Loan originator risk management

There will be a large variety of Loan Originators on the Monestro Marketplace. Our risk team carefully assesses each Loan Originator before they join our Marketplace. Before beginning the cooperation, we execute a Due Diligence procedure for each prospective Loan Originator. We perform a thorough analysis of financial statements, management quality, underwriting policy, credit scoring, loan portfolio performance and data accuracy. We strive to ensure that the Loan Originator complies with the strict risk standards we have set for the Monestro Marketplace. After the partnership launch, we continue monitoring the Loan Originator for risks on an ongoing basis.

Simultaneously, we believe in full transparency and thus co-operate with 3rd parties regarding risk assessments. We developed The Loan Originator Due Diligence process and the scope in cooperation with a Big4 accounting firm. For risk assessment, we also use the service of (CRIF database), please check our Loan Originator audit reports. Specific requirements for Loan Originators: Not established less than one year ago, AML regulations (EEA, UBO) covered, Consumer credit loans only, Equity (entity or group equity) must be positive, Portfolio size no less than €500 000.

AML* (Anti-Money Laundering) a set of laws and regulations preventing criminals from disguising illegally obtained money as legal income. 

CRIF* an international company specialising in credit bureau, business and credit risk information.

EEA* (European Economic Area), consisting of the European Union (EU) members and three countries of the European Free Trade Association (EFTA) (Iceland, Liechtenstein and Norway).

UBO* (Ultimate Beneficiary Owner), as per AML and CTF legislation, the legal person or entity that ultimately benefits from the set investment needs to be known. 

Loan underwriting policies

On an individual loan level, Loan Originators issue loans following their established underwriting and credit scoring policies. These include not only the industry-standard processes – identity, credit, affordability, and fraud – to ensure borrowers are creditworthy but also a series of advanced checks, which are dependent on lender clients characteristics and behavior.

The exact underwriting policy undertaken by each company may differ. Still, the main principles are the same:
we only partner with companies that have developed consistent scoring models for borrower evaluation when issuing loans and use data validation with third-party data sources, such as credit bureaus, when possible.

In the process of evaluating Loan Originators, we examine not only at the formal policies, but also at their implementation, ensuring that it meets our rigorous criteria.

Skin in the game

All Loan Originators that place loans on the Monestro Marketplace must keep a certain percentage of each loan on their balance sheet. Skin in the game refers to how much of their own funds the Loan Originator retains in each loan. For example, if a Loan Originator with 10% Skin in the game issues a €1 000 loan to a borrower and then places this loan on the Monestro Marketplace, only €900 of this loan will be available for investors to invest in; the Loan Originator will keep €100 on their balance sheet. Skin in the game ensures that the Loan Originator interests are closely aligned with the investor’s interests – both sides have a stake in the loan.

Buyback OBLIGATION

To protect investors from borrower defaults, all lending companies on the Monestro Marketplace offer a Buyback Obligation. The Buyback Obligation means that if the loan is delayed by more than 60 days, the Loan Originator will repurchase the investment for the principal’s nominal value and accrued interest. It is valid as long as the Loan Originator is in business. Most of the loans continue to accrue interest during the late period, depending on the Loan Originator. You can read more about this in the Loan Originator details in the Interest income on delayed payments column. Buyback happens automatically and with no additional effort required from the investors’ side. On the Marketplace, loans with a Buyback Obligation are marked with .

In general, loans with a Buyback Obligation come with a lower interest rate than loans without it – the difference is the approximate estimated annualised bad debt rate. Loan Originators charge borrowers higher interest rates than the rate they offer to investors on the Monestro Marketplace. The difference covers administrative and marketing cost and constitutes the profit margin of the Loan Originator. By providing a Buyback Obligation, the Loan Originator keeps the borrower’s default risk on its side. To compensate for this risk, the Loan Originator takes a higher share of the interest paid by the borrower. In other words, the Loan Originator manages the Buyback Obligation from the interest rate spread between the interest rate they charge to borrowers and the interest rate they pass to investors.

Meanwhile, to mitigate possible default risks – we focus (although this is not mandatory) on the Loan Originators who have Forward Flow Agreements. Instead of writing off the debt – defaulted loans, most likely would be sold to 3rd party firm that specialises in debt recovery. However, it is important to state that not all Loan Originators use such practice.

Voluntary Reserve

Monestro has voluntarily created a monetary reserve to reimburse, to the extent of available funds and subject to other conditions of this Policy, the Investors by acquiring their Claims in the event that any Loan Originator does not comply with its Buyback obligation and other conditions of this Policy are met. The Reserve does not guarantee recovery of the Investor’s investment in full or in part.

We make monthly contributions to the Reserve from our own funds. The amount of contributions is determined by us depending on the risk assessment. Typically, the monthly contribution to the Reserve is 0,35% – 0,55% of the outstanding principal amounts of all Claims. In the event that any Loan Originator does not comply with its Buyback obligation, the Voluntary Reserve is used to acquire the Claims from the Investors and make other pay-outs to investors.

Broad diversification opportunities

Have you ever heard of the classic risk management expression “don’t put all of your eggs into one basket’? Diversification is the most crucial component of reaching long-term financial goals while minimising risk. On the Monestro Marketplace, investors can diversify easier than ever. Our Marketplace offers opportunities to diversify by investing in fractions of loans across different borrowers, originators, loan types, and geographies – starting from €10 per investment. What’s more, if investors input their desired diversification parameters into our Auto Invest tool, it happens automatically!
Together, all of these factors go a long way to protect investors and make the Monestro Marketplace an excellent place for an easy, transparent, and diversified investment experience. As with all forms of investment, when investing in loans through the Monestro Marketplace, your capital is at risk. But we do our utmost to make sure this risk is as low as possible.

What risks are associated with investing on the Marketplace?

As with any financial market – the market for P2P loan investment can experience changes and fluctuations. Although the Estonian P2P market became more regulated with the latest Consumer P2P legislation, in general – the P2P market is a relatively new and fast-growing field, and associated regulations might change in the future. These changes can affect interest rates for the short or long run and our Loan Originator’s or our Business model and processes in the future. To mitigate and forecast this risk, we are examining Loan Originator’s economic environment and monitoring ongoing changes in its regulations as part of our Due Diligence. Please read more about what risks are associated with investing through Monestro Marketplace here.

With numerous factors such as economic downturns, crisis and certain geopolitical events, it is hard to predict adverse effects and outcomes in the far future. As with other investment types, these factors could affect the overall market – and thus, the value of your investment and its liquidity. Therefore it is suggested to diversify your investments among different asset types and across geographies.

P2P loans are less risky

Although any investment has a risk of loss – Investing in P2P loans has less short-term volatility and typically lower risk than investing in stock and needs less initial capital to get started than real estate investments.

Meanwhile, with an average annual interest rate of 9% – 12% on Monestro – P2P investments offer higher returns than similar yet traditionally safer investment options such as bonds (Corporate bonds average returns between 3% – 5%).

Deposits: average interest rate for bank deposits redeemable at notice up to 3 months in the EEA (1 Jan 2003 – 30 Nov 2019). Source

Bonds: average annual returns for the Bloomberg Barclays Global-Aggregate Total Return Index over the last 15 years (as of 31 Jan 2020). Source

Stocks: annualised net returns for the MSCI World (29 Dec 2000 – 31 Jan 2019). Source

Real estate: annualised returns for the S&P Global Property (USD) over the last 10 years, as of 6 Feb 2020. Source