The security of your investment is key to the continued success of Žltý melón and it is our top priority. Žltý melón uses a comprehensive risk management program to lower your risks and ensure that the platform facilitates both low cost borrowing and profitable investment opportunities.
Keep in mind that when investing in peer-to-peer loans your investment capital is at risk and except for secured products it is not covered by any deposit guarantee or other protection mechanism.
You can learn more about the risks of peer-to-peer lending and Žltý melón's committment to transparency on this page or in the Prospectus of the User.
Investors should study both the Prospectus and the The Conflict of Interest before they invest.
Evaluation Process For Loan Applicants
Every own loan applicant is subject to the comprehensive assessment process run by our credit analysts, who assess each 1applicant's personal credibility and creditworthiness to determine their likeliness to fulfil their repayment obligations. Žltý melón has an internal team of experienced credit analysts that have developed a sophisticated multi-level approach to evaluating loan applications, which is similar to the processes used by banks and other financial institutions.
Our assessment process is not limited to just the statistics and automatic thresholds set within our system parameters, but instead we also evaluate each applicant carefully through a number of processes and steps which each require manual assessment and verification of the applicant’s information to ensure we only approve borrowers we believe are likely and able to repay their loan.
Loan applicants must meet all of our assessment criteria and pass our verification checks, meaning only those borrowers we identify as being low risk and who pass this screening process can participate in loan auctions with potential investors.
We use methods and assessment which are in line with industry standards and are similar to the ones used by banks, financial institutions and credit ratings agencies. The main areas in which loan applicants are evaluated and assessed include:
- Personal identification and verification
- Financial, property and employment statements
- At least 3 months of recent bank statements by direct connecting of his/her bank account (using PSD2) or by submitting electronic statements;
- Confirmation of their current employment or their tax return confirmation; or
- A copy of their social insurance confirmation detailing their income from
- any retirement pension; and/or
- any state-provided parental allowance benefits; and
- Any other relevant documents that detail and provide verification of their current income and financial position (e.g. mortgage statements, investments, inheritance funds etc).
- Verification of the applicant’s income and existing financial obligations
- Verification of any existing debts and arrears
- Credit scoring borrowers - Identifying unsuitable applicants and classifying successful loan applications into credit rating classes that reflect their level of risk
- Assessment of the borrower’s financial situation to determine their maximum loan amount
- Fraud prevention checks
An applicant must confirm their identity by providing a verified copy of their valid ID card, a second government issued identity document. The borrower’s signature on their loan contract, if approved and once their loan is funded, is either notarised by a registered notary public, signed at the general registrar’s office or verified electronically.
Borrowers must provide us with the following documents to verify their income and financial situation that demonstrates their ability to repay their loan:
Applicants must provide at least 3 months of recent bank statements. An applicant can also choose to send us a copy of the records held on them by the Slovak Banking Credit Bureau (SBCB) as it will ensure we are able to better assess their previous financial history and good repayment of other loans.
In some cases, we require loan applicants to provide a copy of this credit report from the SBCB in order for us to make a final assessment of their application and approve their loan. We also take steps to verify their employment with their current employer, who are asked to provide confirmation of their employment status as well as any other useful information which could affect our assessment about the personal credibility of the applicant.
We check all loan applicants against records held in the official debt databases to identify any tax arrears and for any missed social and health insurance payments. We also check for any existing or past bankruptcy petitions made by the borrower, as well as the databases held by the associate enforcement agencies for any contingent or distant applicant’s cases.
We use the same standard credit scoring matrix in our assessment process that is also used by banks and other financial institutions. This method uses demographic data and information on the financial situation of loan applicants to determine their risk profile and credit rating class.
We also track the development and performance of our entire loan portfolio, monitoring for trends that allow us to continually revise and improve our assessment criteria and parameters in order to ensure we accurately reflect the credit risk of all loan applicants.
Moreover, each application is assessed thoroughly by our experienced loan analysts, who verify all of the data provided and our final assessment before approving each application and making any necessary adjustments to the client’s risk class.
In order to determine the maximum loan amount borrowers are eligible for, our system assesses applicant's entire financial situation including their income, existing financial obligations, monthly expenses and any savings they have.
This assessment of their household income versus their monthly outgoings on bills, credit repayments and regular expenses is known as their 'Debt Burden Ratio'. Our assessment helps ensure we are a responsible lender and to prevent applicants from becoming over indebted by taking out a new loan that they cannot afford to repay and which may cause them problems in meeting their other financial obligations.
We have implemented a number of system processes and checks that alert our loan analysts of any potential mismatch or suspicious issues in the data and information provided in a borrowers loan application or of any fraudulent activities conducted by a group of users such as collusion.
Credit scoring borrowers
The exact loan amount a borrower is eligible to apply for is determined individually for each applicant based on an assessment of their current financial situation and previous credit history. The total sum of loans any individual borrower can apply for cannot exceed 10 000 EUR / 250 000 CZK (exceptions can be made for loans and borrowers that have a sufficient third-party guarantee, assessed on a case-by-case basis, which can allow them to borrow higher amounts).
Our sophisticated credit scoring mechanisms and loan assessment processes allow us to classify all applicants who are approved for a loan and meet the established criteria into several risk classes. Individual borrowers are assigned to one of the following risk classes:
These are visible to investors during loan auctions and are used to help guide your decisions as an investor regarding which loans you should offer to fund, as well as to help determine the recommended and maximum interest rate that investors can offer to borrowers for their loan.
represents the lowest risk class of borrowers, as they are people with a good credit history as well as a clearly established financial situation that will allow them to easily make their scheduled loan repayments. At the other end of the spectrum, borrowers within the class, referred to as ‘Sufficient’, represent the highest risk class of borrowers. We also use rating classes and for real-estates financing secured loans CashFree Housing and CashFree Hypo and class for guaranteed Partner loans.
Assigning a credit rating category to each approved loan applicant is a significant element that can help you in deciding which loan auctions fit best within your investment strategy and match your desired level of risk for your investment. The credit rating class is also a key determining factor used by our system to determine the recommended and maximum interest rate for each loan, which you as an investor are able to offer borrowers during their loan auction.
As part of our commitment to transparency, we provide regularly updated statistics on the returns earned by our investors and the performance of loans on Žltý melón which can be found here.
DIVERsification of investments
Diversification is a standard way of managing and limiting investment risk. By distributing your entire investment across a larger number of smaller investments, rather than investing all of your money in just one loan, you reduce the risks associated with any one particular investment in a loan, should the borrower fail to meet their repayment obligations.
Investing across various different assets, in this case different types of loans available on Žltý melón, means you are able to create an investment portfolio with a lower level of average risk and also earn more stable returns on your investment.
Spread your investment
In order to earn more stable returns on your investment and to limit your exposure to risk, we recommend that you spread your investment across at least 40 different borrowers. The more individual loans you invest in, the better your investment portfolio will be.
To help secure your investment, our system will not allow you to invest more than 250 EUR into any one single loan. For experienced investors who have already invested a minimum of 5 000 EUR in at least forty different loans, this limit is increased to a maximum single investment worth 25% of the total loan value that they want to fund.
If you want to invest 1 000 EUR on Žltý melón, you could:
- Invest the total amount 1 000 EUR in one loan (In reality, the system will not allow you to do this, as the maximum amount that an investor can invest into any single loan is 250 EUR) ; or
- diversify your investment across 40 individuals loans with 25 EUR each.
If you were to invest 1 000 EUR into a loan and the borrower fails to make their schedule repayments and defaults on the loan, you could potentially lose your entire investment.
However, if you were to invest in 40 different loans with 25 EUR each and one of the borrowers whose loan you have funded defaults on their loan, your potential maximum loss would be limited to 2.5% of your total investment. This would be easily covered by the money earned from the other loans you had invested in, meaning your total investment portfolio would generate a net positive return on investment.
CREATING YOUR INVESTMENT PORTFOLIO
Creating an investment portfolio with a higher degree of diversification ensures lower risks and more stable returns on investment. This benefit is maximised when you spread your investment across several different loans according to a specified investment strategy, rather than just at random. The key determinant for you when deciding on your investment strategy, is based on your personal situation and preferences, including the ratio of acceptable risk and your expected return on investment, which is based on your individual investment profile.
To ensure the highest levels of diversification and stability for their investment, we recommend investors build a portfolio of loans from different risk categories, as well as with different loan maturity periods (e.g. some shorter term loans and others with longer repayment periods). The actual distribution of loans in an investment portfolio should ultimately reflect the individual preferences and risk profile of an investor.
As with every other type of investment it is inherent that investment in riskier assets (in this case, borrowers with worse credit rating categories) offers the possibility to earn higher returns (in this case through higher interest rates on loans), but also carries a higher overall risk of loss (in this case if borrowers fail to repay their loans).
The interest rates recommended by Žltý melón include an element of risk premium pricing, as determined by the credit rating classes assigned to borrowers, which means that riskier borrower will pay a higher interest rate than those borrowers that are less likely to default on their loan. If your investment portfolio has sufficient diversification, the risk premiums, built into the pricing of loan interest rates, should mean earnings from loans that are repaid on time will cover any investment losses, caused by defaults on the loans of some other borrowers.
LOW OPERATIONAL RISK, INVESTMENT SECURITY AND SEPARATE ACCOUNTS
To protect your investment, it is important to evaluate the operational risk associated with the possible termination of the company iService a.s. as an operator of Žltý melón. However, the risk is much lower than it may seem.
- iService, a.s. is a joint-stock company backed by high levels of nominal investment capital. The managers of the company have extensive experience in finance, investment management and credit risk management.
- If the iService, a.s. company terminated its existence, it does not terminate your investment or legal rights to collect repayments from the borrowers whose loans you have invested in. Your credit relationship is a legal bilateral agreement between you and the borrowers whose loans you have funded. If iService a.s. terminated its existence, a borrower would have a legal obligation to repay their entire loan along with the associated interest payments.
- Money which you have not yet be invested in loans, were iService a.s. to terminate its existence, and which would be still held in your virtual Žltý melón investment account, remains with you and is not the property of Žltý melón. These funds are deposited in a bank account that is strictly separated from other bank accounts held by the company and are the sole and exclusive property of the investors that originally deposited them.
- If the bank which holds the accounts where clients’ funds are deposited were to experience financial difficulties (currently these funds are held in accounts opened with two Czech banks operating in Slovakia - UniCredit Bank Slovakia and Fio Bank), these funds would be covered and protected by the deposit guarantee scheme, as determined by the current wording of the ‘Czech Act No. 21/1992 Coll. on banks, as amended’.
- iService, a.s. company works as a loan intermediary and only administers loans rather than providing credit directly to borrowers. As loan administration is the main business activity of the company, the possible trustee in bankruptcy would be required to manage the continuation of these activities for clients, or find another solution for the company’s existing clients, the most likely form of which would be to transfer the administration of these existing loans to another relevant subject.
Investors would be entitled either to assume management of the loans themselves, or could agree to the solution suggested by the trustee in bankruptcy, which would mostly likely be to allow a 3rd party to oversee the administration and repayment of the loans that were funded by the investor.
DEBT RECOVERY AND COLLECTIONS
Žltý melón actively monitors each borrower and loan in order to proactively identify the very first signs of any potential repayment difficulties and loans that are possibly in danger of default.
In the case that a loan does default, or a borrower struggles to make prompt repayments as agreed in their loan contract, we provide you with a complex process of debt recovery to collect the money owed to you and which you invested in the borrower’s loan.
KEY ASPECTS OF OUR DEBT RECOVERY AMD COLLECTIONS PROCESS
- All our loan contracts are subject to the highest legal standards.
- If a borrower is employed, he/she signs the Agreement on Wage Deductions, which helps facilitate full and prompt repayment via direct deductions from the borrowers earnings.
- In the case of secured loans, we apply a guarantee or lien protection system.
- A borrower who defaults on their loan will be entered in registers of debtors and will not be able to take out another loan.
- The loan collection process allows for the recovery of debts through legal mechanisms, including via executing proceedings against the debtor to claim against their property.
- To improve the recovery of debts owed to investors we cooperate with the professional institutions for debt recovery.
- The effective arbitration courts help us to speed up the debt recovery process in the event of late repayment or default.
- The subsequent execution of debt recovery processes may under ‘Law No. 233/1995 Coll. as amended’ result in collection being taken from the borrower’s wages, his bank accounts, claims against his movable and immovable property, marketable securities or other rights of the borrower that have financial value.
- In the event of legal collections processes being undertaken against a borrower, they are, pursuant to a court’s decision and in accordance with all applicable regulations, obliged to pay all costs incurred as a result of the legal and executive proceedings taken against them including all legal costs such as attorney’s fees;
- Our recovery system does not burden you as an investor, with any additional costs.
Our debt recovery and loan collections process has two parts:
- 'Soft' collection (loan repayments are in arrears for between 1 day to 3 months)
- 'Hard' collection (loan repayments have not been made for more than 3 months)
If a borrower fails to make their scheduled loan repayments on time, their loan is marked as being in arrears. The delay in making their repayments starts a variety of processes intended first and foremost to ensure that the borrower repays their loan promptly in future, as well as to minimise the likelihood they will default entirely on their loan.
In the event that a borrower fails to make a scheduled loan repayment on time, they are penalised in the form of a late payment fee that is added to their next instalment payment. This missed repayment also launches the active management of their loan by our in-house team which is called 'soft' collection.
We initiate a review process of their loan and engage in multi-level active communication with the borrower through various channels (phone, email, letters), as we seek to collect the missed loan repayments and return their loan to the standard state as quickly as possible.
The entire process of soft collection is fully provided by our in-house collections team, within the guidelines established by our internal set of policies and procedures, which saves investors both time and money.
In order to collect delayed or missed loan repayments we make use of the 'Agreement on wage deductions', which the borrower (when employed) agrees to before taking out a loan. In the case of default, this agreement is forwarded to the borrower’s employer who shall exercise the deductions from the borrower’s wages for the total amount due.
INVESTORS ARE COMPENSATED FOR REPAYMENT FAILURES
In cases of late or missed repayment, the borrower pays a late payment fee in the amount of 5 - 50 EUR (depending on the amount of the installment) for each month that each of the missed or late repyments is delayed by. Of this amount, the investors collects 65 %, split proportionally based on the amount of the loan each individual investors funded, as compensation for the late payment.
Soft collection is effective
Due to our comprehensive application process, only a few loans ever experience late or missed repayments. Based on our experience, we are able to resolve 60% to 70% of loans that are in arrears within our soft collection procedures, so that borrowers can meet their repayment obligations and investors are able to earn the expected returns on their investment.
If the borrower does not cooperate fully in the soft collection process, the claim is passed on to the 'Hard' collection process. The entire claim consisting of outstanding principal, unpaid interests, sanction fees / contractual penalty and possibly also owed premiums is marked as being in default. Consequently, this claim against the debtor proceeds to the association to protect the rights of investors - individuals (here ZOPI), which further recovers the amount of the liability from the debtor in the form of judicial proceedings or by means of execution against the debtor's personal property and financial assets. In the case of secured loans, we also apply a guarantee or lien protection system.
ZOPI is a not-for-profit association founded by iService, a.s. and iSale, s.r.o. for the purpose of providing a transparent and effective debt recovery process for investors on Žltý melón. ZOPI is established as a non-for-profit organisation, which means that all revenues gained from its operations (i.e. receivables recovered from borrowers that have defaulted on their loan) are, after deducting the appropriate costs of operation, transferred directly to the investors that originally funded the borrower’s loan.
External costs arising during the collections process (e.g. court fees, legal fees and the cost of enforcement) increase the amount that is to be recovered from the debtor in a standard way and are all paid for by the borrower in the event of a successful recovery. However, ZOPI covers all of these costs of recovery for investors regardless of whether any money is eventually collected from the borrower. Žltý melón, acting via ZOPI, does not charge any additional fees to investors for providing them with these hard collection procedures.
ZOPI regularly informs investors on its activities and the state of its debt recovery actions. The money that the not-for-profit association recovers from borrowers is immediately sent to the accounts of the investors that funded their loan. This distribution is carried out continuously and in near real time, meaning that any money collected from borrowers is sent to the accounts of investors as soon possible, rather than at scheduled disbursement intervals, such as when the entire debt is collected.
You can read ZOPI´s Articles of Association here.
Rapid process of legal enforcement
To speed up the recovery process, claims against borrowers that have defaulted on their loan are enforced at the arbitration court in Slovakia. After the verdict, other legal steps are undertaken which may lead to the eventual seizure of the borrower’s assets in order to pay back the money they owe to investors.
While we offer a debt recovery service managed by ZOPI free of charge to our investors, it is an optional service and an investor may choose not to make use of it. If an investor is interested in undertaking the steps of legal enforcement ('Hard collection') against a borrower individually, we will pass on the necessary documents to the investor that will enable them to do so. This includes providing them with the personal identification documents of the borrower.
You can read more about our IT security and privacy policies in the section on Safety and privacy.