Despite our 100% track record to date, we need to be clear that past performance is not a guarantee of the future. To help ensure we do continue to deliver on our stated intent, we have in place several layers armour to help protect the money that you invest with Squirrel. If you prefer to watch a simple presentation on everything to do with investing with us, scroll straight down to the bottom. Otherwise, read on.
We created a Reserve Fund so that we could squirrel away a bit of each transaction for a rainy day. We're the only Peer-to-peer lender in New Zealand to have a Reserve Fund, and it's there to help cover expected credit losses as well as offer greater predictability to investors.
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. The Loan Shield Reserve Fund is administrated inside a separate trust that aims to protect investors from repayment delays when a borrower is late with their scheduled repayment or losses if a borrower defaults on their loan.
If a borrower misses a scheduled loan repayment, the Reserve Fund is immediately activated to fulfil the expected loan repayment (of both (if any) principal and interest) to the applicable investor(s) whose investment has been used to fund that loan. Provided there are sufficient funds available in the Reserve Fund, investors should therefore expect to receive the scheduled loan repayment amounts regardless of whether the borrower is in arrears.
If a borrower defaults on their loan and it is written off, again provided there are sufficient funds available in the Reserve Fund, the Reserve Fund will immediately repay the principal and any interest owing on that loan to the applicable investor(s), with the loan closed and moved into debt collection. Squirrel Money will manage the collection efforts to recover that debt from the borrower with any subsequent collections of written-off or arrears amounts being refunded back into the Reserve Fund.
Our 'modelled' expected weighted average loss rate on loans originated through our Platform (based on the profile of our existing loan book) is circa 1.8% to 1.9%1. To ensure we have adequate provisions to cover defaults and arrears, we apply a risk premium (known as a Reserve Levy) of between 0% and 7% to each borrower's interest rate based on their risk grade and corresponding probability of default, at the 99% probability of adequacy level. The weighted average Reserve Levy is currently circa 2.22%1 per annum (applied to the active loan balance) which is forecast to generate Reserve Levies of circa 2.3%1 of the originated loan amounts over the life of those loans. Reserving at that level provides more than 1.6x coverage over the expected life time loss rate. Whilst this does not guarantee your investment and is not an insurance product, the Reserve Fund provides a buffer to help protect investments from expected credit losses (and then some) and provide investors greater predictability of investment repayments.
In the event of a significant increase in default and/or arrears rates (above the expected levels), to a level that threatens the capitalisation of the Reserve Fund, the fund Trustee can pass a special resolution to divert up to 100% of all future interest payments into Loan Shield until it is sufficiently replenished to meet future expected losses.
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:
For more information about how Loan Shield works, see our Investor Booklet.
1Based on loans originated prior to 31 March 2019
We do our due diligence on every borrower that applies for a loan to ensure they're creditworthy, have the capacity to service ongoing loan repayments and that it is responsible to lend them money. We have a credit scorecard that determines their credit risk grade and as a result the amount of reserve levy they pay into Loan Shield.
We take an image of the borrower’s NZ driver’s licence or NZ Passport and check its validity. We also verify email addresses and mobile phone numbers.
We check the borrower’s credit history with Equifax and Centrix to make sure they don’t have outstanding debts or credit card bills from doing something silly like Uber-ing a helicopter.
We add a levy to the borrower interest rate that is based on their individual risk profile. Riskier customers pay a higher interest rate.
We check a borrower’s ability to service the loan by looking at their disposable income and expenses. This is to ensure they can afford the loan and won’t miss repayments if something goes wrong.
1010100001010110010... not sure what that means? That's ok, we've got a team of expert programmers who do. They've gone to great lengths to make the Squirrel Money Marketplace secure, such as undertaking an external IT Security Audit with KPMG. Should a cyber-attack actually manage to breach our walls, your money is still protected. Money is held in a Trust and can only be transferred out of the platform using ASB FastNet with dual signing authority. We've also put in place the added assurance of a cyber-crime insurance policy to protect against Investors losing their nest egg.
Our management team meets weekly (and our board monthly) to review the credit quality and performance of all our loan contracts. With control over the platform and an agile team in-house, this means we can jump on any changing market conditions or credit losses, and quickly tighten or loosen credit policy as needed.