Lendy Entering Into Administration
You may have recently read about Lendy, one of our competitors in the peer to peer lending market, entering into administration. Unfortunately, this has left many of their investors in limbo while the legal process takes its (inevitably) lengthy course.
We should state from the outset that we are not privy to any information about what happened at Lendy other than what has already been published in the press or in other public arenas, some of which may be speculation. Therefore, before we draw any firm conclusions we should wait until the Financial Conduct Authority (FCA), the body which regulates the P2P sector, publishes the results of its investigation into what occurred.
That said, we understand that you may have some queries and concerns about the matter, given the extensive media coverage and the fact that we also operate in the property-backed P2P loans arena.
Therefore, it may be useful to look at the general areas that have been discussed during the commentary about Lendy and consider how they relate to our own business model, and hence your investments.
There appear to have been two main areas of focus in the stories published about Lendy:
- Due diligence and the quality of underlying loans
- The importance of following the correct recovery processes
To consider each of these points:
Due diligence and quality of underlying loans
As you probably aware if you’re reading this blog, we offer two broad types of P2P loans for investment:
- Bridging loans (sometimes described on our website as simply ‘Peer to Peer Lending’ loans)
- Property development loans
Our bridging loans are made to third parties who are unconnected to The House Crowd and they are always secured against UK property.
We will only consider taking on a bridging loan if it meets our Underwriting procedures and we are happy with it from a due diligence perspective. It is worth noting that we turn down the majority that come our way (circa 80% to 90%). This is because we are not prepared to compromise the quality of the loans just to fill product demand.
This does not mean, of course, that there won’t be late payments and instances of default (which we regularly publish via our Performance stats) but it does mean that we do everything we can to try and prevent such instances from occurring.
All security properties are valued by RICS qualified surveyors. The surveyors’ valuation provides an open market value and a ‘restricted market’ value i.e. the projected value the property can be sold within 90 days. We facilitate loans to a maximum 75% to reduce the credit risk borne by investors, should we ultimately have to take possession.
However, this does not mean that any form of guarantee is in place because property prices can fall, as well as rise.
Property development loans
Development loans differ to our bridging loans in terms of the features and the risks involved.
The most striking difference is that, as the words ‘property development’ suggest, the property is yet to be built and so there is a reliance upon the developer completing the project and selling the development before investors’ money can be returned. This undeniably means that there is a risk involved which is not present within our bridging loans, hence the generally higher interest rates on offer.
However, on the flip-side, the vast majority of our development loans are ‘in-house’, in that the loans are made to Special Purpose Vehicles affiliated to The House Crowd, set up purely for the purpose of completing the development project. Therefore, we have much greater control over how our investors’ money is used than is the case for bridging loans. We will only undertake a project, and hence start a fund-raise, if we think it is viable.
We have very recently entered into arrangements with third party firms to lend money to external developers. These are currently described on the website as ‘mezzanine finance’ loans. However, we have conducted thorough due diligence on these third parties and will only accept the loans if they meet our own underwriting and due diligence requirements.
It is also worth noting that these loans are normally made in conjunction with a senior debt provider, such as a bank or specialist lender, who will only commit to the deal if they are satisfied with their own due diligence. The same goes for our third-party lending partners, who are also FCA authorised – if they’re not satisfied that the deal is viable, the loan does not go ahead.
So, whilst we do not have the same control that we have for in-house projects, these loans have to jump through two extra due diligence ‘hoops’ before we can make them available to our investors.
The importance of following the correct recovery processes
It has been widely reported that one of Lendy’s borrowers threatened litigation against them and the underlying investors because, the borrower claimed, Lendy had unfairly placed a loan into default.
Again, we are not in a position to comment on the ins and outs of what happened at Lendy, but it is worth noting that we are often asked two things about the recovery process for late loans by members:
- Why can’t you speed things along?
- Why can’t you provide us with more detail about what you are doing to recover the loan?
The answer to the first question is that we must follow the correct legal procedures. While this can be frustrating for you if you are awaiting the return of your capital and interest, please be assured that our priority is always to recover as much money as possible when a loan is in default.
Similarly, in relation to question 2, it is vital that we do not disclose confidential information that could be used by a borrower to attempt to block any recovery process.
So what does it all mean?
The peer to peer sector is still relatively new and unfortunately it is only to be expected that there will be problems along the way.
However, it does not follow that if one platform has problems that there will be a ‘contagion’ effect if those problems are preventable. It is down to the governance and controls that each platform has in place to do everything possible to prevent such problems from occurring.
We will be able to draw firmer conclusions when the FCA publish the results of their investigation but it goes without saying that if you invest in property via peer to peer platforms, whether it is with The House Crowd or any other platform, you must fully understand the risks before you invest. It is not the same as putting your money in a savings account – if there is greater reward, there is always greater risk.