Maintaining the best credit performance on personal loans is rather like the hare and the tortoise – more haste, less speed. That may sound odd coming from a company that has won awards and government support for innovation, but careful credit assessment of those wishing to borrow from our savers is the foundation of the Zopa business and is at the heart of every decision we make. That credit assessment relies on gathering and monitoring large amounts of loan information over time, so we’ve waited several months since we launched the Zopa Safeguard Fund to update you on its performance.
The Zopa Safeguard Fund was created in April 2013 to compensate savers if a borrower is unable to repay their loan and has covered 100% of cases since launch.
We are pleased to report that the credit performance of Zopa loans continues to be very strong. By this we mean that the number of borrowers who are unable to repay loans is very small and, most importantly, lower than the expectations set by our Credit Risk Director. As an example, the default rate of loans booked in the last 12 months is 0.03% (vs an expectation of 0.25%) - that represents a total of £60k in defaults as a proportion of £175 million of loans. We believe we have the lowest default rate of any peer-to-peer lender or high street bank in the UK but that does not mean we are complacent about our strong credit performance and the loans team continually strives to enhance our risk assessment methodologies. The credit performance of the Zopa loan book is reviewed monthly and we revise expectations wherever necessary. If you are interested to learn more we publish a monthly report of our credit performance for you to download.
Whilst we have your attention, we’d like to take the opportunity to update you on a couple of changes to how Safeguard operates.
- We are going to reduce the amount that we pay into the Safeguard Fund for new loans, in the light of Zopa’s strong credit performance. When we launched the Safeguard Fund in April 2013 we had over 8 years’ experience managing a loan book that had seen over £300m in new loans go through it with extremely low default rates. We used this knowledge to inform how we would keep writing more loans – and offer more loans to more people – whilst running a stable and robust fund. In short, we make contributions to the Safeguard Fund so there are sufficient funds to cover expected losses, plus some extra. In the first instance we made a decision to err very much on the side of caution and have it over-funded against those expectations with a large “buffer”; this meant making a higher contribution into the fund from new loans written than we would have done otherwise.
The continued excellent performance of the loan book – including £139m loans written since the launch of Safeguard – gives us confidence that the current buffer is too large. Ongoing, we aim to maintain the fund with 110% coverage at all times. This is a safe and sensible amount reflecting Zopa’s credit-worthy, low-risk borrowers and protecting but not penalising our savers. Having too large a buffer means that customers are ultimately losing out, either in higher loan prices or in lower returns. In making an alteration to Safeguard contributions from new loans we maximise the benefit of any money that was allocated to the Safeguard fund and has not been required. In the event of something unforeseen like a major economic downturn this policy would still allow us to adjust how we price loans and make contributions to the Safeguard fund to maintain the extra 10% in the fund.
This means that at the moment there is a surplus in the Safeguard fund, and we expect to reduce this surplus in the coming months to bring it in line with our 110% coverage target. While the main drivers of returns to savers are the loan APRs offered to borrowers by banks, a slight reduction in contributions to the Safeguard Fund will benefit returns to savers.
- We are also going to make it simpler to understand when to expect the Safeguard Fund to pay out. It will pay out to savers whenever a loan is behind by the value of four months’ repayments. As before, the saver will receive capital, plus missing interest from the period of payment arrears, from the Safeguard Fund. The Consumer Credit Act stipulates this measure of non-payment before a debtor can be considered to be in default. Previously if a saver was lending to a borrower who moved on to a payment arrangement (where the borrower is paying less than the monthly repayment amount each month) this could continue for some time before Safeguard paid out. We will now pay out as soon as there are four months’ worth of repayments overdue, regardless of whether the debtor is making partial repayments. Borrowers will not be treated any differently however and we will maintain our high standards of fairness when assisting borrowers who are in difficulty. So in effect we are shielding the saver’s experience from the ‘arrears/default’ process.
Of course, should a borrower be declared insolvent, or pass away without four months’ worth of repayments overdue the Safeguard Fund will pay savers back immediately.
As we enter one of the busiest months for lending we wanted to thank our savers and borrowers for supporting us in 2013 and we look forward to providing you with great rates in 2014.
You can read more information in our Safeguard help section