The purpose of a Reserve Fund is to build a trust fund for the benefit of Investors in the P2P lending platform. The Reserve Fund is there to shield investors from missed borrower payments or losses from borrower default.
How the Reserve Fund is funded
With each borrower loan repayment received, a portion of the interest paid by the borrower is ceded into the Reserve Fund – this is known as the Reserve Levy. Since inception (to 31 March 2017) the Reserve Levy charged to borrowers has averaged 190 basis points (bps). The expected credit loss rate for the Squirrel Money P2P loan book is 1.2% i.e. the Reserve Fund is currently being ceded at 1.58 times the expected credit loss rate.
When the Reserve Fund is used
If a borrower misses a scheduled loan repayment, the Reserve Fund is immediately activated to fulfil the expected loan repayment (of both principle and interest) to the applicable investor(s) whose investments have been used to fund that loan.
If a borrower defaults on their loan, the Reserve Fund will immediately attempt to repay the principle and any interest owing on that loan to the applicable investor(s). Squirrel Money will manage the collection efforts to recover that debt from the borrower with any subsequent collections of defaulted or arrears amounts being refunded back into the Reserve Fund.
Provided there are sufficient funds available in the Reserve Fund, investors should therefore expect to receive the regular loan repayment amounts regardless of whether the borrower is in arrears.
In the event of a significant increase in default and/or arrears rates that threatens the capitalisation of the Reserve Fund, the Fund will transfer to ‘Active Management’. In this situation, Squirrel Money will provide Active Management of the Reserve Fund with three principles governing the consideration of claims submitted to the Fund:
Value of the Reserve Fund
At 31 March 2017, the value of the reserve fund was $208,000 (or 2.88% of the total loans outstanding) with a further $165,000 expected to be received into the fund from the active loan book over the life of those loans.
Whilst the value of the Reserve Fund will fluctuate from month-to-month depending on the levels of arrears and default rates, the fund is being ceded at a rate higher than the expected credit losses, so we expect to see the fund continue to grow over the long term.
To date, Loan Shield has ensured that every investor in Squirrel Money has been paid in full and on time, no exceptions. Although, as with all historical performance, it cannot guarantee similar future performance.