Zopa temporarily pulling out of C, D and E risk loans.

It was an email, received this afternoon.
Here is an excerpt:

Question is also will they even allow RR sales of C, D & E loans from existing portfolios. 

And as usual Zopa are silent on that...

Indeed I have asked them this question (today ). And no doubt whilst Zopa Customer Services will promptly pass it on to the "management team", but I doubt I will get a clear reply from "the powers that be at Zopa", let alone promptly.

And I have added that if they are again making major changes to the MRA they need explicit consent  and provide a reasonable timeline to act (not with immediate effect, as they did last time).

The reasonable timeline is especially important since their website crashes so much, so pulling the sale quickly will be impossible and indeed some will be ill, caring for a loved ones or working/volunteering for the essential services (for obvious reasons) and unable to act immediately...

My concern on the MRA is the charge increased 10 fold (0.4% to 4%) last time and they immediately imposed that and assumed consent, so what is stopping a further 10 fold increase to 40%.

i.e. I can see their argument (not sure I totally agree with it) that the MRA can be increased for sale requests made on the old lower MRA terms if investors can terminate the sale, but really such a change needs explicit consent (given the cost) rather than inaction being assumed consent and indeed they need to provide time for investors to react accordingly especially given their website seems to run on dial up..

Regards W35

You might be right on the IT challenges but there are also legal challenges of assumed consent with no time to act and a website that means you cannot act immediately anyway (that is also an IT challenge Zopa have). In the end they may well have to cancel all sales as you say for legal reasons since they could be making material changes to the sale terms.

That is saying their website is not fit to meet the legal and regulatory frame work that the FCA require them to work within is not going to work as a solution for the FCA..

What I have done is raise this before they do so, so it is flagged as a problem before they do it..As an investor I think that is a fair and equitable thing to do.

The fact is all investors will at some point want to sell their investment, but not sell at any price...

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Edit: Incidentally I do see there are IT solutions to this.

i.e. Freezing the sell queue for x days during which time sellers can decide if they wish to pull their sales or not and not bringing in the new higher MRA's until Y future date..  

If the Zopa website cannot do that it is clearly not remotely fit for purpose..

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Edit 2: I would add since Zopa have said (they emailed me a few weeks back) that they are looking at changing the selling function to a rationing approach rather than a queue and as such the position of any given seller in the queue will be irrelevant anyway. So cancelling all sales and asking sellers to explicitly accept new MRA terms would not be relevant to ones queue position, since it is not a queue.






 

Zopa should not be originating *any* new loans, including A*-B while they have more investors selling than they can cope with. That’s the position that RS have now taken, and they are correct.

1) Zopa’s role is to match willing lenders with willing borrowers. There are two semi-equivalent competing “pulls” on money, A) new *potential* borrowers who haven’t signed a contract and have no claim on the money at all. B) lenders selling, who *have* signed a contract, and have a right to attempt to sell, although Zopa haven’t committed to always finding them a buyer. Lenders who want to sell *clearly* stand legally in the queue in front of new borrowers.

2) For an investor wanting to make a new loan, it makes no sense financially to give the money to new borrowers rather than an existing (selling) lender. In both cases, their money gets invested with an external borrower (new loan or old loan), who by credit-rating have nominally the same risk. That risk has increased recently, but it has increased for the old borrowers too relative to when the old loan was made. That shortfall is made up by the 4% compensation (according to Zopa) that the selling lender is giving. But crucially, that’s 4% *cash now, risk free* vs 4% *risk-containing repayment over the lifetime over the loan, via increased borrower rate*. No investor in their right mind would choose the latter. But Zopa has chosen to allocate repayment risk instead of riskless cash to many new investors. The investing/pushing request is completely satisfied by a small fraction of the borrowing/pulling request and therefore there is no need at all to allocate non-riskless cash to provide a return to new investors.
 
3) How exactly are they continuing to credit-rate A and A* at all?
An employed airline pilot would normally likely qualify as A*. But now, obviously that would be a crazy loan to make in current circumstances. Not their fault, but just not investable. My point is, now Zopa should effectively be credit-scoring the employers too. Is there any sign of that? Does that even look practically possible?

3a) Look at the valid reasons to request a new loan. Buy a new car. Pay for a new kitchen. Pay for a wedding. Given that everyone is in lockdown isolation, none of these can be credibly requested *today as we sit here*. If they are planning for expenditure after lockdown lifts, they would just wait for two months and avoid two months interest. Any loan originated today is requested under false pretences, although for reasons we perfectly understand, which are “I need something to either bag a cushion while it’s available before I might lose my job, or tide me over if I already know I lost it, and deal with the fallout later”. That’s not an A* loan, it’s E at best, and no amount of paperwork should convince anybody otherwise.

I agree but in the end we have no idea what the impact will be.

So questions for Z are numerous. I see Core is only A's not B's, so does that mean for Core, B's are also not saleable since Zopa seem to sell Core loans to Core not overlap to Plus.

They also need to communicate how much can now be sold not including C-E and perhaps Core B's. i.e. Less but how much no idea.

They also then need to communicate the new MRA's. For me I am not a distressed seller (albeit I have little faith in Zopa now and that is one of the drivers for trying to sell), I only wish to sell the loans if the price (MRA) is right for my risk tolerance. I am okay with the increase to 4% from 0.4% but given it would be only A 's and perhaps some B's to be sold I would want to see what the new MRA's are to decide if I continue to try to sell.

I really would not be surprised if Zopa do a FC and suspend the secondary market "temporarily" (with no timeline) , in the end since sales are not happening (for me and from I can see not a lot for anyone) it probably makes little difference anyway and if they are unable to price the loans that might be the route they go to minimise the risk of legal and regulatory challenges.. But I know it won't be popular.

And no doubt in line with Zopa's communication policy they will communicate any change at 6pm on Friday (or a Thursday if Friday is a public holiday) so they don't need to address any questions nor IT melt downs on their website, that the announcement generates. After all that has been used as a Zopa comms strategy for years now.

Update Only:

Zopa have let me know that my question on the B-C Core loan sales and C-E Plus loan sales has been raised to Natasha Wear (I think she is now the CEO of the P2P section). I guess that means the answer is not clear. I thought it would be a yes for no.

Also clarity on notice period for major MRA changes will be provided.

I also have had an issue about picking up RR loans when the lender had flagged to Zopa that they are in financial distress (comments section) but had not yet missed a payment. They had said (March 4th) they would place a 30 day moratorium on sales of such loans, but it is unclear as to whether that is now in place. They say for the loan in question since the borrower only said they were in financial distress and did not expressly say they would not meet the next payment they will not reimburse the loss (I have suggested that perhaps Zopa should be asking that question, when a borrower states they are in financial distress). This is why I finally chose to go the no longer lending and sale route.  Really posting this as a heads up for continuing lenders...

If I get clarity on these points I will post accordingly.

W35