Changes to Debt Purchase Options

[savaroony]

Today you should have received an email to inform you of some important changes to the debt purchase process. The message is repeated below for convenience:

"Changes to legislation mean that, with their current licenses, CRS can no longer purchase a debt in order to pursue it. However, they are still licensed to pursue a borrower on behalf of a third party.

What does this mean?
CRS will continue to act on your behalf when a borrower has fallen into arrears, but is not yet in default. Once a borrower does fall into default, CRS can no longer purchase the loan from you. You will therefore no longer be offered 10% of the amount outstanding for the transfer of right and title in such a loan.

What are we doing about it?
We have created a new and independent company named P2PS Limited. This business is governed independently of Zopa Limited and will be non-profit-making. For some loans that have already fallen into default that CRS have been unable to purchase and for loans falling into default hereafter, you will be asked to assign your title right and interest to P2PS Limited, instead of CRS. You will not be offered any financial consideration for this assignment, but please see our comments below in relation to sums recovered.

As with the current process, you will still have 28 days within which you can opt out of this should you wish to pursue your part of the debt independently. Once P2PS Limited has been assigned with the right and title to a debt, it will then pursue the borrower for repayment, and a County Court Judgement or Bankruptcy where applicable. Whenever any funds are successfully reclaimed from the borrower, P2PS will apportion funds appropriately to the original lenders of that loan (excluding any that opted out) after deducting P2PS Limited’s costs.

It is always regrettable to change terms and conditions, but we hope you understand that this change has been brought about by events outside of our control and that we have investigated all potential options before setting up the most effective alternative. We also apologise for not making you aware of this sooner; P2PS required licenses from the OFT and the process to acquire them took far longer than expected.

We have changed the Zopa Principles to reflect these changes.

Why can’t Zopa pursue the debt on my behalf?
Zopa has a contractual relationship with both borrowers and lenders, as members of the Zopa Platform. Therefore, Zopa could be placed in a position where there is a potential conflict of interest if it pursued one member on behalf of another.

Further Questions
Should you have any questions, please post them on this thread so that we might efficiently collate and address your concerns.

[savaroony]

We sent the above communication to the forum moderators last Friday to see if they could advise on some of the likely questions you'd have. So thanks to them for their questions which we've answered below. Please do add other questions to this thread and of course we'll get back to them too.

Why can't CRS just update their licences so they can continue to purchase debts etc?

We asked them the same question and it's simply not something they intend to do. We believe it comes with a great deal more responsibility/reporting/scrutiny which our small volumes wouldn't justify.

What does P2PS stand for; How is it funded; Who works for it etc.? Why are they unable to pay the initial 10%?

P2PS stands for Peer 2 Peer Services. It will be funded by reclaiming its costs from any successful claims it makes, passing all additional funds it reclaims back to lenders. They're unable to pay the initial 10% because they have no funds to do so; all work is undertaken at P2PS' risk. The company is registered to two independent consultant solicitors with experience in consumer credit and litigation.

Why can only some of the loans that are already in default go to P2PS?

We will look to assign all loans that have defaulted which CRS have been unable to purchase and can still be pursued. These therefore exclude cases where the borrower has been declared bankrupt with no recoverable assets, or where the borrower has already had a form of agreement accepted such as an IVA or trust deed.

What happens to defaulters who are declared bankrupt? Will you be updating the principles / FAQs etc to cover this case too?

Further to the point above, it is not possible to pursue a borrower where they have already been declared bankrupt with no recoverable assets. Thus P2PS nor any other debt recovery agency would be able to pursue such a case and therefore no recovery can be achieved.

The only other thing I noticed is you say P2PS is made up of a solicitor. Some people will immediately think, that will be expensive so their costs will be a big chunk of any money recovered.
Is there the possibility to go further into detail on what happens. I.E does the borrower get charged extra fees that will cover P2PS's cost or if they 0we £2k do they only pay £2k back and then P2PS take a chunk.

Guidance from the solicitors is that court fees and legal time is likely to come in at around £650-£700 on each case. They additionally point out that:
- this deduction is much less than a standard debt recovery firm would charge since it doesn't require a profit margin on top
- in a successful recovery they would seek to recover costs wherever possible too, so no deduction from lender's capital would be made in these cases
- if the debt isn't recovered, costs to date are simply absorbed by P2PS and not the lenders; one successful debt recovery is not used to subsidise an unsuccessful recovery

The best way to put it over would be to spell out the alternative. i'e' the other option would be to employ a debt recovery business which would be more expensive and even less likely to recover anything.

Unfortunately there is no alternative as none of the other debt agencies out there are interested in our tiny book of defaulted loans. In order to sell a book of defaulted loans, it would need to be several times larger than our current pool and even then, it would be incredibily difficult to secure a price equivalent to that offered previously by CRS.

We'd also like to make it clear that our bad debt expectations have never included consideration for the 10% that CRS used to pay on debts assigned to them, so bad debt allowances do not need to change as a result of this shift to P2PS.

[savaroony]

Which Piece of Legislation Necessitated This Change?

CRS informed us that they were no long able to purchase debt with their current licenses so I can't point you to the precise legislative change.

[Charlemagne]

Can we assume that errant borrowers will automatically be referred to P2PS unless we as lenders opt out? Please also note that 'licence' as a noun is spelt with a 'c' and 'license' as a verb is spelt with an 's'.

[savaroony]

Can we assume that errant borrowers will automatically be referred to P2PS unless we as lenders opt out?

Yes

[Paul_Herring]

Can we assume that errant borrowers will automatically be referred to P2PS unless we as lenders opt out? Please also note that 'licence' as a noun is spelt with a 'c' and 'license' as a verb is spelt with an 's'.

Skitt's Law raises its ugly head again.

[spl1d]

- if the debt isn't recovered, costs to date are simply absorbed by P2PS and not the lenders; one successful debt recovery is not used to subsidise an unsuccessful recovery

But you have said that P2PS is non profit making so how can they absorb costs for unsuccessful recoveries? Who pays for unsuccessful recoveries?

[bollidear]

I have to be honest and say I am exceedingly uncomfortable with the conflict of interests this Quango will have - with an overhead that is wholly unnecessary. Without doubt, the adverse publicity of a Zopa Quango chasing a debt would far outweigh the Quango not paying the lenders.

I assume that Zopa will supply full name, addess and contact details as well as copies of all contracts in order that we can persue the debts ourselves:

"As with the current process, you will still have 28 days within which you can opt out of this should you wish to pursue your part of the debt independently"

Can Zopa state categorically state that no other debt recovery service in the UK is able to purchase debt - has there really been such a radical change in legislation?

[fluppet]

How will P2PS keep lenders updated on progress?

At the moment it appears from the very brief update in MLB that there is about one communication to the late borrower every two months other than automated late payment notices. Field agents in particular seem to work at the speed of drying paint. Will the new approach be more hands on or at least give more detail as I am sure more work currently goes into 'chasing' than reflects in MLB? I remember when I strated at zopa (April 2008) there was a spreadsheet on contact efforts made and responses which seemed more proactive and also more efficient at getting people back on track.

What alternatives other than taking people to court will be offered to help late borrowers ie referral to debt advice charities (not companies), interest freeze, reduced payment plans, payment holidays, longer loan period etc? In what order?

[rupee]

Can Zopa state categorically state that no other debt recovery service in the UK is able to purchase debt - has there really been such a radical change in legislation?

It is unfortunate that Zopa do not seem able to supply this information, I believe it stems from the Credit Crunch. Until quite recently "debt markets" were unregulated except those that were part of another recognised exchange e.g. LSE. The recent chaos led the Government to extend the provisions of already existing statutes, notably the Financial Services and Markets Act 2000, to cover their literal meaning. It is now not possible if acting by way of business to purchase or deal in "debt instruments" unless regulated by the Financial Services Authority (schedule 2 part II section 12f of FSMA).

On a related, but not very important given that AFAIAA only one loan has been made, point, what has happenned to the purported guarantee on Prime Listings? It used to be mentioned in the principles along with CRS purchases, but a quick glance now did not reveal anything.

[andrewj100]

Previous loans that defaulted were sold for 10%, will PSP2, being non profit and persuing the debt directly be able to recover more than 10% for the average loan default?

[marshall2k]

Thanks for the update about procedures. On what time-scale can we expect loans that are currently "bad debt" to be transferred to P2PS?

[alexp2000]

Can Zopa state categorically state that no other debt recovery service in the UK is able to purchase debt - has there really been such a radical change in legislation?

Unfortunately there is no alternative as none of the other debt agencies out there are interested in our tiny book of defaulted loans. In order to sell a book of defaulted loans, it would need to be several times larger than our current pool and even then, it would be incredibily difficult to secure a price equivalent to that offered previously by CRS.

The point made by savaroony seems to be that CRS was not able, and no-one else was interested in purchasing the debts - not that no-one else was able, so your question seems a bit irrelevant/has already been answered.

Previous loans that defaulted were sold for 10%, will PSP2, being non profit and persuing the debt directly be able to recover more than 10% for the average loan default?

This is an interesting point. It will come down to whether enough money can be claimed from these bad-debts to give any left over money after the recovery costs are paid. I sadly suspect that in the vast majority of cases there won't be any left - which will obviously reduce our return to 0% (from a previous 10%). I'm guessing we should benefit from cases where claims exceed the recovery costs by a reasonable amount (more than 10% of outstanding capital) because hopefully this new companies costs/charges will be lower?

This post has been edited by alexp2000: Nov 2 2009, 02:06 PM

[sl75]

To drag up a point from the first pre-announcement of these changes of which I am aware:

...
All this will mean that this area of the Principles will get a pretty thorough overhaul. When the time for that comes we will determine whether we should do anything for people who would on balance be disadvantaged by the new terms (I hope none as they should be fairer for all) ...

Perhaps I'm missing something, but isn't every lender who assigns a loan under the new terms potentially "disadvantaged" to the tune of 10% of the amount assigned? (unless P2PS are successful in recovering at least 10% + costs on average)

On a related, but not very important given that AFAIAA only one loan has been made, point, what has happenned to the purported guarantee on Prime Listings? It used to be mentioned in the principles along with CRS purchases, but a quick glance now did not reveal anything.

6.9 of the Zopa principles has been re-drafted:
You agree that any loan contract made under the ZOPA PRIME Listing Scheme will be assigned to P2PS Limited under clause 6.7, save that P2PS Limited shall pay to the Lender for the assignment of the Lender's right title and interest in each Zopa PRIME Loan Contract with that Borrower equal to no less than 50% of the total amount then outstanding.
(Edit: compared to the old version:)
You agree that any loan contract made under the ZOPA PRIME Listing Scheme will be assigned to a the Collections Agency under clause 6.7, save that the price which the Collections Agency shall pay to the Lender for the assignment of the Lender's right title and interest in each Zopa PRIME Loan Contract with that Borrower stated in paragraph 6.7 b of these Principles, will be equal to no less than 50% of the total amount then outstanding, rather than 10%.


Edit2: "Changes in Version 16 of the Zopa Principles" seems to me to have been over-summarised:
1. We have included reference to P2PS Limited where loans more than 120 days in arrears are assigned to them instead of CRS.

Mention of the removal of the minimum purchase price for non-guaranteed loans would also seem appropriate IMHO.

This post has been edited by sl75: Nov 2 2009, 02:41 PM

[andrewj100]

Will we be able to access a graph of "average % of outstanding capital recovered vs time" for each of the markets?

That would be the only way Zopa members would realy be able to judge how well P2PS were doing and would make a big difference to how we assess risk. I personaly would be much less concerned about bad debt rates if I could be more confident that once a debt had gone bad it was going to be more efficiently recovered and I was'nt just going to be fobbed of with a 10% fixed payment.

My view is that if P2PS works well it could be a very positive thing for Zopa lenders.

[alexp2000]

That would be the only way Zopa members would realy be able to judge how well P2PS were doing and would make a big difference to how we assess risk. I personaly would be much less concerned about bad debt rates if I could be more confident that once a debt had gone bad it was going to be more efficiently recovered and I was'nt just going to be fobbed of with a 10% fixed payment.

Isn't a bad-debt by definition one that can't be recovered? I'm not too sure what point you are trying to make, surely the figures we should be interested in are the percentage of loans we make that have to be written off at some stage as irrecoverable - this is what the bad-debt allowance is there for. What is the difference to us if very few loans need to be passed on to P2PS but they are hopeless at recovering any capital, or if a lot of loans are passed on and they are very good at recovering capital? The outcome is the same. And if we find ourselves in the situation where lots of loans are passed on and no capital is recovered then it's quite probably the expected bad-debt rates we should be questioning, not anything else.

My view is that if P2PS works well it could be a very positive thing for Zopa lenders.

I fully agree with you. Whether we are better off or not compared to the 10% offered by CRS I don't know, but at least the court action threat now exists again for non-payers, and given the limited choice Zopa seemingly had I think this resolution sounds reasonable.

[chilterncom1]

I fully agree with you. Whether we are better off or not compared to the 10% offered by CRS I don't know, but at least the court action threat now exists again for non-payers, and given the limited choice Zopa seemingly had I think this resolution sounds reasonable.

I also agree. There certainly needs to be something in place, and it doesn't sound as if there were many, if any, alternatives available.

[sl75]

Will we be able to access a graph of "average % of outstanding capital recovered vs time" for each of the markets?

That would be the only way Zopa members would realy be able to judge how well P2PS were doing and would make a big difference to how we assess risk....

AIUI, such a graph would take several years to show meaningful results as outstanding debts don't "drop off the books" until the borrower is declared bankrupt, until a payment is accepted "in full and final settlement", or after at least 6 years, whichever comes first.

There could also be differing interpretations of such a graph - if P2PS recover little to nothing, perhaps this simply means that CRS were extremely effective in recovering as much as possible from anyone who had the means to pay, and conversely if P2PS recover more than a nominal amount from borrowers, it could raise questions over why CRS were unable to do so.

Perhaps a related question would be what assurance we have that P2PS Limited will continue to exist for as long as any possibility of recovery of any funds from the borrowers exists... or what would happen to such assigned loans should P2PS fail... (if CRS were to fail, we'd at least have the "consolation prize" of the 10% initial payment).


Also, I'm having trouble making sense of the following:

- this deduction is much less than a standard debt recovery firm would charge since it doesn't require a profit margin on top
...
- if the debt isn't recovered, costs to date are simply absorbed by P2PS and not the lenders; one successful debt recovery is not used to subsidise an unsuccessful recovery

If P2PS make no profit from successful recoveries, yet absorb costs from unsuccessful recoveries without them being subsidised by successful ones, where does the money come from in order to absorb these costs, and how is this sustainable?

This post has been edited by sl75: Nov 2 2009, 04:10 PM

[Ajax]

IIRC if CRS recovered anything over the 10% initially paid out to lenders the difference got pro-rated to lenders (after their costs had been deducted I think).

This post has been edited by Ajax: Nov 2 2009, 04:10 PM

[Ledney]

But you have said that P2PS is non profit making so how can they absorb costs for unsuccessful recoveries? Who pays for unsuccessful recoveries?

Good point.