Changes to risk provisioning and reporting

by Simon Cordell

Changes to risk provisioning

All RateSetter borrowers pay a charge, called a Risk Assurance Charge, into our Provision Fund to help protect our investors from late payments and defaults. Ordinarily this charge has been capitalised to their loan and is received by the Provision Fund at the time the borrower draws their loan.

In order to make our offering more appealing to borrowers and to help us ensure that the Provision Fund continues to maintain a healthy coverage ratio over expected losses, for a significant proportion of our loans we are shifting this risk charge from being payable at the time a loan is established to being payable over the term of a loan.

Through making this change, we are taking the opportunity to increase the overall expected payments into the Provision Fund from certain categories of loans.

Corresponding changes to Provision Fund reporting

Given a meaningful proportion of payments into the Provision Fund will now be made during the term of the loan rather than at the establishment of the loan, we will start to publish the expected future contributions to the Provision Fund paid by borrowers from outstanding loans.

The expected future contribution amount will be adjusted to reflect future expected early repayments and borrower defaults on outstanding loans. The expected future contribution amount will be updated in real time, and when combined with the the existing Provision Fund balance, will be used to provide a coverage ratio that reflects both money in the Provision Fund and expected future Provision Fund contribution amounts from outstanding loans.  

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