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RateSetter sells off bad loans in latest attempt to bolster provision fund

Major peer-to-peer lender sells non-performing loans to debt purchaser in UK first.

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RateSetter, one of the UK’s largest peer-to-peer lending platforms, has completed the sale of £2.1m worth of non-performing loans. The debt has been sold to 1st Credit, a specialist debt purchaser, and the sale is said to be the first of its kind by a UK peer-to-peer lender.

The proceeds of the sale have been paid into the platform’s provision fund, which serves as a backstop for individual lenders on the platform, covering their losses in the event of loan defaults. To date, no individual lender has lost money investing via RateSetter, but the provision fund has come under strain in 2016.

The fund first showed signs that it might struggle to keep pace with the platform’s debts in June, and RateSetter has since made various adjustments to the way the platform works. RateSetter used to employ a hard-fail model, meaning that the platform would go into wind-down mode if ever the provision fund were depleted, but this clause was removed in November. This meant that RateSetter, for the first time, could begin factoring its interest rate buffer into its capital coverage ratio for investors. 

Exactly what price RateSetter got for its £2.1m worth of loans has not been disclosed. The non-performing loans, which were written between 2010 and 2015, were adjudged by the firm to have a low chance of recovery. For these sorts of loans, RateSetter is typically unable to make contact with the borrower, or is unable to put a debt management plan in place. 

The debt sale results in a small reduction in the Provision Fund usage for the years 2010-2015.

While perhaps unique within the UK space, the sale of non-performing marketplace loans is not unheard of globally. US marketplace lender Prosper, for instance, launched a debt sale programme in the summer of 2015. Each month, its non-performing loans are grouped together and sold off to a single buyer.

But selling loans to specialist debt purchasers comes with its own complications. “We always strive to ensure that RateSetter borrowers are treated fairly and that is why we specifically chose to partner with 1st Credit as they are a progressive, responsible debt purchaser,” said Ryan Marais, operations manager at RateSetter.

“We undertook this debt sale to secure some value for the Provision Fund from loans where we’d exhausted the other options available to us.”

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