How does Funding Circle structure the loan term?
When assessing any property loan, Funding Circle will look to structure the loan term to take into account expected timescales for completion of the development and sales period, as well as an assessment of the construction costs. This will include the involvement of independent valuers, while a Monitoring Surveyor is appointed by Funding Circle to assist us with regular monitoring of the development’s progress. The loan term will include a buffer period to account for minor delays to the construction and sales process, however delays to developments can occasionally run to beyond this period.
Why do property loans fall late?
Property loans may get delayed for a variety of reasons, some of which are outside of the borrower’s control. These can include bad weather, unforeseen construction issues, delays to the legal completion process, or changes in market conditions.
The nature of building homes means that delays to a development can’t always be resolved quickly. It takes time to find new purchasers and agree contracts, or to agree to refinance with a third party. As these delays are sometimes unavoidable, we recommend that you diversify across small business and property loans to achieve a well-balanced portfolio.
What happens when a property loan falls late?
Funding Circle carefully monitors all property loans, and has procedures in place for dealing with property loans that are late or are likely to become late. When a property loan is likely to become late, an Early Warning Notice is sent to the borrower, which informs them that if the loan does become late, the interest owed will automatically increase by 2% per year. This higher interest rate will be applicable from the day the loan goes late, and will apply to all property loan tranches that become late. This additional 2% per year is repaid to investors from the sale proceeds once the loan is repaid.
The notice will also contain any conditions that we require for us not to default the loan. When a loan falls late, we send out a Pre-Default letter which confirms the interest, fees and conditions for not defaulting the loan. From this point, communication with the borrower or their solicitor will be handled by our in-house Collections & Recoveries team, who will continue to work closely with the Property team. During this period we may require a new independent valuation to be carried out, or an options paper to be produced by a third party that specialises in distressed property investments. We can also require the guarantors to give additional security.
We may ask the borrower to refinance, either with a new loan through the Funding Circle platform or externally with another provider. We will only refinance a loan through Funding Circle if the business passes the same assessment process as all other property loans, and the status and progress of the project is satisfactory to both ourselves and the monitoring surveyor.
What else will Funding Circle do to protect my interests?
The actions we take, in addition to the automatic increase in interest rate and letters outlined above, depend on factors such as our certainty of the source of payment, the current status and residual value of the properties/development and the transparency and cooperation of the borrower. The approach we adopt in each case is intended to preserve the best interests of investors, whilst also treating borrowers in a fair manner. In some cases the best option may be to formally put the loan into default and pursue recovery through legal action or enforcement of the security; in other situations this route may not be the most appropriate.
If a property loan falls late this does not necessarily mean an increase in credit risk, as we have visibility over the residual value of the property and the current status of the development. Enforcement on distressed property is costly, can often be detrimental to the sale price, and will most likely significantly delay repayment to investors so we will only take this action where we consider it absolutely necessary to protect your interests. In all cases, we will endeavour to take the approach that results in the best outcome for investors.
What happens when a property loan is defaulted?
If there is a risk that investors will not be repaid, or we feel investors will receive their funds faster, we will default the loan if this will result in the best possible outcome for investors. As all property loans are secured against an asset, our approach will depend on the status and nature of the project itself. For example, if a property development has been completed we may appoint a fixed charge receiver over the property so they can market and sell it. It is likely that the appointment of a receiver will have a negative impact on the final sale price so where possible we will avoid this.
When the property is part of a trading business, for example with a hotel, then we may appoint an administrator as there will often be further assets other than the secured property, and other creditors which will need to be dealt with. In instances where a property development is incomplete we may be able to use a third party developer to either provide the funds to complete the development, or to finish it themselves.
Legal enforcement and recovery of a distressed property is often a costly and time-consuming process. It can take many months to take ownership of the property, appoint receivers/administrators and complete the construction and sale of the asset. In addition, the fall in value of a distressed property, including any third party costs, can lead to a significant decrease in the final recovered amount, so although in many cases we would anticipate a full recovery for investors, this can’t be guaranteed. Often with late property loans, the best option is to work with the borrower to allow them to resolve any outstanding issues and repay investors in full.
Are borrowers intentionally delaying payment?
When delays occur, we take great care to ensure that we know the reason why. In many cases, we are confident the borrower is not attempting to delay repayment to investors intentionally. Accruing interest, at a higher rate for loans that are late, can have a significant impact on borrowers’ profit margins, so borrowers are not incentivised to delay repayment. If we feel that borrowers have been intentionally misleading us and investors, we will take appropriate action.
Why can’t Funding Circle distribute interest payments on late property loans?
With property finance loans the borrower will not usually be a trading business with a regular cash flow, so may not have the means to service regular interest payments following the end of the expected term of the loan. Funding Circle will always work with borrower to ensure investors’ best interests are taken into account.
Additional interest, at a rate 2% per year higher than set out in the loan agreement, will continue to accrue on a daily basis on the outstanding amount for each tranche, and will typically be paid by the borrower along with the outstanding principal where they have been able to refinance or sell the units in the development. This additional interest will be typically be distributed to investors after the loan has repaid; and this will be done as soon as possible but can take a few working days.
Why can’t Funding Circle distribute the final scheduled interest payment on late property loans?
As the final scheduled interest payment can’t be distributed without the scheduled principal payment, we are unable to distribute this to investors on each loan tranche until the full principal payment for that tranche has been received from the borrower.