Standard for Calculating Defaults Established

By AltFi on 19th June 2014

P2P/Marketplace Lending

The Peer-to-Peer Finance Association continues to be busy – announcing a further measure to improve upon standards in the peer-to-peer lending space.

Standard for Calculating Defaults Established

All P2PFA members will henceforth calculate defaults on loans in a standardized method – helping consumers with cross-platform comparison as well as improving transparency across the industry. The new method of default rate calculation is in the process of being implemented by the various member sites of the P2PFA. Zopa already has a table in place entitled “Defaults for current loan market” – which adheres to the new default calculation methodology. Registered Funding Circle investors can gain access to a similar table – again bearing the P2PFA stamp of approval. 

Giles Andrews, CEO and Co-Founder of Zopa, commented on the news:

"Clear information on default rates is vital for consumers who are considering peer-to-peer lending. I'm delighted to see a standard way of displaying this data within the industry. The standardisation helps consumers know which lending services are excellent or poor at managing risk. Zopa and I welcome this industry standard as we believe it is vital for building trust and setting expectations for lenders. It's great to see the P2PFA introduce this new standard and I would hope other lenders outside the P2PFA will align themselves to present figures that are fair, clear and not misleading."

This latest development is in keeping with P2PFA’s mission to ameliorate standards in consumer information disclosure. The P2PFA see it as imperative that default information is fully disclosed in a meaningful way – especially given the rapid growth of the sector.

Christine Farnish, Independent Chair of the Peer-to-Peer Finance Association, said:

“Information on loan default rates is crucial information for consumers looking to lend on peer to peer lending platforms. Having a standard measure helps ensure that this important data is presented in a transparent and fair way and ensures that loan default data is honestly presented. Consumers can trust P2PFA members to uphold high standards and treat them fairly. If you want to lend on a peer-to-peer lending site you should look for the P2PFA logo."

One of the key talking points among the platforms on this issue has been the distinction between arrears and defaults – in other words – at what stage should a loan that is late to be repaid be considered in default?

Advanced transparency – whilst admittedly a positive development for consumers – might be considered even better news for the statisticians and aggregators that are currently attempting to track the performance of the peer-to-peer sector. Sam Griffiths, MD of AltFi Data, weighed in on the importance of standardized definitions:

“The introduction of a standardized default definition is a big step forward in terms of transparency and the clarity of data for investors. It will enable them to compare metrics between platforms on an apples-with-apples basis – thereby boosting confidence in the sector. It underlines the speed with which the sector is maturing.” 

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