In light of Diana Clement’s great article on the realities of peer-to-peer lending using the Harmoney platform, I’d like to mention a further concern of mine – the risk of borrower default.
Harmoney have a policy of offering borrowers the option of a top-up / re-write after only 3 months of regular payments towards their existing loan. So, that’s a total of only 3 payments (one per month) to constitute a good and reliable payment history.
Is this a good idea? Is this what a prudent lender would do?
Having worked in banking, I know that offering a top-up after only 3 payments is not something that a risk-averse lender would consider. There are instances where circumstances have changed dramatically (e.g. gaining higher paid employment) and these would be looked at on a case-by-case basis. The idea of sending out offer letters to borrowers after only 3 payments though – no way would that happen!
A lot of investor grumbling has been heard around Harmoney’s double-dipping on the fees of re-written loans, but a bigger concern really is the quality of these loans when they are re-written. Have the borrower’s circumstances really improved that much that they can afford to repay a (sometimes much) bigger debt?
Whilst a good return on investment is important to an investor, the return of the investment is even more important.
On Harmoney’s website they have a wee graph that can be seen here. If you scroll down to “Defaults over time” then you’ll see the graph showing that the highest risk of borrower default is between 4 and 10 months.
Why are Harmoney offering re-writes at 3 months when a far more prudent time to do this would be at 11 or 12 months?
Lending Club in the USA will allow additional lending after 12 months of on-time payments. I believe Harmoney should be operating under the same model.
When I met with Harmoney’s Mark Bardi the answer to the question “why only 3 months?” was simply that the directors of Harmoney are from a consumer finance background and that 3 months was fairly common in the industry. I’m not convinced, but then I’m a suspicious sceptic. When it comes to financial matters, being sceptical can only be a good thing, right?
So, given that I don’t believe 3 months to be industry standard, is there another reason why Harmoney could be re-writing loans at 3 months?
Yes there is!
Unfortunately, Harmoney’s business model relies heavily on the fees generated by writing new loans (or re-writing old ones). There is a very serious moral issue with this model.
Investors are unhappy about the double-dipping of service fees – and rightfully so, but the fee that the investor pays is miniscule in comparison to the fees paid by borrowers.
With Harmoney using investors’ money to generate fees from borrowers, this poses a potentially serious risk to investors.
When I last spoke to Harmoney, they denied relaxing lending criteria. I am, here’s that word again… sceptical. My preferred loans are debt consolidation or home improvement loans where the repayments are less than 10% of the borrower’s income. These loans are harder to find now, compared to when I started investing over a year ago.
In my view, re-write churn has reduced the attractiveness of investing through the Harmoney platform.
The return to the investor is still better than the bank, but not as good as Harmoney used to advertise. I see that with the dashboard update, the estimated gross annual return (weighted for default risk) has disappeared from view. Re-writes have made this extremely hard to estimate.
For me, it’s a matter of only investing the amount that I am prepared to lose.
I have yet to test out the competition, but it’s on the cards. Might be a little project for 2016?
[As always, please remember that I am not a financial advisor. I am writing about my own experiences and nobody is sponsoring me. I tell it as I see it, in the hope of educating and informing others]