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Inside Loanpad: The Tech Protecting Your Lending Returns
In 4thWay's main update published this week, I wrote about how the financial regulator has put restrictions on Kuflink, due to failings in governance.
“Governance” basically means managing the business in a proper way, with sufficient safeguards for lenders and others.
One of the issues that the FCA has identified was inappropriate loans, funded unwittingly by lenders.
Whatever type of investments you take part in, most companies talk a lot about how their culture is meticulous about good governance – but tracking it from the outside is not easy.
However, I was given the opportunity to have an unprecedented demonstration of Loanpad's in-house software a few weeks ago. And I got to see its ability to support rigorous standards of management and oversight.
Its technology – a collection of custom-made and off-the-shelf software – covers the full lifecycle of loans available through its online lending platform: from the initial application through assessing the deal, working with lawyers, agreeing amounts to lend, approving them, tracking the course of the loan and interest payments, and receiving full repayment from borrowers.
The prerequisites before using technology wisely
Loanpad* has a well designed procedure, encapsulated in three documents: a 13-page underwriting manual, a six-page credit-risk assessment process, and a 12-page loans risk management framework.
Those documents have effectively been incorporated into excellent process flow that reduces error.
It includes comprehensive internal checklists, standardised contracts with all Loanpad's lending partners (which are other lending businesses inviting you to take part in loans), and a standardised set of 31 points for all property lawyers to verify before going ahead with the loan. Loanpad does this to have the confidence that everything that it considers important is covered.
There is no commission attached to lending partners. Staff at Loanpad who are reviewing the applications also receive no commission for closing deals. There are no perverse incentives at Loanpad.
The head of lending is copied into 99% of communications about each loan or application.
Technology to make it work
Above all, it's through technology that Loanpad staff are more or less compelled to follow their well-documented procedures to prevent mistakes and fraud.
The software tracks loans from the beginning of an application to paying out to borrowers and to final closure after full repayment.
Meanwhile, all transactions and entries put into their programs automatically flow into a bookkeeping system for lenders that tracks their position.
All valuation information is fed into an assessment tool that contains all of the paperwork, from valuations to contracts, and answers to assessment questions.
Loanpad's software calculates loan fees automatically, as well as interest and amounts to be paid out to solicitors for ultimate use by the borrowers.
The software ensures proper sign-off of every loan, with the two most senior people at Loanpad doing that on each loan.
Reporting on what is currently outstanding with each of Loanpad's 21 lending partners is comprehensive and automated. The software produces daily reporting on interest to be paid in and whether it is received.
Loanpad's technology makes it physically impossible for someone using it to quietly add on additional amounts to pay out to borrowers.
Paranoia level at 90%
At each stage of the technology and procedures, I saw a lot of controls.
The level of security against governance risks is at about 90% of a paranoid person's level – which I think is about the right level of care when you're trusted with other people's money.
I am deeply impressed about the head of lending's understanding of how fragile human nature can be, leading to mistakes, bias, greed or fraud. Most senior people I talk to don't show that they fully get that it's those things that cause more trouble than errors in calculation, when dealing with money and investments (probably as with anything else in life).
He's made sure that this understanding has been fully embedded in Loanpad's software, which is why it's a near-perfect example of how technology should be used for good governance and quality control.
Further reading
Visit Loanpad*. | Read the Loanpad Review.
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The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Loanpad and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.
