How the Finwiz Risk Score works

The Finwiz Risk Score and subscores evaluate a lending company’s loan offering. Before iqtirad can be offered for a new lending company, we assign the initial scores based on our due diligence checks during the company’s onboarding. And as long as iqtirad for the lending company are offered on Finwiz labs, we keep monitoring the company and regularly update the scores based on our findings.

What are subscores in the Finwiz Risk Score?

Subscores help investors to evaluate different aspects related to the risk of a loans available for investment as iqtirad, even if the services are provided by multiple entities. They are expressed numerically and are assigned to Loan portfolio performance, Loan servicer efficiency, Buyback strength, Cooperation structure. Subscores contribute to the Finwiz Risk Score with the following weight: 40% Loan portfolio performance, 25% Loan servicer efficiency, 25% Buyback strength, 10% Cooperation structure. The calculated numerical value is rounded to 1 decimal place. Numerical values are split across three intervals: lower risk (10.0-7.4), mid risk (7.4-4.5), and higher risk (4.4-1.0).

What are three statuses in the Finwiz Risk Score?

Status: Active – If investment opportunities from a particular  lending company have an assigned Finwiz Risk Score, the status of the company on Finwiz is “Active”, regardless of the score value. “Active” is any company who has/can have investment opportunities available on the Finwiz Primary Market, or whose investments in Notes can be traded on the Secondary Market. This status is not visibly assigned on the platform. Status “Suspended” (S) means that all investment or selling activities related to the loans issued by a specific lending company are stopped on the Finwiz Primary and Secondary Markets. Suspension of a particular lending company occurs due to the company failing to pass on borrowers’ repayments to investors/Issuer and/or honor their buyback obligation. We use a suspension to protect investors from further investments in loans issued by the lending company, until the next steps are known. In case of positive developments, the suspension can be lifted and investments can be continued. On the platform, this status is visibly assigned as “Suspended” or (S). Status “Defaulted” (D) means that investment or selling activities related to the loans issued by a specific lending company are not possible anymore on the Finwiz Primary and Secondary Markets.Status “Defaulted” (D) can be assigned to investment opportunities offered by a specific lending company under three possible criteria:Current estimated cash flows are not sufficient to cover full exposure, The lending company has declared bankruptcy or a process of insolvency is underway (including enforced liquidation) or the company is under legal protection, A restructuring solution has not been achieved within 180 days of suspension

To understand portfolio quality, we compare the non-performing loans ratio, the annual percentage rate, and the maturity term to the direct portfolio-related operational costs. Besides the other portfolio health indicators, we take a deep look into the historical performance of the lending company’s loan book. The loan portfolio performance subscore is calculated based on information about: Loan portfolio quality, Non-Performing Loans (NPLs) tendencies, Track record seniority, Product characteristics (e.g., liquidity of the collateral)

Buyback strength

This subscore measures the buyback strength and is a summary of the obligor’s ability to fulfil contractual obligations, meet liquidity needs and capital sufficiency. We calculate this subscore based on: Financial profile and performance. Management experience and  internal governance principles. Diversification of revenue streams and geographies. Funding mix and access to external/public funding . In rare cases, the buyback can be the responsibility of a business entity that’s different from both the loan originator and the loan servicing company. Even if such cases happen, with the current Finwiz Risk Score evaluation model, it will be possible to have an insight into the standings of all involved business entities.

Through this subscore we measure the loan servicer’s efficiency when it comes to collection of borrowers’ payments. Capabilities of the loan servicer are expressed in a subscore which is an evaluation summary of: The structure of Corporate governance and management experience in the lending business Implemented risk controls and compliance procedures. Loan administration processes and efficiency, Internal and external reporting quality. Please note that in some cases, the loan servicer and the loan originator might be two separate business entities

Cooperation structure

The Cooperation structure subscore evaluates the legal setup between the lending company and Finwiz. Factors that are evaluated, summarized and expressed with this subscore are: Access to borrower-related cash flows for Finwiz, Recoverability potential based on the legal setup, Transparency of cooperation structure for investors.

What are the criteria for a company to get a status “Defaulted” on Finwiz Labs?

Status “Defaulted” (D) can be assigned to loans offered by a specific lending company under three possible criteria: a.) Current estimated cash flows are not sufficient to cover full exposure: We evaluate whether the expected repayments from the underlying loans – or in case of a buyback obligation, cash flows from the lending company’s overall portfolio and operations – are sufficient to cover the contractual payments to the Issuer and the investors in full. Should we identify a shortfall in the necessary amounts for full recovery, we would assign Defaulted status irrespective of the size of the shortfall. b.) The lending company has declared bankruptcy, or a process of insolvency is underway (including enforced liquidation), or the company is under legal protection: Because of third party involvement, such as an administrator or liquidator, there is an increased risk of the lending company not honoring the buyback obligation or not passing on borrowers’ repayments in full, even if the current cash flow forecasts do not show this. The impact of these proceedings can vary based on each country’s specific legislation. For example, in one country, revocation of licence might allow the lending company to seek a voluntary wind-down and continue servicing loans and it would not fall under this criteria, while elsewhere, the same revocation would necessitate an obligatory wind-down by an appointed administrator, meaning it would fall under this criteria. c) A restructuring solution has not been achieved, within 180 days of suspension: 180 days should be sufficient to reach a reasonable restructuring agreement with a distressed lending company. We consider a restructuring solution reached with the lending company if payments are being made according to the plan, even if a formal agreement has not yet been signed.