There are risks associated in financing a loan and HNW Lending Ltd cannot guarantee that every lender will get all money lent back (plus the interest) at all times. While, to date, there have not been any losses of capital for lenders investing with HNW Lending Ltd, a number of loans have been in default and so it is important to understand all potential risks. Below are what we believe to be the risks lenders are taking and also the procedures HNW Lending Ltd has put in place to mitigate those risks for lenders
First, there is a loan to value threshold calculation in all HNW Lending Ltd's loan agreements. This means that if the the asset value falls beyond a certain level, then HNW Lending has the right to take possession of the property and sell it before the end of the loan.
For example, let us assume that HNW Lending Ltd organised a loan for £65,000 against a property worth £100,000. On day 1 of the loan, the loan is at 65% loan to value (£65,000/£100,000). The LTV threshold may be set at 70%, which means that if the value of the asset fell below £92,860 (£65,000/70%), then HNW Lending Ltd as agent for the lenders, would tell the borrower that the loan was in default and either ask for more collateral to be posted, some of the loan to be repaid, or would take steps to sell the asset. This means that the lenders do not need to wait until the end of the loan term, by which time the asset may have fallen below the loan value. Nevertheless, the risk remains that the asset may sell for below the value of the loan
Secondly, HNW Lending Ltd always obtains a personal guarantee from the borrower. This means that if the sale of the asset was not sufficient to repay the loan, then HNW Lending Ltd as agent for the lenders should be able to sue the individual on behalf of the lenders. However there is still a risk that the legal action against the borrower fails or if the legal action is successful, the borrower has insufficient assets
If the loan is unable to be repaid in full because the valuation of the assets is incorrect then HNW Lending Ltd, on behalf of the lenders should have a legitimate claim against the third party valuer (and their insurers) for negligence. This means HNW Lending Ltd should recover the shortfall from the valuer (or their insurers) in order to pay this on to the lenders. All HNW Lending Ltd's valuers have at least £1m of insurance cover per claim, however the risk remains that a legal action against a valuer may fail
Although a borrower commits to take out a loan for a specified period of time, such as 12 months, HNW Lending Ltd has found that relatively few borrowers pay back on time. In broad terms, HNW Lending Ltd have found that about a quarter of borrowers pay back early, a quarter within a week or two of the expected repayment date, a quarter ask for loan extensions and a quarter pay back either a month or more late or debt collection action is required. Lenders should note that they will continue to accrue interest on loans that do not pay back on time and loans where debt collection action is instigated
The loan documentation is drawn up by HNW Lending Ltd's solicitors. As a result, they give a representation before each loan is completed that they have fully reviewed the terms and conditions in the loan documentation and confirm that they enable interest collection, the loan principal to be collected and enforcement action to be successfully taken against the borrower in the event of default.
This means that if HNW Lending Ltd, as agent of the lenders, cannot enforce the loan then there should be a valid claim of negligence against the solicitors and thus any shortfall should be able to be recovered from the solicitors (or their insurers) in order to pay this on to the lenders. All HNW Lending Ltd's solicitors have at least £1m of insurance cover per claim, however the risk remains that a legal action against a solicitor may fail
The loan documentation is drawn up by HNW Lending Ltd's solicitors and they are responsible for ensuring that the loan complies with the provisions of the Financial Services and Markets Act 2000 and all of its secondary legislation, the Consumer Credit Act 1974 and Consumer Credit Act 2006 and any other relevant legislation (eg in relation to collective investment schemes). The solicitors also give an assurance to the lenders on each and every loan that HNW Lending Ltd as arranger and agent for the lenders and the lenders themselves comply with all applicable regulations to enable them to enter into the transaction
This means that if HNW Lending Ltd or the lenders do not comply with any applicable laws or regulations then there should be a valid claim of negligence against the solicitors. All HNW Lending Ltd's solicitors have at least £1m of insurance cover per claim, however the risk remains that a legal action against a valuer may fail
HNW Lending Ltd adheres to the Financial Conduct Authority requirements which includes having a wind-up plan and having a sum set aside to pay for this wind up plan in the event of our insolvency or that we cease trading. All loans are protected by way of a charge on the property lent against or a pledge over an asset. Any receiver will see that a lender's loan is secured against the relevant asset and will work to repatriate the lender's money
In addition, HNW Lending Ltd has put arrangements in place to protect your money in the event of our insolvency including funds not committed to lending being held in a segregated client money trust account according to the rules of the Financial Conduct Authority. It should also be pointed out that the Diretcors of HNW Lending Ltd also invest in most of the loans and so it would also be in their interests to see an orderly winding up of the business so that their shares of the loans were also repaid
HNW Lending Ltd holds a proportion of its fee and margin income so that if a borrower defaults and there is a shortfall (after selling the property and less all related enforcement costs), then any fees and margin income earnt by HNW Lending Ltd will be paid back to Lenders so that HNW Lending Ltd has made no profit on such a loan. For example, if HNW Lending Ltd had earnt an arrangement fee of £2,000 and margin income of £1,000 then these would be paid back to lenders so that the lender's loss was reduced
There are further risk mitigation policies in place:
a) Before we advance a loan to a borrower we conduct comprehensive identity, fraud and anti-money laundering checks and perform due diligence on the underlying security asset, including a valuation. We assess the Borrower's credit history, level of assets and liabilities. If we find this to be deficient the loan will not proceed.
b) Money is only handled by HNW Lending Ltd's solicitors or in a Client Account
c) HNW Lending holds unlent funds on behalf of the Lenders in a segregated bank account with Barclays Bank PLC so they do not form part of our assets (and would not be available to our creditors in the event of our insolvency) or in solicitors' client accounts which are similarly protected. The security charge over properties is also held in trust for the benefit of lenders.
d) HNW Lending Ltd have had many years experience in the lending business and therefore reject many opportunities that do not match our lending criteria based on their skill and experience
e) The Directors of HNW Lending Ltd offer to put their own money into every loan
f) Where HNW Lending Ltd arranges a loan on a property development, HNW Lending Ltd will employ (at the borrower's expense) third party monitoring surveyors who confirm the budgets are reasonable and that works have been completed prior to HNW issuing any stage payments.
g) Lenders are lending on an individual loan basis and not in a 'fund'
Investing in Peer-to-Peer lending involves risk to your capital. If you suffer a loss, you are not entitled to compensation from the FSCS. Although HNW Lending Limted is regulated by the Financial Conduct Authority (FCA), this does not mean that customers' funds are covered by the FSCS up to £85,000
Please note your capital is at risk and interest payments are not guaranteed. Click here to find out more