interest rate mechanism provides significantly more stability and flexibility than a pooling event, which would be a binary outcome leading to a lockup of funds on the relevant cohorts and a 5-year repayment distribution timeline. The current model allows poor performing cohorts to be addressed, while maintaining the benefits of the Shield and avoiding cross-contamination between cohorts i.e. using fees/NIM on new loans to support older cohorts.

Going forward, rate adjustments (if any) will be more forward-looking and very gradual, as opposed to the current adjustments which were applied to prior cohorts some way into their contractual term.

Current advertised target rates

The current advertised target rates of 4.0% and 5.4% represent the annualised target rate of return on the two products for investments made today. Loans funded during 2020 are receiving these rates and this will continue while performance remains in line with expectations. We believe it is clear that these rates are target rates and are not guaranteed, due to information set out on our marketing website, our terms and conditions, our lender key information document and the appropriateness test all new investors must take before investing. I cannot agree that these target rates are misleading - if there are areas where you feel we could be clearer, please do let us know and we can try to address.

Our November communication

Some have suggested that we should have advised investors to sell their portfolios in December and buy back in January. As previously commented, we offered the fee-free exit period to allow investors who did not want to invest under our new terms and conditions a straightforward exit. It was not intended as an opportunity to benefit from interest rate arbitrage. 

In addition, we are unable to provide investment advice and therefore would always avoid advising investors to sell or or hold their portfolios. I think it's fairly understandable why we would not send an email to all of our investors suggesting they should all try to sell their entire portfolio and then buy it back in a month's time. This would have caused significant concern, delays and unnecessary disruption to the platform which could never be in the best interest of investors.

While we take on board that the transition to the new terms and conditions has been challenging, we remain fully committed to the new model and believe over time we will be able to restore the trust which some of you say you've lost through this process, by continuing to deliver healthy and consistent returns to investors.

Apologise to lenders on behalf of LW (a glaring omission thus far)

We will always hold our hands up and apologise where mistakes are made, and you will see that in various other threads. We apologise that our November announcement was not sufficiently clear about the impact of the changes we made. We tried to distill quite a complex topic into a straightforward announcement and believed that a 30-day fee-free withdrawal period was sufficient to allow investors time to consider the changes, ask questions if needed, and take action or otherwise.

Explain clearly and in simple terms what has gone wrong with your lending model and how you are fixing it

We do not believe that anything has gone wrong with our lending model. Some of the prior cohorts of loans performed less well than expected, hence we made the decision to reduce returns to ensure the Shield continues to operate effectively, for the benefit of all investors. We have invested a significant amount of resource into our credit function, including bringing in a new head of risk and making significant improvements to our credit models as a result of now having significantly more data, which is only possible after a number of years of trading (models prior to this point tend to be built on anonymous data obtained from a credit bureau which may not be reflective of your through-the-door population).

Explain clearly the impact on lenders and what their options are to allow them to make informed decisions going forward

As described above, due to the adjustments to prior cohorts, interest income is currently lower than in previous months. We will continue to adjust interest rates to align with the profile of payments and we expect to reduce the adjustments along with an announcement next week. These adjustments are timing differences, provided you hold loans to maturity, and do not affect the overall returns displayed on your Dashboard. 

Some have commented that interest has been retrospectively clawed back or that returns should not be considered over the life of a loan, however I have to disagree with that perspective. In a non-contingency fund model, a 36-month loan may meet its scheduled repayments for 30 months and then go into default, meaning 6 months without payment. The return from that loan would be calculated as an IRR over the life of the loan, and any calculation over a shorter timeframe would be misleading.

Continue to engage and respond to questions even if that feels awkward, uncomfortable or tiresome to you

I am still here and will continue to engage where I feel I can add value. I have no concern with addressing awkward, uncomfortable or even tiresome questions, just please bear in mind my comments above that you are always best using our official communication channels if you need a prompt answer to any query.

Apologies for the long post but hope this helps.



Of course not. You have avoided any potential problems that may have arisen. You can’t expect to benefit from any positive actions.

That would be, er, eating your cake and eating it.

I’m in the same situation. Be glad you are out of the uncertainty.

It is impossible, it is like asking my trading broker, ooops sorry, i sold my Tesla Share at 300$ , now that it is at 900$ , can i have the difference back because actually I regret that i sold , pretty funny :-))