Diana Clement: investor love for credit companies is fading

Some Harmoney investors complain about a lack of transparency. Photo / Getty Images

Some people are unhappy with the billing model of peer-to-peer companies.

Investors fall in love with New Zealand’s leading peer-to-peer (P2P) lender. Harmoney was launched last year and investors have appreciated the opportunity to earn higher returns than bank loans.

But many are now unhappy with the billing model, which sees Harmoney increasing loans to double his commission.

Investors lend to borrowers through an online dashboard and can choose individual loans to invest in. A $ 1,000 investment can be split into $ 25 amounts among up to 40 different borrowers, reducing risk. Investors are charged a 1.25% service fee (commission) by Harmoney when interest is paid to the investor’s account or principal is returned.

Harmoney is under investigation by the Trade Commission regarding its pricing structure for borrowers. However, a growing number of investors / lenders are complaining about the fees charged to them. (See Mary Holm’s column for more on Harmoney and the loans.)

Many investors have discovered that Harmoney closes up to a quarter of their 36- and 60-month loans in less than three months and takes its full commission.

To encourage this churn rate, Harmoney sends unsolicited emails to paying borrowers encouraging them to get a larger loan. Rather than supplementing the existing loan, Harmoney closes the first loan and takes its full commission. He then takes a second commission on the “new” loan.

Harmoney says “rewrites” are needed in consumer credit to keep borrowers from going elsewhere. But investors say they’re “chipped” because Harmoney is being encouraged to, in the words of an investor identified on a blog as “David”, “churn and burn.”

Investor Meghan Holender chose to invest in higher interest / risk loans and found that churn rate, arrears and failed loans reduced her return to 11% from the 25% that the system Harmoney said she was on track to win.

“Harmoney Investor” complained on the Holender blog that it was “totally misleading” for Harmoney to prominently display “annualized returns” that did not take into account rewrite fees.

David added, “They charge a fee for the service which was supposed to be 60 months of service in just one or two months. The result was that the fees paid to Harmoney were about 5 percent, not 1, 5 percent. “

When Holender looked at one of her loans at 9.99%, she found that the interest would be 62c, after three months, but if the loan was rewritten after three months, Harmoney took its full share. of 32 c and the investor received only 30 c. before tax. She thinks the only winner is Harmoney and that a more honest way to do business would be to have zero overwrites service charges to avoid double deductions.

Even with the rewrite fees, arrears, and defaults, investors earn more than they could with the money invested in the bank. P2P loans are also expected to lower costs for borrowers. However, some complain about the lack of transparency.

The Autorité des marchés financiers (FMA), which approved Harmoney’s license, said it would discuss with Harmoney whether it had properly disclosed its fees to investors.

“At the time we approved Harmoney’s license, we knew it offered to charge a service fee to investors,” said Garth Stanish, director of market surveillance at the FMA. “However, we were not aware of this alleged business model in which investor loan documents are canceled and then rewritten when borrowers borrow additional amounts through the platform.”

Harmoney says that of all the loans in the first six months, 38% of them were repaid.

In response to Holender, Harmoney’s Mark Bardi said the company expected about a quarter of loans to be rewritten.

Managing Director Monica Mathis points out that rewrites are common in consumer loans. She added this week that of the $ 162 million in loans Harmoney had taken out to date, only 0.05% “is the incremental rewritten portion.”

Some overseas P2P lenders use the double-deduction model, but many others do not. Few or no P2P lenders in Britain are fully transparent with investors, analysts at 4th Way, a P2P comparison site, told me.

An investor who communicated with me all year raised the issue of the rewrites with Harmoney and was informed in an email from Bardi that the loans were being rewritten “at the request of the borrower”. This is consistent with what I was told when I asked Harmoney the same question. Mathis said in an email: “It is important that we continue to serve clients by rewriting their loans because it is healthy for the market or the ecosystem.”

But when I did some research, I discovered that many loans are not rewritten at the request of the borrower. Harmoney is marketing them to encourage them to borrow more.

Borrower Paula Phillips, for example, said she received an unsolicited email invitation to top up her loan in June. Phillips was surprised that the top-up meant she had to cancel her existing loan and take out a new one.

When I called Harmoney’s investor hotline to inquire about the issue, a member of the Fiji-based call center staff gave me a long overview.

The staff member repeatedly claimed that in all cases where my loans were “paid off” within a few months, the investor had simply paid off the loan. As investor Harmoney Callum Irvine noted in the Trade Me community forums, had they “suddenly won the Lotto”? It wasn’t until I interviewed each loan that the call center operator told me that the loans had been rewritten.

The double dip surprised investors. Wendy Wood posted on Harmoney’s Facebook page that she believed this was “investor fault.”

“Comsolve” wrote in the Trade Me community bulletin board: “Yes, that’s right. You, the lender, took the first risk, paid the 1.25% loan fee, and are now getting ripped off so Harmoney can get a second set of fees. And Anthonycat posted on PropertyTalk.com: “I’m pretty disgusted that a rewrite will reimburse me for my principal with the service charge waived.”

Another problem is that because the money is rewritten and returned to investors’ accounts, it doesn’t earn interest unless they log in regularly and reinvest it, Holender says. “It’s a lost opportunity,” she said. Investors do not receive alerts to tell them that the money has been returned to their accounts and there is no automatic investment feature that would turn the money into new loans.

The other three billing models for New Zealand P2P lenders differ from Harmoney’s. Squirrel Money charges a lump sum of 2% per year on overdue loan balances. Interest payments are not charged and it makes no difference if the loans are canceled. “The advantage of our approach is that if a loan repays early (as it does), we don’t charge the investor a fee for that repayment,” said Managing Director John Bolton.

Wayne Croad of The Lending Crowd says his fees to lenders are charged as a percentage of interest payments only, not principal. The fee has not been finalized, but Croad says it will likely be 10% interest, not principal. Croad says his company considered the Harmoney model adopted, but concluded that recliping the note created “moral hazard.”

LendMe charges investors an annual percentage of invested funds ranging from 0.90 to 1.95% depending on the risk rating of the loan and the LVR.

There have been other complaints from investors, some of which relate to what investors see as a high rate of failed loans. Harmoney says it will release data related to this early next year once it has enough loan volume to create statistically significant data.

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