What are loan originators ?
A loan originator (often abbreviated as LO) is a company that lends money to borrowers, before putting to loan for sale through loan marketplaces such as Mintos, Iuvo, PeerBerry, Debitum Network or Viventor.
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.
This article will primarily focus on Mintos loan originators, as this platform is much larger than their competitors. It also features many more originators, and their reliability vary greatly compared to Iuvo‘s or PeerBerry‘s more uniform selection.
A parallel between loan marketplaces and e-commerce marketplaces
Consider your experience shopping with Amazon. When browsing for one item kind, you’re usually spoiled with choice :
- At the top of the price scale, there are premium brands, which are expensive but usually very reliable.
- On the opposite side, you’ll find plenty of very cheap Chinese items from dubious sellers. Your purchase may stop working after a few days – if it ever gets delivered -, and it may actually be poorly designed to the point of being dangerous.
- Between these two extremes, you’ll also find find items from intermediary brands, which usually turn out to be okay and offer a great quality/price ratio.
It turns out that loan originators in loans marketplaces such as Mintos or Viventor are just as diverse. There are very reputable ones, such as Mogo or IuteCredit. They’re usually large established companies, which have an excellent track record and provide a great level of transparency. At the same time, there are many small and sometime very obscure lending firms, with roughly no track record and a few months of existence.
The danger of being greedy
Here’s a concrete example, from early June 2020. I examined Euro loans secured by a buyback guarantee on Mintos primary market. Dozarplati, Sun Finance or E Cash all offer interest rate above 20%. These are much higher than interest rates for Mogo or IuteCredit, which are 13% and 14%. It’s thus very tempting to invest in loans yielding 20+%, right ?
Except that… Until a few days ago, one could find loans issued in Vietnam by CashWagon, with a 25% interest rate – roughly the same level as Dozarplati & co -. And guess what ? CashWagon’s Vietnamese subsidiary got shut down by Vietnamese authorities. The reasons for the closure are still unclear. One plausible explanation is simply that the predatory interest rates (up to 792% APR according to Mintos !) are illegal in Vietnam. Another mentioned the lack of a proper licence. Finally, the aggressive recovery process and a possible theft of data from customers’ phones were also mentioned as possible reasons.
The news got published on Telegram on Wednesday, June 3rd. Mintos reacted 3 days later by suspending this originator, thus disabling all secondary market transactions. This left a lot of time for well-informed investors to unload their CashWagon loans at a discount on the secondary market – most were probably bought automatically by unsuspecting Invest & Access investors -.
As of November 2020, CashWagon is considered as defaulted. Mintos indicated that they expect to recover less than half of the invested funds for loans in India and Vietnam, and even less than one quarter when it comes to loans from Philippines !
Although it could be written off an isolated incident, unfortunately nothing is further from the truth. Many other Mintos loan originators already defaulted, and several other are currently suspended.
My own past mistakes when selecting Mintos loan originators
I must admit that for a long time, I was guilty of careless investing at Mintos. Indeed, in spite of the failure of several originators at Mintos, I never really cared about these important entities. Bankrupt originators were some kind of far-away hypothesis to me; I always tried to get the highest returns, which resulted in a loans portfolio with a poor diversification.
At some point, 75% of my Mintos loans came from only two originators (GetBucks and Express Credit). As we’ll see below, although there’s they used to get good ratings from Mintos (B and B-), independent ratings for them were only 19 and 22 out of 100 ! In particular, GetBucks’s mother company generated huge losses, making this company very unreliable. This helped me realize how risky my portfolio really was.
I was lucky to be able to sell most of these loans – for a discount – on Mintos’ secondary market, as both originators eventually got suspended by Mintos in Spring 2020.
Defaulted and suspended originators at Mintos
Mintos publishes monthly updates about defaulted and suspended companies. As of late May 2020, there are 10 defaulted companies and 5 suspended companies. That’s a rather large chunk out of the 70 Mintos loan originators !
The first defaulted originator was Eurocent, in late June 2017. Two years later, in August 2019, loan originator Aforti defaulted. And since summer 2019, there’s been roughly one new default each month – a situation worsened by the Covid-19 outbreak in Spring 2020 -.
Aforti was also present at Viventor, which shows that other marketplaces aren’t immune to loan originators defaults ! Moreover, as we’ll see below, this lending company also briefly offered loans on Debitum Network, but they quickly got removed thanks to the quality of the platform’s due diligence.
The recovery process is at various stages, but the recovered amounts are far from being impressive. Indeed, three years later Eurocent’s default, slightly more than 50% of outstanding investments got recovered. The recovery level for Aforti after one year is much worse, as it barely reaches 12%. It’s unfortunately safe to consider that many investors will lose part of the invested capital.
In November 2020, Mintos started providing estimates regarding the expected recovery levels and the probable timeline. If investors in loans issued by Fink AM can expect to recover all invested sums by the end of 2022, the expected recovery for Rapido Finance or EuroCent is… zero.
And that’s only the defaulted loan originators; several other are currently suspended as the amount of pending payments is too large.
To sum it up, if defaulted loan originators were for a long time a very rare occurrence, they’ve unfortunately become much more common. Moreover, the consequences of such defaults can be dramatic, as investors may lose all invested funds. We should keep this in mind when tempted to invest in loans sometimes yielding 15% or more !
This emphasizes the importance of selecting the loan originators wisely – and thus the need for information about their reliability -.
Loan originators ratings provided by Mintos
In summer 2018, Mintos started rating their own originators, giving investors an idea of how risky it is to invest with them. The auto-invest feature also allows investors to automatically diversify their investments through selected originators.
Unfortunately, the platform seemed to be reactive rather than proactive when it comes to changing ratings. For example, currently suspended originators such as Express Credit, CashWagon or Capital Service were rated B- by Mintos before their suspension, while Akulaku was rated B+. Both ratings mean “Moderate risk” according to Mintos; current investors would probably beg to disagree. Moreover, as we saw with CashWagon, negative information is often available from other sources several days before Mintos reacts !
In order to address these shortcomings, Mintos unveiled their new Risk Score in late October 2020. It replaces the ratings, and aims at being more transparent. Lending companies are now evaluated based on the following four criteria :
- loan portfolio performance (40% weight in the final score)
- loan servicer efficiency (25% weight in the final score)
- buyback strength (25% weight in the final score)
- cooperation structure (10% weight in the final score)
The result is a score between 1 and 10.
This improved scoring model is a step in the right direction, thanks to the increased level of transparency. However, the suspicion of a conflict of interest still remains, and investors may be tempted to do due diligence themselves. It may unfortunately prove to be a daunting task.
Indeed, finding information about large lending companies is relatively easy; for example, Mogo’s results and reports are available for free on the company’s site. However, for smaller loan originators, it’s much more complicated to obtain these – if they even exist -. Moreover, many of us don’t necessarily have the financial knowledge to read a balance sheet.
The good news is that an independent source of ratings is available for free.
ExploreP2P's ratings for Mintos loan originators
ExploreP2P did all the hard work for us – getting the reports, extracting the relevant information, and summing them up nicely.
They provide ratings for Mintos loan originators. Similar ratings are available for PeerBerry and Viventor . As neither of these marketplaces provides such a rating, these are the only available indicators of the loan originator’s reliability.
Mintos ratings as provided along with ExploreP2P’s so we can compare them. Many loan originators rated B or B- by Mintos get rated below 40 by ExploreP2P, which further questions the reliability of Mintos ratings !
As a guideline, I invest only on loan originators rated 60 or more. I update my auto-update settings monthly, after ExploreP2P’s ratings get updated. I must acknowledge that it’s a rather tedious process. Peer-to-peer lending is sometimes described as a passive investment; although this may hold true for some platforms, it’s far from being the case when using Mintos’ auto-invest !
Basing my investments on these ratings rather than Mintos’ will of course lead to decreased returns.
Always keep in mind that although ExploreP2P’s ratings are more objective than the ones provided by Mintos, they’re not sure-fire. For example, Akulaku got suspended by Mintos in Spring 2020 and was rated 57/100. However, diversifying your portfolio among well-rated loan originators will significantly decrease the likelihood of a large loss due to the default of an originator !
A quick look at loan originators on other loans marketplaces
Not all P2P platforms feature loan originators as diverse as Mintos. Actually, several of them take the opposite approach, by carefully vetting the loan originators.
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’.
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.
PeerBerry : a middle ground
Although many loan originators are present at PeerBerry, the vast majority belong to two large groups – Aventus Group and Gofingo -. Aventus Group now provides a group guarantee for all their subsidiaries, making them equally safe to invest in (ExploreP2P’s ratings for PeerBerry are 60 for all of them).