What are loan originators ?
They commonly provide what’s called a buyback guarantee; this means that if the borrower defaults (usually by being more than 30 or 60 days late), the loan originator will buy back the loan – and often even pay accrued interests -.
In order to encourage originators to provide good quality loans, they have to invest partially in the loan with their own capital (usually between 5% and 15% of the loan amount). This mechanism is called skin in the game.
When buyback guarantee fails : Mintos’ Eurocent
I’ve repeatedly pointed out that the buyback guarantee isn’t an absolute guarantee. Indeed, the originator itself may end up in financial troubles, in which case it won’t be able to honor the buyback guarantee.
This happened with one of Mintos originators called Eurocent. The consequences for the investors are still unclear, as is often the case when judiciary action is triggered. In July 2019, Mintos’ latest update mentioned that the court still didn’t approve the creditor list which was submitted one year earlier !
At least another lesser loan originator from Mintos has defaulted (Rapido), while lesser incidents also happened. This emphasizes the importance of selecting the loan originators wisely – and thus the need for information about their reliability -.
Loan originators ratings provided by platforms
In summer 2018, Mintos started rating their own originators, giving you an idea of how risky it is to invest with them. The auto-invest feature at Mintos also allows investors to automatically diversify their investments through selected available originators.
Grupeer also introduced a rating system in late 2019, although it’s currently not possible to use it for auto-investing, which greatly reduces its usefulness.
How to select loan originators in a better way
For a long time, in spite of the failure of several originators at Mintos, I never really cared about these important entities. I always tried to get the highest returns, which resulted in a loans portfolio with a poor diversification.
Indeed, 75% of my Mintos loans come from only two originators (GetBucks and ExpressCredit). They scored respectively rated B and B- at Mintos ratings, what A being the best rating and F the worst. However, ratings from independent site Explore P2P for these originators are only 19 and 22 out of 100 ! In particular, GetBucks’s mother company generated huge losses, making this company rather risky.
As I plan to increase the size of my Mintos portfolio, I also want to decrease its risk. As a result, I will only focus on loans coming from originators rated at least B- on Mintos and 60 on Explore P2P.
Doing so will of course lead to decreased returns; indeed, while in January 2020 the highest interest rate on Mintos is currently 14.5%, this figure drops to 12.5% when only selecting the safest originators. Moreover, it will force me to update my auto-invest settings every time the ratings change, which is a rather tedious process.
Similarly, Explore P2P provides independent ratings for PeerBerry’s loan originators and loan originators at Viventor . As none of these two marketplaces actually provide such a rating, these are the only available indication of the loan originator’s reliability.
A special case : Debitum Network’s rating system
Recently reviewed Debitum Network has a different way to provide the loan originators ratings. Indeed, their ratings are actually provided by credit rating agencies, instead of being computed by the marketplace itself. The advantage is that these agencies are likely to be more objective, and have a better knowledge of the local credit market. I thus tend to regard Debitum Network’s ratings as more trustworthy than Mintos’ or Grupeer’s.
A proof of the quality of Debitum Network’s risk management was given in summer 2019. Indeed, at that point, Mintos and Viventor investors were somehow left in the dark when there was troubles with the repayments from Aforti. However, investors at Debitum Network didn’t have to worry about it, as all loans from this loan originator got removed from the platform earlier (and the loans already invested in got bought back).
Iuvo : a platform focusing on reliable loan originators
Their criteria are indeed very strict : all the originators have been profitable for several years, and the “skin in the game” is much higher than usual – 30% in most cases, compared to 5% to 15% for most other platforms -.
In addition, the level of detail provided for each loan originator surpasses by far what’s provided by Iuvo’s competitors.
Of course, the high reliability of these loan originators results in decreased returns compared to more risky ones. As of February 2020, the highest interest rates for Euro loans at Iuvo is slightly below 11% – compared to as much as 16% at Mintos. In addition, Iuvo’s buyback guarantee is less favorable than at most other platforms, as it doesn’t cover the interests.