The Compensation Scheme
The Compensation Scheme (“CS”) endeavours to protect lenders from late and missed payments, arrears and defaults by borrowers. Its objective is to provide funds to lenders where there has been such a problem with a borrower.
The ultimate objective of the CS is that lenders receive all the principal and interest repayments that they are expecting. This will ensure that lenders view this site as a safe place for their savings. This directly benefits borrowers - there being more lenders, and more lenders' money, available for borrowers!
OPTIONAL MEMBERSHIP FOR LENDERS
The CS offers to lenders, by subscription, an optional membership of the Compensation Scheme. The CS builds a fund, the Compensation Scheme Fund (“CSF”), to be used to compensate CS member lenders, if they should be so unfortunate as to suffer the problem of a borrower’s late or missed payment, arrears or even default. The CSF will be accrued from returnable contributions by borrowers, and partially from lenders' membership subscriptions and monthly fees.
The Compensation Scheme is not an insurance product, is not enforceable and does not guarantee that the funds available in the CSF will cover every default.
It is a lenders' cooperative by membership and is operated by the site on a reasonable endeavours basis. The CSF will allocate funds to a lender who suffers a missed payment, arrears or default, on a “first come, first served” basis, subject to:
i) being a member of the CS at the time the loan was made, and
ii) sufficient funds being available in the CSF,
such lender will be recompensed their expected repayment, within 28 days after a due repayment instalment is still unpaid.
The Compensation Scheme is managed to benefit the members who might potentially suffer loss.
THE COMPENSATION SCHEME FUND
The CSF is designed to have sufficient funds to adequately cover the likely default rate of less than 1.5%. However, to be prudent we aim to accumulate a fund at least 40% greater, so we aim for a CSF in excess of 2% of all outstanding loans. We will manipulate the level of contributions to endeavour to achieve an adequate CSF to cover the estimated fund target at the minimum cost to CS lender members and borrowers.
We will build the CSF from three sources:-
1.Refundable Borrower CSF Contributions
By deducting a percentage, depending on the borrower’s credit score, averaging 1% (from 0.4% to 1.9%), from each loan when disbursed to a borrower, being paid into the CSF, which is returned to the borrower on full repayment of the loan, subject to conditions.
Example: On a loan of £3,500, the borrower will have, on average, £35 deducted when the loan is disbursed and paid into the CSF. Assuming that the borrower has not had any late or missed payments and has repaid the loan in full, the £35 will be returned following the final loan repayment.
2. Lender CS Membership Subscriptions
A percentage (which will be varied by Administration to achieve the target fund value) of the optional lender CS subscriptions paid for membership of the scheme.
Example: The optional lender Compensation Scheme membership subscription is £4.95. Initially 80% of that will go directly into the CSF - £3.96.
3. Lender Monthly Percentage CS Contribution
An opted-in lender subscribed to the CS will pay an additional monthly percentage lender fee, depending on the credit score of the borrower/s of the Loan/s made, from 0.2% to 0.8%, for example 0.4% for borrower Credit Stars 7 - 9 (which approximates to credit rating of A on the A*, A, B, C, D scale), per annum for each loan (paid monthly, 0.0333% per month) on the money lent, which is paid into the CSF.
Example: If a lender has lent a total of £2,000 to borrowers with Credit Stars 7 - 9, then that lender will pay, in total on that lending, (2000 * 0.0333%) 67p per month into the CSF.
The CSF is held in our segregated Client Money Account at the bank, therefore not a part of LendLoanInvest's assets, but ring-fenced and belonging wholly to the Borrowers and Lenders involved.
THE COMPENSATION SCHEME IN ACTION
In the case of a late or missed payment, arears or default, the following procedure occurs:-
After a set number of days (currently set at 21 days), on behalf of all the lenders involved, claims are automatically submitted to the CSF.
Administration will review the circumstances of these claims, and, assuming they are approved, will automatically reimburse the lender/s affected.
If the borrower's missed payment is later paid, that money will be credited to the CSF. In the case of a default, any funds later collected by the Debt Collection Agency ("DCA"), net of any costs, will similarly be credited to the CSF.
IF THE CSF PROVES INSUFFICIENT
If there is a sudden increase in late or missed payments, arrears and/or defaults and the CSF may not have sufficient funds to cover all its claims, the company will consider an injection of funds into the CSF. In the meantime the following will happen:-
1. The allocation of CSF funds will be managed to the equitable benefit of all the participating lenders involved.
2. If necessary CSF repayments will be pro-rated across lenders, until such time as further CS funds are available.
The objective of the CS is to ensure that lenders receive all the principal and interest that they are expecting