Investors are falling out of love with New Zealand's first peer-to-peer (P2P) lender. Harmoney launched last year and investors relished the opportunity to make higher returns than bank lending.
But many are now unhappy with the charging model, which sees Harmoney churning loans to double dip its commission.
Investors lend to borrowers via an online dashboard and can choose individual loans to invest in. A $1000 investment can be spread in $25 amounts across as many as 40 different borrowers, reducing risk. Investors are charged a 1.25% service charge (commission) by Harmoney when either interest is paid into the investor's account or capital repaid.
Harmoney is being investigated by the Commerce Commission in relation to its charging structure for borrowers. However, increasing numbers of investors/lenders are complaining about the fees they are charged. (See Mary Holm's column for more about Harmoney and borrowing.)
Many investors have found that Harmoney is closing off as many as a quarter of their 36- and 60-month loans in as little as three months and taking its full commission.
To encourage this churn Harmoney sends unsolicited emails to paying borrowers encouraging them to get a bigger loan. Rather than topping up the existing loan Harmoney closes the first loan and takes its commission in full. It then takes a second commission on the "new" loan.
Harmoney says "rewrites" are necessary in consumer finance to stop borrowers going elsewhere. But investors say they're being "shafted" because Harmoney is encouraged to, in the words of an investor identified in a blog as "David", "churn and burn".
Investor Meghan Holender has chosen to invest in higher interest/risk loans and has found that churn, arrears and failed loans have seen her return reduced to 11 per cent from the 25 per cent that the Harmoney system said she was on track to earn.
"Harmoney Investor" complained on Holender's blog that it was "downright misleading" for Harmoney to prominently display "annualised returns" that didn't take into account rewrite fees.
David added: "They charge a fee for service that was meant to be 60 months of service in only one or two months. The result has been that the fee paid to Harmoney has been around 5 per cent, not 1.5 per cent."
When Holender examined one of her loans paying 9.99 per cent, she found that the interest would be 62c, after three months, but if the loan was rewritten at the three month mark, Harmoney took its full cut of 32c and the investor received only 30c before tax. She believes the only winner is Harmoney and a more honest way to do business would be for the service fee on rewrites to be nil to avoid double dipping.
Even with rewrite fees, arrears and loan defaults, investors are earning more than they might with money invested in the bank. P2P lending should also drive down costs for borrowers. Nonetheless some are smarting at the lack of transparency.
The Financial Markets Authority (FMA), which approved Harmoney's licence, says it will be talking to Harmoney to discover if it had adequately disclosed its fees to investors.
"At the time we approved Harmoney's licence we were aware that it proposed to charge an investor service fee," says Garth Stanish, director of markets oversight at the FMA. "However, we were not aware of this alleged business model where investors' loan documents are cancelled and then rewritten when borrowers borrow additional amounts through the platform."
Harmoney says that of all the loans in the first six months, 38 per cent of those have been paid off.
In a response to Holender, Harmoney's Mark Bardi said that the company expected about a quarter of loans to be rewritten.
General manager Monica Mathis points out that rewrites are common in consumer lending. She added this week that of the $162 million in loans Harmoney had written to date, only 0.05 per cent "is the incremental rewritten portion".
Some overseas P2P lenders use the double-dipping model, but many others don't. Few if any of the P2P lenders in Britain are fully transparent with investors, analysts at 4th Way, a P2P comparison site, told me.
One investor who has been communicating with me all year raised the issue of rewrites with Harmoney and was told in an email from Bardi that loans were being rewritten "at the request of the borrower". This concurs with what I was told when I put the same question to Harmoney. Mathis said in an email: "It is important that we continue to service customers by rewriting their loans as this is healthy for the marketplace or ecosystem."
But when I did some digging I found that many loans aren't being rewritten at the borrower's request. Harmoney is marketing to them to encourage them to borrow more.
Borrower Paula Phillips, for example, said she received an unsolicited email invitation to top-up her loan in June. Phillips was surprised that the top-up meant she had to cancel her existing loan and take out a new one.
When I called Harmoney's investor helpline asking about the issue I was given a lengthy run-around by a Fiji-based call centre staff member.
The staff member claimed repeatedly that in every case where my loans had been "paid off" in a matter of months the investor had simply repaid the loan. As Harmoney investor Callum Irvine noted in the Trade Me Community Forums, had they "suddenly had a Lotto win"? Only when I queried each loan did the call centre operator tell me that the loans had been rewritten.
The double dipping has come as a surprise to investors. Wendy Wood posted on Harmoney's Facebook page that in her opinion it was a "rort at the expense of investors".
"Comsolve" wrote in Trade Me's Community Message Board: "Yes, that's right. You the lender took the early risk, paid the 1.25 per cent lender fee and are now being shafted so Harmoney can get a second bunch of fees." And Anthonycat posted on PropertyTalk.com: "I'm pretty disgusted that a rewrite repays me my principal with the service fee removed."
Another problem is that as money is rewritten and returned to investors' accounts, it isn't earning interest unless they log in regularly and reinvest it, says Holender. "It's a lost opportunity," she says. Investors do not receive alerts to say that money has been returned to their accounts and there is no auto invest feature that would roll the money into new loans.
New Zealand's three other P2P lenders' charging models differ from Harmoney's. Squirrel Money charges a flat 2 per cent a year on the outstanding loan balances. Interest payments are not charged and it makes no difference if the loans are being churned. "The benefit of our approach is that if a loan repays early (as they do) we don't ping the investor with a fee for that repayment," says managing director John Bolton.
The Lending Crowd's Wayne Croad says that its fees to lenders are charged as a percentage of interest payments only, not principal. The fee hasn't been finalised, but Croad says it's likely to be 10 per cent of just the interest and not capital. Croad says that his company considered the model Harmoney adopted, but concluded that the reclipping of the ticket created a "moral hazard".
LendMe charges investors an annual percentage of invested funds ranging from 0.90 to 1.95 per cent depending on the risk rating of the loan and the LVR.
There have been other complaints from investors, some of which relate to what investors see as a high rate of failed loans. Harmoney says it will release data related to this early next year once it has a sufficient volume of loans to create statistically meaningful data.