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In Search Of Contradictory Information
In assessing lending risks, it's useful when you uncover contradictory information on a P2P lending company. So, today, I'm going to list a variety of very typical contradictions that we see, using real-life examples. I'll help you learn how to spot them and give you some ideas on what to do with that information.
When you dig up some conflicting information on a P2P lending company, it can help you to judge whether you will lend through it, how much you will lend, and sometimes even how you will lend – meaning what your strategy will be.
Anyone can make a mistake, even the best P2P lending companies. So the contradiction could be completely harmless. But it could also be a sign of outright lying, of soft and overly flexible lending standards, of incompetence, insufficient resources, over-aggressive marketing tactics, fraud, or simply a lack of enough respect for lenders.
At 4thWay, we are able to collate a great deal more data than lenders and we typically have access to key team members, heads of credit, CEOs and founders. So we have many different points of contact for which we actively seek out contradictory information or signals.
But there's an awful lot that you can do yourself at home as a lender in seeking out the inconsistencies that can be so revealing. Especially when there are many of them or when they are combined with other yellow or red flags.
You could assemble quick ideas of your own of other flags by reading 4thWay's 10 P2P Investing Principles or Fend Off Peer-To-Peer Lending Fraud & Incompetence – A Checklist.
Don't over-react to contradictions
Before I list some typical contradictions and help you use that information in your P2P lending, I just want to give you a general piece of advice: don't react knee-jerk fashion to contradictions.
In investing – including money lending – it's a mistake to react quickly without taking enough time to calmly consider all the facts, mull them over, research some more, and make a decision slowly.
Because it leads to worse results for you if you buy and sell your investments in a panic. If you're having those kinds of feelings, you need to think seriously about whether you really know enough about the investment at this stage. Lack of knowledge isn't the only cause of consternation for investors, but I think it's the most common one.
Now, here we go – onto listing some of the different contradictions:
Conflicting information about lending standards
CrowdLords was a P2P lending company that didn't last too long. I believe lenders were all repaid or are on course to being fully repaid, but it was a very inexperienced company that made mistakes.
One type of loans that it approved were loans to property developers. It publicly set a limit on the amount developers could borrow. This limit was 70% of the hoped-for sale price of the completed development. That's a great, strict standard for these kinds of loans.
However, it showed separately that it would actually go up to 85%, which is a lot riskier. Not only that, but it would do so on junior debt, meaning the risk of a total loss for lenders on any individual loan was considerably higher.
How to spot this contradiction in lending standards
You should be making notes before lending about all the criteria and lending standards that a P2P lending company professes to keep. You will then need to look for conflicting information.
You might have seen the contradiction for yourself, if such a loan was listed on CrowdLords and you did a simple calculation of the total lent versus the expected sale price of the development.
Another way you can look into this contradiction is by looking at a P2P lending company's detailed data, when it's available. Some of them publish their full, historical loan books in a spreadsheet. By looking through each loan for yourself, you can typically find out what many of its standards are in practice.
What a contradiction in lending standards could mean for you
This sort of contradiction can show, I think, a reasonable-to-high chance that lending standards are either airy-fairy, not strictly understood and adhered to across the company, or plucked somewhat out of the air. One way or another, it's unsettling that professed standards can easily be shifted in a dramatic way.
It's not a certainty that this contradiction reflects a real problem, though, especially if it's just an isolated loan or two. There could be a good explanation for it. So you might first look into it further.
To do that, you could ask the P2P lending company about the story of the loan and borrower, and how it came to be approved. But don't mention the suspiciously high LTV, at least in your initial questions.
They might explain, for example, that it's an extremely rare exception made to a wealthy borrower with an excellent record, who has contractually agreed to put up other property security up as well.
Out-of-date, incorrect information about lending results
ArchOver had web statistics claiming “Borrower defaults: £0”, but this was after borrowers had gone into administration and ArchOver had appointed debt collectors.
Crowd2Fund had a page on its website that had long been saying no loans had ever gone into default, but at least four loans had been passed to its bad-debt recoveries unit at that time.
How to spot out-of-date, incorrect information about lending results
Look to 4thWay's research and whether we are showing bad debts or late loans where the P2P lending company says there are none, or few.
Look to any, more detailed, information on individual loans you can find on the provider's website, especially when logged in.
Sign up to their newsletter to get hints or even direct information about any loans with potential issues.
Look to what other lenders are saying about the performance of their own loans with the P2P lending company.
What out-of-date, incorrect information about results could mean for you
There can be many causes of incorrect information about bad debts: a technical or human error on the website, a deliberate delay to updating figures so they look better for longer, lack of resources to update punctually, the grossly mistaken belief that it's not important to update punctually in these cases, or a lack of care for the information that lenders and prospective lenders receive. There are surely other reasons too.
You could point out the omission to the P2P lending company. Do it gently and not forcefully, because their response will be more indicative. If they are hugely apologetic and immediately update their website, it means they are possibly as horrified as you are about the situation, which is the correct response on their part.
If their reaction is anything less than that, it's probably at least a yellow flag, if not an orange one, in terms of how you should now think about this particular lending platform. You want to see that these people are very interested in numbers, especially accurate ones, since money lending is largely about numbers. Sloppiness of this kind is not a good sign.
Alarming lack of information contradicted by lender enthusiasm
SoMo is a very rare P2P lending company. On the one hand, it's extremely opaque, particularly in that it typically takes years to update its performance statistics. Yet it also gets overwhelmingly positive feedback from lenders. That's not a typical combination, as you could probably imagine.
To take a completely different example, FundingSecure, the disgraced P2P lending company, provided confusing and unclear statistics that appeared to show virtually zero bad debt. Quite a lot of lenders continued to hold it in high regard, right up to the point where it collapsed and the problem debts revealed themselves.
How to spot this contradiction and figure out how important it might be
SoMo and FundingSecure are very different businesses. One key way they differ is that SoMo acknowledges late debts and bad debts quickly. It takes rapid, aggressive action to recover those debts. In contrast, FundingSecure was basically denying loans were a problem.
Lack of information is never good, including in SoMo's case. But what's particularly important here in distinguishing between the SoMo's and the FundingSecure's is context. What you're looking for is other signs about how loans are performing or whether problem loans are being dealt with. Or even looking earlier in their processes, such as the criteria and methods they use to approve loans.
The context for FundingSecure is that it was allowing borrowers to roll over their loans for another six months by merely paying the interest due, no questions asked. It stated this clearly on its website.
You could see for yourself that many loans were rolled over again and again. In the meantime, lenders could also have looked for answers about it's implausibly low level of loans turning bad or being written off – especially for the high interest rates involved.
The context for SoMo is a mirror image of this. SoMo states clearly that it pursues debts swiftly. Online reviews from both lenders and borrowers also claim that it pursues late debts rapidly, perhaps even aggressively, and successfully recovers them.
Rapid action (if not aggressive action) is absolutely required for the sorts of high-interest rate, property-secured loans that SoMo does. This is so there's a decent chance of ultimately recovering bad debts. It also gives clarity to lenders earlier on about how the loans are really performing.
What this contradiction could mean for you
SoMo really should do a lot better in updating information and statistics. (Coincidentally, I've just seen that SoMo has tried to get in touch with me to start providing more information to 4thWay – I hope to report good news on that soon!)
But SoMo clearly shows context that, at least to some extent, offsets the poor information provided on its website. This makes it less likely that its slow, slow updates on performance are because it has something to hide. It means that you might not necessarily cast SoMo off your shortlist in an instant. With more digging and research, you might decide to put some money into its loans.
The FundingSecure's in the world can more easily be removed from your shortlist. Yes, they still have some positive reviews from lenders, but their unclear performance information is combined with a policy of allowing borrowers to kick the can down the road. With no clear evidence that they're pursuing problem debts strongly and quickly, the overall picture is a red flag.
Contradictions caused by sales talk
Sourced Capital is extremely salesy. For example, last time I checked, it was still bragging on its website about having “100 offices”.
What it really means is that it has had 100 customers in the property industry.
These customers are franchisees that pay a fee to effectively join the Sourced club to learn more about developing, to build connections, to get support, and also sometimes to get opportunities of funding through the Sourced Capital P2P lending platform.
It's good for Sourced if it already has 100 franchisees. But 100 customers and 100 offices are two very, very different things.
How to spot this contradiction between fact and sales talk
Sales talk of this kind is all about making really powerful claims to get you excited. Your emotions are to drive your decisions, rather than your cool, calm understanding of what you're getting into.
It usually takes just a small amount of effort to find out if there's any truth to claims that sound amazing. You just need to give a bit of thought to what the consequences of the claims are, and look for supporting evidence.
For example, if a business really has 100 offices, it's going to be a very large business indeed. With that many offices, a quick glance at the latest company accounts in Companies House's free online database should show you that Sourced has tens of millions of pounds of revenue (if not hundreds of millions) and many millions of pounds of profit.
In contrast, Sourced's accounts are still the abbreviated ones that you would usually expect to see for a startup P2P lending company at an early stage in its life.
Such accounts are not independently audited and contain little information, because Sourced simply doesn't have much revenue and so it's not required to provide those figures yet. With little revenue, it usually means it's not profitable. Again, that's what we'd expect for Sourced this early in its life.
If you read further into its latest accounts, you'll see the average number of employees in the year was 15. And that includes the directors and founders.
With 100 offices, those employees have got an awful lot of office space between them.
What this contradiction could mean for you
Based on seven years of assessing this industry, I'd say there's at least some correlation between down-to-Earth honesty and results. In contrast, those that use more sales talk or marketing, those that exaggerate or tell seemingly white lies to make their businesses look bigger – these ones don't correlate as well with great results.
The correlation isn't perfect, by any means. Some people are just born and bred salespeople, and that certainly is the case for Sourced's CEO. Some people can't help themselves and they even believe it's the only way that a new business can succeed. There are quite a few books for entrepreneurs that can be blamed for such thinking.
But that doesn't mean that these salespeople and their businesses are all just talk. Perhaps they are surrounded by people with more relevant skills to P2P lending or that they have those skills themselves, on top of their sales patter.
This sort of sales talk is therefore more of a yellow flag than a red flag. It's one aspect of the business that you are to keep in mind, along with the moral hazard that goes with it.
So, you don't necessarily have to remove such a P2P lending company from your shortlist. But take a look at the other aspects of its proposition, and see whether it looks fantastic or whether you find a few more yellow flags. As usual, don't lend unless you have zero doubts about a P2P lending company.
Bigging up the staff
Here's how this sometimes plays out, in real life:
- Saying a key person has 20 years experience in finance. And yet you can find no details of that background on the internet – because the experience was irrelevant, being nothing to do with money lending.
- Stating that they have someone on the team with ten years' experience as a credit analyst and head of credit. In reality, it was just a freelancer who did a few months' work for them, as a quick glance at the person in question's LinkedIn profile will tell you.
- Showing off a highly experienced director on the website – long, long after they resigned as a director, as shown in their public entry at Companies House.
Bigging up employees and directors is one form of sales talk that is especially relevant. Because it doesn't just tell you something about the character of the people running the P2P lending company. It's not merely a moral hazard. The skills and experience of its people are highly indicative of the quality you might expect of the underlying loans you are going to lend in. So it's supremely important.
How to spot it when staff are being bigged up
From your desk at home, for free, you can often find useful information in just a few minutes using the usual, basic resources:
- Read the profiles on the website in full and assume the worst if they are not very specific about their career history, training and experience.
- Look to LinkedIn and Web articles about these people for more information.
- Search the internet for their name and the job titles or companies that they professed to work for, to see if you can find anything about them doing what they said they did.
- Check out their entries in the Companies House register.
- Ask the P2P lending company if the individual is a full-time member of staff.
- Write to the person directly through contact details on the website or through a message on LinkedIn to ask what their role is and roughly how many hours a week they have done over the past month.
What this contradiction could mean for you
Mostly – but not always – when a P2P lending company bigs up its staff, it's not trying to deceive you about its capabilities. It just wants to look bigger and more impressive.
While we always like to see a huge amount of experience, smaller P2P lending companies often don't actually need a full-time person with a lot of training and experience. They genuinely can outsource to a freelancer for a few months' work, perhaps with ongoing advice when needed. So that person's skills are still highly relevant for you and the P2P company.
However, the more complex the lending is, or the higher risk it is, the more internal experience you'll want to see from the actual team. Furthermore, exaggerations, omissions or lies about staff still reveals a level of moral hazard. Down-to-Earth honesty is always going to be better for lenders.
If you're interested in learning more about assessing P2P lending companies, check out the recent What You Need To Know About P2P Bridging Lending.
You may also be interested in The Impact Of Inflation On P2P Lending Results.
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Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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