Chief Risk Officer update – Q&A with Simon Cordell
Simon Cordell has led RateSetter’s credit and risk teams since 2016. Simon ensures that we lend only to creditworthy borrowers and that the Provision Fund is sufficiently capitalised to be able to protect investors from borrower late payments and defaults on an ongoing basis.
A highly experienced senior risk executive, Simon has over 20 years’ experience in consumer and small business lending risk management across Australia, New Zealand, and the United Kingdom. Most recently at American Express, he was the Head of Consumer Risk and then Head of Small Business Risk for Australia and New Zealand, responsible for the full credit life cycle from origination through to collection.
Below, Simon answers a few questions about RateSetter’s credit risk management, and the possible impact of COVID-19 on our lending performance.
How is RateSetter’s credit portfolio performing?
Our credit performance remains attractive and within our expectations, as can be seen on our website (we release the performance of the RateSetter Lending Platform loan book each quarter).
RateSetter offers three core loan products:
- Personal loans: most of our personal loans are to borrowers looking to save interest on existing debt or to add value to their homes through renovation
- Renewable energy finance: an increasing proportion of our lending is to borrowers, almost always homeowners, to finance the purchase of renewable energy products such as solar panels and batteries. By installing these products, borrowers will typically reduce their household energy bills
- Car loans: we fund borrowers to buy new and used vehicles. Depending on the age and value of the car, we may take security to provide additional protection
Data from Australia and other major developed markets such as the USA and the UK shows that each of these lending categories has demonstrated resilience across credit cycles (traditionally, this lending demonstrates more stable returns than credit card lending and business lending). Accordingly, we are confident that our loan book will continue to perform even where there are external shocks.
However, we are not complacent. The key to good risk management is to anticipate effects on a loan portfolio and identify and adopt strategies to ensure there are no surprises.
What are your expectations for the remainder of 2020, especially considering the impact of COVID-19?
Whilst we can’t know the long-term impact of COVID-19 on the broader economy with certainty, we can make informed assumptions. Having worked across several economic downturns across various geographies, I believe there are some common credit trends that we can draw on:
- The overall performance of a credit portfolio reflects the quality of its borrowers. Accordingly, I take confidence in the high average credit score, income level and homeownership concentration of RateSetter’s borrowers
- Borrowers tend to show rational behaviours, in that many choose to pay their debts down faster in times of doubt. RateSetter makes this simple for its borrowers to do, given we do not charge early repayment or exit fees on our loans
- When creditworthy borrowers experience economic difficulty, it tends to be short-lived, temporary hardship, as a downturn typically doesn’t affect a borrower’s fundamental character and willingness to repay. Most people we lend to want to meet their financial obligations and so by working with our borrowers and offering flexibility in difficult times, we can help them restore their financial health and resume their contractual loan repayments. Our Provision Fund gives us the ability to offer this flexibility without affecting retail investors.
What is RateSetter doing to prepare for the impact of COVID-19?
Over time, depending on the long-term impact of COVID-19, we may see some applicant segments more vulnerable to shock than others. In preparation, we are modifying how we assess, underwrite and price these segments, where we may see an increase in requests for short term financial assistance. We are equipped to help those borrowers who need our support and expect to be able to assist them in restoring their financial wellbeing, whilst also continuing to be effective in delivering our fixed income offering to investors.
Importantly, the Provision Fund is well capitalised, with a Provision Fund buffer of over $17.4 million. Whilst not providing a guarantee, the Provision Fund has an unblemished record for protecting investors against borrower late payments or defaults, with 100% of principal and interest paid as due. We expect it to maintain this track record provided that future losses remain below 6% of current loans outstanding, which is a substantially higher loss rate than the RateSetter Lending Platform has experienced to date.
Are there any forward indicators that you monitor closely to predict future credit performance?
We regularly review economic and behavioural indicators to forecast potential movements in credit performance and demand for loans. These indicators include, amongst other things, the level of unemployment, growth in retail sales and the Reserve Bank of Australia’s approach to monetary policy and interest rates.
A more abstract metric that we follow, that drives both lending volume and to some extent the indicators mentioned above, is consumer confidence. Interestingly, the February consumer confidence measure was broadly in-line with those levels back in October 2019, which bodes well, although we must remain prepared for change.
How is credit risk managed at RateSetter?
Credit risk management is the discipline that we apply to all aspects of the credit lifecycle, from attracting creditworthy applicants through to our arrears collection processes:
- Product design: Our loans designed to be competitive and offer good value to high-quality borrowers
- Acquisition: We seek to lend to borrowers who are looking for a better value offering, not those that can’t obtain a loan from their bank. Additionally, we seek to attract only those loan applicants where we believe there is a suitable willingness and capability to repay a loan
- Applicant credit underwriting: We apply stringent credit criteria when assessing a loan application. We leverage both applicant information and third party data to assess the risk of a borrower defaulting on their loan and the resultant loss that may occur, to determine how much credit we should extend and what price we should charge (i.e. what amount the borrower should pay into the Provision Fund to cover the expected loss)
- Repayment performance: We monitor the payment performance of borrowers, identifying if they ever need assistance to help ensure they can fully repay their loan, and ensure it is a priority
Importantly, regardless of the checks we perform, inevitably a proportion of borrowers will encounter unforeseen financial difficulties. Thankfully, we can make a claim on the Provision Fund to cover repayments to investors, while our collections team works with the borrower to seek to recover the outstanding loan amount.
How is RateSetter managing effects COVID-19 may have on operations?
RateSetter has a business continuity plan to help us deal with situations like these. We believe RateSetter is well placed to manage the implications of COVID-19. As a technology-led business, with a cloud-based platform and related functions, we are able to have employees work from home or in different geographies.
Our entirely online loan application process means customers can complete the application process without having to visit a branch or wait for a call centre to make contact. This means they are kept safe and makes RateSetter a more attractive option to borrow from.
To help protect the welfare of our employees and ensure business continuity, we have already shifted to have half of the operational staff from two of our offices work from home. We take our employees’ wellbeing very seriously and are following the Department of Health isolation guidelines closely. These arrangements will not impact the quality or speed of our loan processing.