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Zopa in the current climate
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That's because the regulator for lending to consumers is the Office of Fair Trading, not the Financial Services Authority. Zopa has a consumer credit license from the OFT.Zopa is conducting regulated financial transactions but apparently the FSA think they don't need to regulate them
The OFT has agreed that consumers lending to other consumers will not need an consumer credit license at leas tup to 25,000 per lender. Above that Zopa requires that they obtain an individual consumer credit license.
The lending is from one consumer to another consumer with Zopa merely in the middle. The contracts are between the two consumers. Consumers are not required to have an FSA authorisation before they borrow money, whether it's from another consumer or not.
You seem to have looked at the Listings part of the site. Did you also look at the Markets part that does most of the lending? That uses traditional loan underwriting. Both parts check employment and credit history and you can see a credit score and a stability measure on the Listings pages.they're using undocumented screening methods and the lending mechanism seems to be based on a dating website
Why do you believe it's a pyramid scheme? No lender makes any money from other lenders and that's the essence of a pyramid scheme. There is often a referral scheme but that's available to all, including you and MSE (which appears to use it).somehow this whole pyramid scheme keeps running?
That is alleged to be a Ponzi scheme, not a pyramid scheme. While I don't think it's the case that Zopa is a Ponzi scheme, I don't have enough information to rule out the possibility.Zopa doesn't happen to be run by Mr Madoff's English cousin, does it?....
That's easy. The banks are leveraged lenders with capital of their own (from their shareholders) that's typically less than 8% of their total lending and the rest of the money lent is borrowed money. If people withdraw savings from a bank or default on loans it may be forced to repay ten times as much in its loans as the amount withdrawn so that it can stay with the multiplier allowed for the borrowings. Lenders on Zopa lend their own money, almost always with no leverage at all. So unlike the banks, the most a lender at Zopa can lose is 100% of their money. The banks can lose ten times as much as they have lent. Or more.So I take it that everyone who is a lender on Zopa has a strong, reasoned argument as to why their type of lending is totally different to the lending that's taken down the major banks?
What's been taking down banks isn't defaults. It's defaults on leveraged lending that lead to a shortage of cash.
Consumers aren't lending with leverage so they can't be faced with the problem of having to pay back ten Pounds in loans if they lose one Pound to a defaulting consumer. That's what has hurt the banks.And whilst the major banks tighten their belts and lending, Zopa has a very good model that explains why you should do the opposite?
There remains increased risk of defaults, but it's not primarily the defaults that have caused the banks pain, though they started it. It's the leverage and consequent deleveraging after the defaults.
Zopa in general has so far managed a default rate that's pleasantly below the estimates. It's possible that consumers really are less likely to default on loans from other consumers than on loans from banks. Still, some will lose their jobs and be unable to repay and some will simply steal the money. And it's very likely that default rates will increase. Whether they will increase to above the bad debt estimates that prudent lenders use is a more difficult question to answer. We simply don't know.
It's a risk. So is putting money in savings accounts, shares or bonds. Each of us decides which of those risks to take and in what proportions.0 -
jamesd - I thought ponzi and pyramid schemes were the same thing0
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Do Something Amazing - Give Blood0
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The OFT has agreed that consumers lending to other consumers will not need an consumer credit license at leas tup to 25,000 per lender. Above that Zopa requires that they obtain an individual consumer credit license.
I seem to recall from a post on their boards, that the limit was inititally proposed by Zopa themselves, something they perhaps regret setting 'too low.'Conjugating the verb 'to be":
-o I am humble -o You are attention seeking -o She is Nadine Dorries0 -
jamesd, I think you took some of my comments more literally than I intended...The lending is from one consumer to another consumer with Zopa merely in the middle. The contracts are between the two consumers. Consumers are not required to have an FSA authorisation before they borrow money, whether it's from another consumer or not.
This smacks of evasion-on-a-technicality to me. Zopa are a company facilitating regulated financial transactions. Regardless of whether it's effectively consumer-to-consumer lending, Zopa is fundamentally involved - the transaction cannot occur without Zopa. It's hardly different to Paypal, which is similarly consumer-to-consumer financial transactions and is covered by the FSA.You seem to have looked at the Listings part of the site. Did you also look at the Markets part that does most of the lending? That uses traditional loan underwriting. Both parts check employment and credit history and you can see a credit score and a stability measure on the Listings pages.
You're right, I was looking at the listings section. I didn't realise there was an alternative lending mechanism, but having read it I still think the "markets" section is only marginally better than the "listings". You're still taking direct exposure to unsecured debt.Why do you believe it's a pyramid scheme? No lender makes any money from other lenders and that's the essence of a pyramid scheme. There is often a referral scheme but that's available to all, including you and MSE (which appears to use it).
My reference to Madoff wasn't to define Zopa as a pyramid or ponzi scheme, or whatnot. It was simply a humorous aside to highlight how I think this whole system is built on a house of cards. For example, let's take a hypothetical situation where the owners/operators of Zopa simply do a runner with the cash (not inconceivable, take the Phoenix Venture Holdings/MG Rover situation for a classic example), or alternatively go bust. In that case you'll have thousands of creditors who have no way to retrieve their money from their debtors. The debtors also have no incentive to pay, and the whole thing collapses.
I'm sure I could come up with several other scenarios that end in tears...That's easy. The banks are leveraged lenders <....> Lenders on Zopa lend their own money, almost always with no leverage at all. So unlike the banks, the most a lender at Zopa can lose is 100% of their money.
I edited down your paragraph to the salient points. You're right, banks use leveraged lending. Zopa lenders don't - or at least you'd hope they don't, but with the prevalence of people insane enough to try "stoozing" perhaps there are a few stupid ones. However the underlying problem is the same - the inability of debtors to pay their creditors, and that was the point I was making.
Your last sentence is the important one. A Zopa lender could lose 100% of their money. You're risking 100% of your capital, in an unregulated company, making unsecured loans, for a 9% return (I'm taking 9% from other posts in this thread). That is a massive, massive overshoot of the risk/return equation.What's been taking down banks isn't defaults. It's defaults on leveraged lending that lead to a shortage of cash.
I beg to differ. Defaults are exactly what's been taking down the banks and causing massive writedowns. The leveraged lending is somewhat incidental within the context of this Zopa discussion.Zopa in general has so far managed a default rate that's pleasantly below the estimates. It's possible that consumers really are less likely to default on loans from other consumers than on loans from banks. Still, some will lose their jobs and be unable to repay and some will simply steal the money. And it's very likely that default rates will increase. Whether they will increase to above the bad debt estimates that prudent lenders use is a more difficult question to answer. We simply don't know.
I predict the economic situation to worsen significantly during 2009. Distressed consumers will not care where their loan has come from when they can't afford to service it and put food on the table - thinking otherwise is romantic hope & idealism (which, actually, is what Zopa plays on with its "People lending to people" motto). As an investor, becoming a lender on Zopa is a bad decision in my opinion.It's a risk. So is putting money in savings accounts, shares or bonds. Each of us decides which of those risks to take and in what proportions.
I totally disagree. Putting money into big-bank savings accounts (meeting the FSCS limit etc etc etc) is absolutely safe. Putting money into equities is safe as long as you know what you are doing. The same with bonds. Zopa is a lending mechanism that the investor has no control over, and represents a massive risk for a mediocre return. I'd choose penny shares over Zopa to start with, and Zopa would have to offer 15%+ returns before it would begin to look attractive to me (as a high risk investment).
Just my opinion.Mmmm, credit crunch. Tasty.0 -
With ZOPA using a credit scoring system and rejecting a large proportion of potential borrowers, surely the risk/return ratio is acceptable against any other investment.
I've lost 24% on my equity investment returns, and my endowment is struggling to give me a return of 5% pa and that's over 20 years!Target acheived: _party_ Mortgage offset in June 2012!_party_Mortgage = -£98Endowment = £0Investments = £40,247[STRIKE]Deficit[/STRIKE] / Surplus = £40,149(at 22/09/2017)"Don't spend then save, save then spend!"0 -
With so much cash swashing around in the Zopa holding account, the risk/return ratio in a normal savings account appears to look more favourable at the moment.With ZOPA using a credit scoring system and rejecting a large proportion of potential borrowers, surely the risk/return ratio is acceptable against any other investment.0 -
Admittedly a wondrous time for borrowers right now.0
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Let's hope they can afford to pay it all back, otherwise Zopa lenders are going to end up taking a nasty hit!TechnoBadger wrote: »Admittedly a wondrous time for borrowers right now.0
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