If you have read my peer to peer lending reviews, you will know I consider platform failure as the single biggest risk in peer to peer lending.
There could however, be an even bigger risk that lenders often overlook. That risk is borrower loan fraud.
Several months ago a loan I invested in went into default. This loan has been slowly moving through the court system as the lending platform attempts to legally obtain access to the assets. Once the assets are acquired, they will be sold in an attempt to recoup lenders capital and interest. How much money will be recovered is unknown. I recently received an email from the platform giving an update on the legal process. The platform stated they believe the borrower has intentionally misled the courts, the lenders and the platform. The borrower is intentionally dragging out the legal process to delay asset recovery. This in turn is costing lenders in the form of legal fees.
If a platform lends a borrower whose sole intent is obtain funds fraudulently, this can be damaging in many ways. Firstly when the loan defaults, lenders lose money. Secondly, lenders lose confidence in the platforms ability to competently perform borrower due diligence. Thirdly, if the assets cannot be legally recovered, they cannot be liquidated to recoup lenders funds.
Early in 2016, I decided to discontinue investing in Rebuilding Society due to a loss in confidence of their underwriting process. Two loans I had invested in were in my opinion, obtained fraudulently. The borrower on one loan failed to make a single payment while the second borrower had taken three additional loans with other peer to peer companies and made only two payments before filing for insolvency. After finding this out, my confidence in the platform had disappeared. Maybe Rebuilding Society has improved but now there are too many good investment alternatives so I have stayed away.
Despite having assets securing peer to peer loans, default recovery is no easy task. It can be a lengthy process that is expensive due to legal costs. Some property defaults can take years to recover.
If you see multiple cases of possible borrower fraud within a platform, it might be time to revaluate whether or not that platform is worth investing through. There are too many other options for investing your funds and no need for you to take additional risks.
If you enjoyed this article and want to learn more about peer to peer lending, click here and receive my complimentary Top 5 Peer to Peer Lending Sites Report.
