Peer-to-peer lending sites: MSE guide discussion

bigadaj

I believe Lendy introduced overriding terms into their general agreement with borrowers and lenders that they claimed overrode the loan specific terms, this appeared to be a few months before they went into administration.

The administrators do not appear minded to rule that the contract term is unfair, possibly because the likely consequence of it would be to increase the return to creditors at the expense of secured lenders.

Teh consequence of the waterfall is to change the order of payment of returns on defaulted loans but also because the penalty interest is so high it means that the balance of payment between creditors increases very rapidly at the expense of secured lenders.

It's a ridiculous situation but appears to only be able to be overturned by going to court. The minimum sums have now been raised for legal representation by the lenders so there will presumably be a court date set in the next few months.

Another consequence of the legal case is that the administrator can carry on charging fees for longer at typically £300-500 per hour so has no incentive to resolve this but profits from delay and longer resolution.

masonic

bigadaj wrote: »

I believe Lendy introduced overriding terms into their general agreement with borrowers and lenders that they claimed overrode the loan specific terms, this appeared to be a few months before they went into administration.

Between the time I signed up on the SavingStream platform and sold my last loan, I never had the opportunity to see the terms of any loan agreement I entered into. The fact the details of the loan contracts were kept secret was a concern to say the least. Presumably Lendy eventually had to be more transparent and there was some term within those loan contracts allowing penalty interest to be charged and granting lenders some share of it, perhaps all of it. The question remains whether any penalty interest was actually paid by borrowers, and if so how much?
(Edit: Apparently this is estimated at £20-30m against a loanbook of £152m, which seems very high given borrowers were already being charged about 1.5% per month, some loans would not have incurred any penalty interest and some borrowers would not have paid any penalty interest they were charged)

The administrators do not appear minded to rule that the contract term is unfair, possibly because the likely consequence of it would be to increase the return to creditors at the expense of secured lenders.

Teh consequence of the waterfall is to change the order of payment of returns on defaulted loans but also because the penalty interest is so high it means that the balance of payment between creditors increases very rapidly at the expense of secured lenders.

It's a ridiculous situation but appears to only be able to be overturned by going to court. The minimum sums have now been raised for legal representation by the lenders so there will presumably be a court date set in the next few months.

Normally such an issue could be resolved through the Financial Ombudsman Service, which can be done even when the firm being complained about has later gone into administration. The issue with a company like Lendy, who is FCA Authorised, but whose authorisation is as a P2P lender, is that a decision from an Ombudsman, while legally enforceable would presumably not be backed by the FSCS, like it would for an upheld complaint about a stockbroker or investment platform, so such a decision would place the investor no closer to the front of the queue of creditors.

Neither, presumably, would direct court action under the Consumer Rights Act against Lendy for making the unfair change to the terms. So, I suppose this court action is being brought against the administrator, presumably for not acting in accordance with the Insolvency Act and related legislation, which could be somewhat challenging.

Another consequence of the legal case is that the administrator can carry on charging fees for longer at typically £300-500 per hour so has no incentive to resolve this but profits from delay and longer resolution.

Indeed, and the legal process is not renowned for being quick or efficient. As well as their ongoing fees, the administrator would also be entitled to recover legal fees from the disposal of trust assets, unless the court ruled otherwise. Needless to say, there can be no distribution to creditors or investors until the legal matter is concluded and the appeal process exhausted.

Kendall80

bigadaj wrote: »

Another consequence of the legal case is that the administrator can carry on charging fees for longer at typically £300-500 per hour so has no incentive to resolve this but profits from delay and longer resolution.

What is worse is that everyone knows this including the FCA. Yet nobody does a thing about it. Instead, the only people to profit out of this debacle will be those who 'screwed it up' in the first place and those brought in to 'wind it up'.


Forget the 'little guy' for he has negligible protection and insufficient resources to advance his claim/concerns. The financial services industry in this country is a stitch up designed to take money from those with little and 'redistribute' it to those with more.

bigadaj

Masonic I agree with soem of your comments but you seem to be missing some points.

Terms were unilaterally changed and parties deemed to accept, you would think this was a fairly basic unfair term in any contract, let alone a consumer one, but lenders are having to go to count to get it overturned.

The point in relation to actual penalty interest also needs explaining.

Many of lendys loans effectively defaulted several years ago, but Lendy never put these into default formally. Therefore Lendy have now applied the default rate of interest for the time that payment hasn't been forthcoming. Once this is combined with the fundamental mis valuations that seemed the case on many if not most property loans, then lenders security is largely wiped out.

So the say 50% returns that might be expected in many loans are being gobbled up by Lendy, which is then distributed to creditors, including the former Lendy directors.

If that want enough then many of the properties seem to be purchased by the original borrowers, having put the Spv into liquidation, at a fraction of the original valuation, sums borrowed and often a knock down price. The penalty interest helps that process as stringing out teh sale to maximise return isn't effective if penalty interest continues to roll up.

It's a real car crash of situation, with tens of millions of typically small investors money being spirited away. If teh fca were in any way effective this would have been fully investigated, if it was the us people would already be on criminal charges but financial protection for investors in the uk is very poor.

masonic

bigadaj wrote: »

Masonic I agree with soem of your comments but you seem to be missing some points.

Terms were unilaterally changed and parties deemed to accept, you would think this was a fairly basic unfair term in any contract, let alone a consumer one, but lenders are having to go to count to get it overturned.

I didn't miss that part. I agreed that the change would be considered unfair under the relevant legislation, which in this case is the Consumer Rights Act. It would also fail the fairness test based on the FCA's TCF Principles. I don't think non-consumer contracts are required by law to be fair, providing the terms are clear, so I don't follow your point that it would be a fairly basic unfair term in any contract.

As I mentioned, the normal recourse (of complaining to the firm and then referring that complaint to the FOS, and then ultimately taking that legally enforceable Ombudsman decision to the FSCS for compensation) probably isn't available because Lendy is under a different regulatory regime to other types of investment firms and exempt from FSCS cover. Which is a rather unique situation among FCA authorised firms and itself unfair IMHO.

The point in relation to actual penalty interest also needs explaining.

Many of lendys loans effectively defaulted several years ago, but Lendy never put these into default formally. Therefore Lendy have now applied the default rate of interest for the time that payment hasn't been forthcoming. Once this is combined with the fundamental mis valuations that seemed the case on many if not most property loans, then lenders security is largely wiped out.

So the say 50% returns that might be expected in many loans are being gobbled up by Lendy, which is then distributed to creditors, including the former Lendy directors.

So you are saying assets are being disposed of during recovery and the proceeds are to be used to repay Lendy's penalty interest as a priority over return of capital to lenders? If so, I am surprised by that and I now understand why said penalty interest is estimated to be in the tens of millions. That's very naughty and something that a regulator ought to have stepped in and stopped as soon as it was brought to their attention by investors who were given notice of said change. But in the light-touch regime of P2P I'm not surprised the FCA did nothing to prevent such a thing happening.

Treating recovered capital as interest is rather fitting, given the fact that many of the borrowers were funding interest payments using the money lent to them all along (i.e. borrowing more to cover the interest payments).

If that want enough then many of the properties seem to be purchased by the original borrowers, having put the Spv into liquidation, at a fraction of the original valuation, sums borrowed and often a knock down price. The penalty interest helps that process as stringing out teh sale to maximise return isn't effective if penalty interest continues to roll up.

It's a real car crash of situation, with tens of millions of typically small investors money being spirited away. If teh fca were in any way effective this would have been fully investigated, if it was the us people would already be on criminal charges but financial protection for investors in the uk is very poor.

Unfortunately that part is characteristic of the business and doesn't surprise me one iota. It was Lendy's early dodgy dealings, and it's assurances that lending to borrowers with a recent past of financial misdeeds was perfectly fine, that caused me to jump ship before it sank.

masonic

Kendall80 wrote: »

What is worse is that everyone knows this including the FCA. Yet nobody does a thing about it. Instead, the only people to profit out of this debacle will be those who 'screwed it up' in the first place and those brought in to 'wind it up'.

Forget the 'little guy' for he has negligible protection and insufficient resources to advance his claim/concerns. The financial services industry in this country is a stitch up designed to take money from those with little and 'redistribute' it to those with more.

This is why the 'little guy' should generally stick to mainstream investments, and mainstream excludes things like P2P. It's certainly a lesson I've learned the hard way.

bigadaj

with respect to the contract issue its not a question of fairness or consumer protection, its the fact that contract has been unilaterally changed, which is a basic tenet of contract law.

what appears to have happened is that the administrators have arrived and taken the contracts as they were when they commenced rather than those agreed to when the contracts were formed. their preliminary legal advice didnt conflict with that and it was beneficial to them and the creditors they represent.

i believe that the administrators aren't liable if they act in good faith, so the court case is to clarify the order of payment and legality of the waterfall, in full or part, following which the administrators will have to follow that judgement. i don't believe the administrators would appeal any decision which is not to say that other creditors may not.

masonic

bigadaj wrote: »

with respect to the contract issue its not a question of fairness or consumer protection, its the fact that contract has been unilaterally changed, which is a basic tenet of contract law.

what appears to have happened is that the administrators have arrived and taken the contracts as they were when they commenced rather than those agreed to when the contracts were formed. their preliminary legal advice didnt conflict with that and it was beneficial to them and the creditors they represent.

i believe that the administrators aren't liable if they act in good faith, so the court case is to clarify the order of payment and legality of the waterfall, in full or part, following which the administrators will have to follow that judgement. i don't believe the administrators would appeal any decision which is not to say that other creditors may not.

The contract will contain conditions under which either party can vary the contract. Unilateral changes are acceptable and common in consumer contracts. For example, most consumer contracts have a clause whereby the company can change the terms providing they give adequate notice and allow the other party the opportunity to dissolve the contract should they not wish to accept the new terms. Should the other party exercise that option, they would be able to continue under the existing terms until the contract had been dissolved, during which time they would not be able to take any actions that would cause the duration of the agreement to be extended (such as investing in loans in the case of P2P).

Lendy made a couple of variations to my contract during the time I was there and they followed the process above.

Perhaps there are a few individuals who refused to accept the new terms when they were introduced, and those people would have a case that they should be held to the terms of the contract they entered into as amended prior to that most recent change. However, I suspect the vast majority did not reject the variation to the terms.

I'm presuming in the above that the 'waterfall' is established in the general contract between Lendy and the lender, not each individual loan agreement between borrower and lender in which Lendy acts as agent. The loan agreements will most likely detail what the borrower needs to repay under various scenarios and not how this is split between Lendy and the lender.

If not, and the 'waterfall' was detailed in individual loan agreements but not the general lender terms, then it's very likely lenders were not even aware a change had been made. I mentioned before that I'd never had access to any of my loan agreements with borrowers, nor even a general template, so had no idea what terms they contained. Can a loan contract be valid if it contains terms one party has neither seen nor agreed? There could be a scenario in which the borrower has agreed to terms that are in conflict with the terms the corresponding lender is deemed to have agreed. Hopefully someone involved in this fund raise has already had sight of those loan agreements and has ensured they will be considered valid in light of this challenge, because there is some risk they may not.

masonic

Further to the above, I've taken a look at the lender T&Cs and it seems the waterfall was outlined in these:

Lender T&Cs dated 11/07/2018
"13.3 In the event of a shortfall in the amounts available for repayment of the Loan, the available proceeds will be paid in the order set out in the Loan Agreement, as follows: first, payment of any unpaid fees, costs and expenses of the Agent under the Finance Documents; second, payment of any accrued interest, fee or commission due but unpaid under the Loan Agreement; third, payment of any principal due but unpaid under the Loan Agreement; and fourth, payment of any other sum due but unpaid under the Finance Documents. However, Lendy may, and Saving Stream Security Holding may, vary this order in their discretion."

So it does appear the default waterfall in the lender terms is the one the administrator intends to use, and no changes have been made to these terms since July 2018.

The lender T&Cs also state:
"Each agreement between each lender and borrower comprises a Loan Agreement, a Loan Confirmation and an accompanying Term Sheet setting out the specific details of the loan (together the "Loan Contract"). There will be more than one lender for each loan (and each Loan Contract is a separate agreement between you and the borrower and is governed by separate terms and conditions. If there is a conflict between these terms and conditions and the Loan Contract, the Loan Contract will prevail. Please note that under clause 9 of these terms and conditions you grant us the authority to amend the Loan Contract (without the need for your agreement to those changes and you will be bound by those amendments)."

And in clause 9:
"9.8. You agree that Lendy will be acting as your agent on your behalf in:

9.8.1. negotiating and agreeing amendments to the Loan Contract in accordance with clause 9.6 above; and
9.8.2. negotiating and settling any dispute relating to the Loan Contract.

9.9. You hereby appoint Lendy (for the duration of your membership of the Lendy Platform) as your agent on your behalf with full power to carry out those amendments referred to in Clause 9.8 without your specific agreement. You will then be bound by those amendments. You agree and acknowledge that Lendy shall take on no liabilities, obligations or rights under the Loan Contract as a result of such agency, and you agree that you will continue to be solely liable and responsible for the rights and obligations under the Loan Contract (as amended) and Lendy and/or Saving Stream Security Holding will not be liable for any amendments to the Loan Contract."

So it seems to me that overturning the waterfall would necessitate establishing that the terms granting Lendy authority to enter into these contracts on lenders' behalf were unfair and should be invalidated. The consequence of which would be that the loan contracts themselves were not validly executed, and the borrower, Lendy and the individual lenders should be released from the agreement. That's not to say the borrowers would not be liable to repay the principal lent by the lenders, but these would presumably revert to unsecured loans to which Lendy and SSSH was not party, and Lendy and SSSH would not have been entitled to collect any interest, fees or hold legal charges over assets used to secure the loans. There's a general principle that unfair contracts only need to be modified to the minimum extent to make them fair, but I can't see a smaller change is feasible than revoking those parts of clause 9.

bigadaj

The date of the change to the general contract is important, I stopped investing in Lendy in early 2017 and had fully exited by late 2017 or possibly very early 2018, I remember having some concerns about the debacle around the London loan as it was made just after I left and had mild concern I could be drawn into a court case if the liability was found to extend to all lenders, unlikely and illogical as that sounds.

I'm not sure if Lendy actually made any loans after July 2018, there were certainly very few if they did so. So teh change in terms appears to have been a cynical ploy by the comoany at that time anticipating administration a few months later, acting against the interests of the lenders for whom they act as agents.

The introduction of the July 2018 terms and conditions was commented on on the p2p independent forum, and some posters explicitly stated they had contacted Lendy and formally rejected those new terms; as above very few if any lenders would have lent more money on the site so could be deemed to have explicitly accepted.

Ultimately the courts are the only option and natural justice won't necessarily prevail so it will be an interesting case to observe. Lendy seems to have almost single handedly pretty much killed off p2p lending, certainly of the 'higher' risk and rates nature.