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By Eerik Oja, Country Manager of MOGO Estonia ([email protected]) | October 2016
Quite a few of the most active Mintos investors have shown interest in MOGO’s business, asking questions on Facebook groups and approaching me directly. This blog post aims to answer the most frequently asked questions.
Please note that even though the MOGO business model is similar in all countries in which we operate, there are also many differences, mainly due to regulatory requirements. Because of this, the information provided below does not necessarily apply to other countries in which MOGO operates, or to other loan originators.
MOGO Estonia offers two main products to its clients – title loans (also known as leaseback) and vehicle financing (similar to leasing, we finance the purchase of a vehicle). In both cases, the vehicle secures the loan.
About a third of the loans we issue are title loans, while the rest are vehicle financing. We began operations in Estonia in 2013; since then we’ve served almost 6,000 clients and have reached a gross portfolio exceeding EUR 12 million. Our average loan amount is about EUR 3,000, and the average age of the collateral is between 10 and 15 years. We charge interest rates ranging from 30% to 60% per annum. Less than 10% of our portfolio consists of defaulted loans.
Do you invest on the Mintos platform yourself?
Yes. I was among the first investors on the platform, back when Latvian mortgage loans were the only investment opportunities available. So my investment career on Mintos precedes the cooperation between MOGO and Mintos. By now the investments I’ve made on Mintos make up the largest part of my personal P2P portfolio. My Auto Invest is configured to only pick up buyback-guarantee loans, so most of my money on Mintos has been invested in MOGO loans.
How is your business regulated?
MOGO Estonia is a licensed creditor under the Creditors and Intermediaries Act. Aside from the rigorous conditions set for us by Mintos, we are supervised by the Estonian Financial Supervisory Authority. Our auditor is PwC, and we have outsourced our internal audit function to Grant Thornton Baltic.
What does the loan issuance process look like?
After an application is submitted on our website, we gather information both on the client and the vehicle from various databases (including population, vehicle, pension and credit issues registries). Based on this information we calculate a credit score for the client. Before we transfer the loan amount, MOGO Estonia is registered as the owner of the vehicle while the client remains the “responsible user” in the registration document of the vehicle.
How do you assess the value of the collateral?
Initially, we used vehicle sales portals to evaluate the market value of a vehicle; now this process is largely automated and requires little input from our team. The algorithm creates a sample of similar vehicles on the market (make, model, production year, engine type and size, etc.) and calculates the median price, which is used as a basis for the final assessment value.
What happens if the loan defaults?
First, MOGO always attempts to avoid defaults. Our main income consists of interest payments; the share of penalties and service fees is small. Our “soft collection” procedures are highly automated, allowing our debt collection team to focus on finding individual solutions to payment issues instead of performing standard repetitive tasks such as sending emails, text messages, and making phone calls.
If we are not able to avoid a default, our repossession managers attempt to secure the vehicle. At this point, the client can still renew the contract if the outstanding debt is repaid. Repossessed vehicles are sold on the MOGO car lot. If the vehicle sale proceeds do not cover the outstanding debt amount, we attempt to reach an agreement with the client (settlement agreement, buyout, etc.). If the client is uncooperative, we will sell the claim to a collection company, which can pay anything between 10% and 50% of the outstanding principal amount. The rest of the claim is then written off.
In the past we’ve also used court proceedings and bailiffs to recover the funds owed to us, but these processes have proved too slow and too costly. Now we prefer to focus on our core competence of issuing and servicing loans.
Eerik Oja, Country Manager of MOGO Estonia
Why do so many loans get bought back?
Our average loan term is around four years, so there is ample time for conditions to change. As a flexible credit company, we allow clients to change contract terms. As noted above, we strive to avoid defaults, and so we may agree on a new payment schedule with the client. Moreover, many loans get repaid before the original maturity date, and sometimes well-paying clients ask for an additional loan (principal increase). Changes to the contract terms can be as small as changing the payment date for a more suitable day of the month (e.g. on the day the client receives his or her salary). In all of these cases, a buyback-guarantee loan is repurchased from the Mintos marketplace (and frequently relisted the next day with new contract terms).
There have also been questions about buyback reasons, in particular the designation of a “not specified” reason. These have been caused by data exchange issues between the MOGO and Mintos internal systems, as both are being updated constantly. The issue has been found and resolved, so in the future you should not see “not specified” as a buyback reason any more.
Why do you use Mintos instead of other financing types?
Mintos is not the only financing source for us. The MOGO Group also uses bank credit lines, loans, bonds, etc. In 2015 we secured a EUR 23.3 million financing round from Mezzanine Management, which is backed by EBRD and EIF, among other institutional investors.
That being said, we like the flexibility that the Mintos platform offers, which enables us to match loan issuance and financing cash flows. In case of bond financing, for example, we would receive the proceeds in one day and would have to pay interest on money that is standing in our bank account. With Mintos we don’t have this cash drag issue.
Why does the interest rate/LTV/term of the loans offered on the platform change?
It’s important to note that loan parameters are set by MOGO, whereas the role of Mintos is to provide the platform that enables different loan originators to compete for investors’ money – in that sense Mintos has the characteristics of a stock market rather than a typical P2P loan service.
As a for-profit business, MOGO is interested in securing financing at the lowest possible effective rate, which is why we test investor demand by changing certain parameters (LTV, interest rate, loan term, buyback vs. no buyback, etc.). When we first started our cooperation, we hand picked the loans that we believed would get the first investors on board so we could prove that we are able to provide attractive risk-adjusted returns. These loans had a long payment history, low LTV and offered a comparatively high interest rate. Over time, demand for our loans increased, and now our loans listed on Mintos are quite similar to our general portfolio metrics – although, of course, we have not listed our whole portfolio on the platform.
Why are MOGO interest rates lower than other buyback loans?
It is true that MOGO buyback loans tend to offer lower interest rates than unsecured payday loans. This might sound trivial to many, but it is important to stress that all MOGO loans are secured by vehicles, so in case of a default, the claim against the client can be covered by selling the underlying asset. We believe that MOGO loans offer the best risk-adjusted investment opportunities on the Mintos platform, but of course investors are free to “vote with their money” and invest in the loans they deem to be the most attractive.
To meet different investor preferences, MOGO offers both buyback and non-buyback loans, with the latter currently offering the highest interest rates available on the Mintos marketplace.
We believe the cooperation with Mintos is an integral part of the continuing success of MOGO. We strive to use innovative solutions in all areas of our business, and financing is no exception. We believe that Mintos is leading a revolution and we’re happy to be a part of it.