Upstart, who just launched their p2p lending platform a couple of months ago, has made some very interesting changes today for investors. One of the complaints I hear from investors in Lending Club and Prosper is that when a loan defaults it is the investors, not the platforms that take the hit. With the changes made today, Upstart is addressing that issue head on.
Investors Will be Refunded Origination Fees if a Loan Defaults
This is the really big news for investors and the change that I am most excited about at Upstart. The industry standard today is this: if a loan defaults the investors will lose their outstanding principal. Meanwhile, Lending Club and Prosper keep the origination fees they made by issuing the loan and lose nothing. This has always felt like a misalignment of goals to me.
Upstart is taking a different approach. Now, if a loan defaults at any time over the course of the three-year loan term (all Upstart loans are currently three-year terms) then Upstart will take the revenue they earned from the origination fees and refund the money to investors.
Now, like the other platforms, Upstart has a sliding scale of origination fees ranging from 1% up to 6%. So, we could be talking a significant credit to investors in the case of a default. And I confirmed that there is no time limit on this refund. So, in theory a borrower could default in month 32 of a 36-month loan term and investors will receive the full credit for the origination fee.
