There are many risks associated with property lending, and we take our responsibility to manage such risks very seriously
We use the latest cutting edge technology to automate our processes, and to pull from the widest data set possible, so that our experienced underwriting team can make a more informed decision in a quicker way. The decision to make every single loan is ultimately made by one of our experienced underwriters, but through technology we allow them to make better decisions.
What are the risks and how do we manage them?
The risks associated with operating a marketplace are diverse and we regularly review our risk appetite framework in line with the changing environment that our business operates within. We have listed some of the main risks associated with property finance products below.
We always recommend that our investors diversify their investments between a range of loans. This way, if one property falls in value, the borrower falls behind with their payments or we need to take formal action to recover the security, you have spread your risk across a number of loans.
There are three main categories of risks:
Property related risk
Property market risk
The value of UK property can go up as well as down with economic cycles. If the value of a property against which we have lent falls, the borrower may find it difficult to meet their repayment obligations, particularly if they try to refinance their loan based on a reduced valuation. We plan for this risk by issuing loans worth no more than 75% of the property’s value, and understanding market dynamics in the property’s local area. If a borrower requests an extension on their loan, we will normally commission a new and independent valuation of the property.
For all our lending, we obtain a professional valuation, undertaken by RICS registered valuers with local experience, which are backed by professional indemnity insurance. Each valuation is carefully inspected by our experienced underwriting team to ensure the security is acceptable to support the lending proposal. LendInvest has a restricted valuer panel for all residential and commercial valuations and regular reviews are undertaken of the valuation service including the quality of the reports provided to us. The valuations allow us to make informed decisions about where to lend and against how much of the value.
All our loans are backed by security. As with any secured asset, there is a risk that the security is not properly constituted, rendering it unenforceable. A particular risk associated with property investment is the risk of property fraud. We work closely with our panel of solicitors, each of which is a specialist in property finance, and require that the solicitors used by the borrower meet our minimum requirements. This, together with our diligent internal processes, ensures that property risk and security risk is minimised.
Borrower related risk
Product and payment risk
Our property finance products typically range from one to three years in duration and repayments are contingent on the borrower’s successful exit from the underlying property project. Before committing to a loan, we examine the viability of the borrower’s payment schedule, including monthly interest payments, as well as the intended exit route – typically by refinancing or selling the underlying property. In the industry we operate within it is common that extensions and further advances are agreed. Each time one of these is requested, we thoroughly review the borrower’s track-record and the project’s progress to ensure continued suitability before approving an extended term.
Financial crime risk
Generally speaking, those seeking short term property finance in the UK are working to short deadlines that require fast turnarounds. The profile of these borrowers can be very diverse too, ranging from individuals to complex corporate structures.
These factors make short-term property finance a target for criminals to attempt to launder money or commit other financial crimes. Our experienced underwriting team undertakes robust due diligence on every customer using two of the country’s leading fraud detection systems. You can find out more about our due diligence approach below.
Every loan we underwrite is secured against property. This means that in the event that a borrower fails to repay, we would seek to recover the outstanding loan by selling the property and passing the proceeds on to investors. The secured nature of the loan does not, however, mean that repayment of the loan is guaranteed because the loan outstanding may exceed the property net sale proceeds. Where appropriate we will also look to rely upon the personal guarantees from the borrower or directors to ensure the loan is fully repaid.
Sometimes, borrowers require some flexibility. For example, they might warn us of an issue that could make them late on an interest payment (perhaps a delay in obtaining planning permission from the council has tied up their cash flow for longer than anticipated), or they tell us they may not exit the loan within the prescribed term (perhaps the sale of the property has been delayed). If, having assessed the facts and the evidence provided to us, we are comfortable with the delay, we may allow the borrower to defer payment to a later date.
If the borrower fails to make payments, an investor may not receive the investment income as your capital is at risk and repayments are not guaranteed.
LendInvest related risk
A benefit of investing through a marketplace like LendInvest is that as an investor you never have to deal with borrowers directly. LendInvest does all that for you. However, if LendInvest was to fail, investors would not have direct access to borrowers to recover their money.
As with any company, there is a risk that the company may lack the financial resource required in order to keep the business running. LendInvest is well capitalised and has sufficient financial resources well in excess of regulatory requirements to manage its business.
In the unlikely event that our platform was to fail or become insolvent, Pepper UK, our outsourced specialist loan servicer, will continue to service our loans.
Thorough due dilligence process
We engage our own external legal counsel for every loan that we provide and we never use the same lawyer as the borrower. In addition to the due diligence that we carry out ourselves, our solicitors also undertake due diligence on the borrower, the security and the transaction.
We obtain an independent third party valuation on every property that we lend against. Valuers provide us with comprehensive reports on the property, which will include commentary on the relevant local market, show evidence of comparable recent sales for the property, and address any specific concerns we may have about the property and the local area. We only instruct RICS registered valuers that have passed our internal due diligence and compliance procedures, including our requirements on professional indemnity insurance.
Comprehensive fraud searches
Fraud in the UK remains a constant threat and one we take very seriously. We always carry out a comprehensive set of searches on all the loan applications we consider that is designed to protect against any potential fraud being perpetrated by a borrower (or a borrower’s solicitor). Protecting investors against fraud is at the forefront of our risk assessment and whilst no lender can guarantee that fraud will not be attempted we are confident our approach is focused, robust and stands up to scrutiny. There are many enquiries, procedures and technologies we use to limit the risk of fraud. We pull data through Equifax plc and make use of two leading UK fraud detection systems, SIRA & CIFAS. These provide us with indicators of potential fraud. Most major financial institutions in the UK use these systems for a comprehensive and sophisticated defence against fraud. The systems provide access to a centralised database that cross-references borrower information across their network of participant members.
Comprehensive due dilligence on borrowers
We carry out extensive searches on a borrower before proceeding with a loan. These searches include everything from credit searches, court registry searches, through to searching the UN, EU, HM Treasury and offshore financial sanctions lists. Our searches typically involve more than two sources of data to ensure validity of information. We also undertake robust credit or ancillary checks on every borrower using Equifax plc, one of the world’s most reputable credit reference agencies, our own proprietary data and other data sources available to us. If a borrower passes all our checks and we agree to provide a loan, we require the borrower to meet personally with their solicitor and to sign the loan documentation in front of them. This helps us get comfortable that the person we’ve run all our checks on is actually who they say they are and is actually the person who is signing all the documents.
Borrowers may sometimes operate complex corporate structures. In these instances, we undertake additional due diligence to establish who has ultimate control in accordance with current money laundering requirements.
Legal advice for borrowers
We require all borrowers to appoint a solicitor that is qualified to act in connection with the transaction. Our due diligence on a borrower extends to the borrower’s solicitor, and we will carry out a range of searches on the relevant law firm in each instance. We require the borrower’s solicitor to confirm to us that they have explained all of the obligations under the loan to their client, and that they are understood.
We have comprehensive insurance policies in place that are tailored to our business. These cover fraud and crime, terrorism, and contingent buildings insurance for our loans. Should a loss be suffered on a loan as a result of a fraud or crime, we will, where possible, seek to claim on the insurance policies in an effort to return any shortfall to investors.
Comprehensive fraud searches
We regularly review and monitor our borrowers’ circumstances to ensure there are no material changes in their position. These may include automatic notifications or manual searches from Equifax plc and other data sources, including Companies House, Land Registry, HMRC, proprietary data and other data sources that provide financial crime or performance data. We also use a panel of external agents that help us mitigate risk associated with any loan. These include real estate agents and field search agents who can go and meet with a borrower, or carry out site visits if there is information that needs confirming. For some loans, we will meet borrowers in person at their sites during the project to ensure that works are being carried out as expected.