The bond would be paid for by the borrower. I feel it could work like this.
The borrower applies and once REBS has arrived at a risk category and highest starting bid interest rate, the borrower pays a bond equal to 1 months payment upfront.
The auction progresses with 4 possible outcomes:
1) Insufficient funds offered. This is not the borrowers fault and so the bond payment is refunded.
2)The auction fills, all the paperwork is promptly executed, funds released, and the bond is used for the first repayment so the borrower next repay 1 month +30 after auction close.
3)The Auction fills, paperwork takes an age to complete - more than 30 days after close. The bond pays interest and capital to the bidders based on their bid rate and amount borrowed, The borrower has to pay a second bond amount this time equal to the monthly repayment due on the mean auction closing interest rate less any balance left on the first bond.
When the paper work completes fully, again the bond is ready in place to pay out to borrowers at 30day plus 1 month from auction closure and the borrower pays as normal from 30day plus 2 months from auction closure. In extremis the process repeats but that should be extremely unlikely.
4) The auction fills, paperwork eventually fails, payments have already been made in accordance with 3. Borrowers are paid out pro-rata for the period from the previous pay out until the date of failure and the balance in bond kitty is refunded to the borrower.
In all cases fees to rebs can be added/waived as per they contractual arrangements.
I see this method as incentivising the borrower to get his paperwork done promptly and credibly as well compensating bidders who have made capital commitments and have lost access to their funds when a loan fails through no fault of their own.
A possible are to be studied by Rebs is what the process should be if in the rare event the loan fails due to a fault within REBS end of the processing. Whatever is decided then, bidders should be paid as above.
I'd be very interested to hear of any flaws in this and I honestly don't think any reasonable borrower should be put off by this and if they were it rather indicates either a desparate financial situation or poor confidence in their own application in which case that application should not even come to auction.
hth
LW