AC loan monitoring -concerns

For clarity the funds are held and controlled by AC but, as I understand it, legally remain the property of the borrower.

The problem with buffers is as i see it, is if i was a borrower with a pot of money legally mine held by ac earning no, or less interest than the loan rate i would use it up to pay the loan until it gone as fast as possible. Its called good business practice.  i have cut my costs. If ac investers do not like it, or cant trade their loan parts on on the after market because of this , so what . I have no direct contractual relationship with them and am paying my loan. The truth is a buffer is a sop to ac investers giving an illusion of security that does not exist, the borrower can or can not fund the loan and any buffer will not change the outcome in the end at all, so why have them.
Only one group are advantaged by buffers  i have come across on the fc forum, these people invest in a new loan with x months buffer and sell to in their words the muppets in the auto invest fund at x-1 months hence leaving all risks to those people. So as a muppet invester, buffers actually work to my disadvantage

Thanks chris for the useful inputs.

Mike whilst I sympathise to a degree with some of your comments (why so many buffers, wouldn’t it be better if AC got rid of them) you’re missing a number of points, many of which others have picked up on so not worth repeating, & are perhaps assuming a little too quickly that your view of what the buffers are there for must surely be everyone else’s view too.

As a strong supporter of AC (& future shareholder) my primary concern is that the platform operates in a clear manner, understood by all & fair to lenders (existing & new). I have no interest in complaining in order to get compensation on loan 123 or 456 (even if what pennies I can get out of my investments on AC were my sole concern – which it isn’t – I reckon I’d stand to gain more from having the platform work well & attract new lenders than fighting battles on single loans).

The issue of buffers is delicate because if they are seen to form security (at least in some cases) the way things have been handled to date raises (imo) serious questions. On loan 123 (it’s real) & also loan 86 they are explicitly listed as security. It was also explicitly stated that these funds would be held in ACTCL’s account. AIUI security is held by ACTCL – a separate company outside the control of AC management. I would have expected that if a repayment was missed AC would have had to go to ACTCL & ask for (if they wanted repayment to be made from the buffer) authorisation to release the funds, at which point ACTCL would have (amongst other things) verified 1. what the situation with the borrower was 2. that lenders had been notified 3. that all was in line with AC’s T&C’s.

This doesn’t seem to have happened. I’m particularly concerned that repayments from the buffer seem to have been made – on both these loans at least – on the very date they were due, which suggests that in addition to the 3 mentioned things not being likely to have been done there may be a freer hand from AC’s management as to the handling of funds held by ACTCL then should be the case. I’m not an expert but that sounds like it could be potentially serious, on compliance & misselling grounds, in addition to not very good process on simple common sense grounds. As a lender & future shareholder that worries me.

ACTCL has as corporate director (according to AC’s website) a leading accountancy firm let’s call them Gin & Tonic, to date I cannot recall hearing anything about their involvement or actions on any AC loans. (Perhaps they’ve been enjoying plenty of G&T’s?) When I see what seems to be a free hand in obtaining funds very quickly from the account they control not only do I worry about the loss of an important line in lenders’ defence, I could also be concerned about what else might be wrong with the Trust side of things on AC..

I may have misunderstood ofcourse, & hope that AC’s upcoming education piece will explain the role of ACTCL more clearly, what funds are held in what accounts & how ACTCL fit into AC’s internal processes. For example, if the 3 steps above are part of the process what then happens with next points to be decided (suspension or not of loan, application or not of default interest, flagging etc). These are things that need to be clear to all lenders.

As things stand now, it seems loans with buffers are paradoxically more risky than those without, as the use of the buffer as it has been applied so far masks any repayment problems. This despite the quality of the loan having worsened (repayments missed must be a sign of problems, not to mention a pointer that perhaps further repayments could also be missed). That’s why whatever other solutions are found I think default interest should apply. Not having this would create another problem ie providing no incentive to the borrower to restore the position of the loan to where it was before. A buffer in this instance serves as a pre-booked repayment holiday facility..

Sure AC will need to check that such a decision is also in line with the terms of their contracts with borrowers, & (for the buffer loans that have had repayments missed already) with what AC staff have told the borrower so far as to how the loan would be handled moving forwards. I imagine that’s perhaps why they’re needing a couple of weeks to sort out loan 123.

As to the argument that the size of the buffer is insignificant in terms of security cover against debt, this may well be the case for loans that are only repaying interest, but what about loans that are repaying capital. If I’m not mistaken on loan 66 the buffer = 11% of the principal due at term, for a high risk loan with uncertain value of the leasehold that’s not immaterial.

Last point, I too am unclear as to why there seem to be so many loans with interest buffers & what exactly AC’s intentions were with having these. It may well be that their value is not always very real (& if handled badly could actually be negative), so perhaps AC should review this & use them more sparingly in future. In any event I hope that whatever decision is taken does not open AC up to future possible claims or adverse publicity. If that means drawing a line now & treating some (or all) existing buffers as security, & future ones in a different way shortly to be explained, I personally might be happier.

(All this without embarking onto the issue of insider trading: it wouldn’t need an overly malicious lawyer to suggest that the existence of a large number of buffered loans making repayments without the knowledge of lender creates fertile ground – whether intentional or not, whether taken advantage of or not – for insider trading by those with access to privileged information).

Forgive my ignorance, but what other scenario were you expecting?  That the funds were controlled by the borrower or that they legally belonged to lenders before loan payments fell due?

jjc Gin & Tonic have been involved in several loans where interest has been retained at drawdown as repayment has been delayed by AC needing to get authorisation to move money from the old Trust account but noone avaliable to authorise at GT. Not sure whether old  is the significant factor

eg #46 Q&A 12/3/15 Buffer called on but delayed by a day due to needing to speak to GT

Another where the buffer is listed as security and  its creation is actually included amongst the covenants (unclear on whether it being maintained is). Again the use of the buffer is not referred to in the 'activity' section (possibly as borrower paid before it actually got actioned), in fact no activity on this loan at all despite significant queries raised by lenders.

Forgive my ignorance, but what other scenario were you expecting? That the funds were controlled by the borrower or that they legally belonged to lenders before loan payments fell due?

chris, I don’t doubt your (or AC’s) intentions for a minute but I don’t think us lenders are legal experts, it’s down to AC to explain whose funds are whose (if that’s relevant), & where they are & who controls them (which must be).

It sounds like banker-speak was a big reason in the disconnect as to what was meant by a buffer. One thing many of us don’t like about traditional bankers is it’s hard to know what they mean sometimes, & when you do find out it’s invariably something that plays (sometimes rather slyly) into their interests. AC have to get their staff from somewhere & I guess the banking world will always be a big hiring pool. Let’s hope they don’t bring their old habits with them. Many of us P2P early adopters came here precisely to avoid that sort of thing.

I have faith in AC but one wee slightly troubling example many of us noticed recently was the very poor email explanation on loan 46, which (in an uncharacteristically roundabout for AC & tbh looked sly way) didn’t address the main questions ie why the loan (buffer) was where it was & if there was anything AC could have done better to avoid this (a miscalculation of rent expected is a minor error in the grand scheme of things, why not just say so?)

That’s a shame, it leaves a bad taste making you wonder how high lenders’ concerns are really in the platform’s mind, & if there is a reluctance to examine one’s own actions (even just to see how things could be improved) where things are likely to be heading in future.

IMO the buffers issue has opened a can of worms I can’t see AC safely wriggling out of unless they draw a line under existing loans, hold their hands up very clearly as to what could have been done better, & in future use fewer buffers with the exact role of ACTCL & next steps in the process made very clear. If that p***** off some existing borrowers that might well be the lesser of two evils.

L**** buffer also in old account and GT had to be stirred (Q&A)