One p2p investor asked me this: Every platform claims to be doing stringent checks on its borrowers. Yet the problem loans at certain platforms are climbing fast, implying that the so-called checks are not as stringent as they claim to be. How can one know if a platform is really doing a proper underwriting job? Or is it just churning out big loan volume just to earn its fee? Indeed, it is difficult to know for sure. But there are some things an investor can check to get a rough idea.
Check the platform’s underwriting track record
Underwriting track record basically refers to how good (or bad) a platform has been when they list out loans. An investor should avoid any platform that have default rate above 10%. But platforms don’t like to talk about loan defaults. As far as I know, only Funding Societies (below) shows such statistics clearly.
But this information is absolutely essential. If you can’t find it, email or ask. If you are not satisfied with the answer, skip the platform. Never compromise on your due diligence.
Another thing to take note is that each platform have a different definition of loan default. You can ask the question this way, “What is the percentage of loans that are 30, 60 and 90-days overdue?” If you see anything above 10%, you should be extra cautious.
Check out the Founders
The next thing to do is to do a quick Google and Linkedin search on the platform’s founders. Ideally, the founders must come with some real work experience, preferably in the financial services. p2p lending is not easy, especially chasing SMEs for repayments.
You also should try to meet up face-to-face with the founders to get an idea whether they are serious about the entire endeavor. Why are they doing this? Are they doing this full-time? Have they invested much of their own money into the platform? Why do they think they can succeed?
Check out the Credit Officer
After the founders, make sure you speak to the Credit Officer. Don’t get too distracted by the cute Account Manager or the attractive BD Manager. The Credit Officer controls the credit underwriting process and determines whether you get good quality loans or rubbish deals. Ideally, the Credit Officer should come with several years of experience. I come from a credit background, so I usually spend some time trying to understand the underwriting framework. But for novice investors, it is sufficient to request for a brief walkthrough of the credit underwriting to get a rough idea.
Is the platform’s interest aligned to investors?
Always remember this: platforms earn a fee matching borrowers to lenders, but lenders bear the full loss if borrowers default. Of course, loan defaults are inevitable and every platform try to filter away the risky loans. But when times are rough, will platforms relax their underwriting criteria just to earn some revenue?
One way to approach this issue is to see if the platform’s interest is aligned to investors. Does the platform earns its fee when the loan is originated, or when as the loan is repaid? If it earns a fee when the loan is originated, is it possible that the platform may be less stringent since it suffers no financial loss if default occurs? Does the platform or the founders invest their money on each loan? There is no clear-cut answer here, but you may be able to an idea on the platform’s financial incentives.
Keep a lookout for red flags
If a p2p platform originates too many risky loans, it will eventually blow up. But before that happens, there will be usually some warning signs – just like there were rumblings that something fishy is going on at Olam and Noble before everything exploded.
Do watch out for things like Credit Officer or co-founder leaving the p2p platforms. Or more and more risky DP8 loans (as opposed to fewer of such loans in the past). When you see several of such warning signs, you should turn cautious.
What are some of the other things that you can check on the p2p platforms? I’ll love to hear your views!