Amount and maturity mismatches in P2P lending in China

Regardless of suspected crime cases like illegal fund-raising and fraudulent fund-raising, many peer-to-peer lending intermediary agencies (P2P platforms) also face other problems, including capital pool problems, failure in implementation of bank depository, from-the-melting problems, illegal guarantees and commitment of gains, maturity mismatch and capital mismatch. Of all the problems, amount mismatch and maturity mismatch are the most common and also the trickiest problems. Therefore, the authors took the two representative mismatch models as examples and analyzed them from the perspective of practical operation.

The “cut interest” model. Some P2P platforms, before providing a loan to a user, may deduct in advance a higher amount of service charges, which may include petty cash for risks, account management fees, payment handling charges, authentication fees, bank card verification fees, and interest.

For the borrowers, those P2P platforms have deducted the interest, and other costs and expenses before providing a loan to them. For the lenders, they haven’t received in advance the interest paid by the borrowers to the platform calculated based on the principal without deducting interest and expenses. As a result, the incomplete uniformity between credit and debts usually results in amount mismatch. For example, a borrower borrowed RMB 1,000 from a P2P platform. After deducting the service charges, the P2P platform actually paid RMB 920 to the borrower. But the fact is that the lender corresponding to the borrower has lent out RMB 1,000, and the P2P platform has also charged the borrower an interest calculated according to the loan principal of RMB 1,000.

Besides amount mismatch itself, it is also illegal or non-conforming for P2P platforms to charge interest on the loan amount without deducting service charges. Notice of the Supreme People’s Court on Properly Trying Cases of Private Lending Disputes to Promote Economic Development and Maintain Social Stability (Fa [2011] No. 336) stipulates that: “Where the lender deducts interest in advance from the principal amount, it shall refund the loan and calculate the interest according to the actual amount lent.” Provisions of the Supreme People’s Court on Certain Issues Concerning Application of Laws in the Trial of Private Lending Cases (Fa Shi [2015] No. 18) also stipulates that: “Where interest is deducted in advance from the principal amount, the People’s Court shall affirm that the amount actually lent should be deemed as the principal amount.”

Therefore, according to the above laws and regulations, the “cut interest” model is not subject to protection of laws, and debtors have the right to pay interest according to the actual principal amount. In addition, the “cut interest” model along with the platform’s failure to pay lenders the advance-deducted interest can also bring about some issues such as “cut interest” fund sedimentation and incomplete matching of debtor-creditor relationship, and further affect the one-to-one matching degree of P2P platforms on the level of legal relation. It is particularly important to note that for any service item for which a service fee should be charged, P2P platforms shall ensure that corresponding services are delivered; otherwise borrowers have the right to request a refund.

The “new loan for old debts” credit assignment settlement model. Credit assignment here refers to the credit assignment between users of a P2P platform, i.e., re-matching a new lender for a borrower after overdue repayment of the borrower, or re-matching a new borrower for a lender after early repayment of a borrower. Both cases can directly induce the mismatch of creditor’s rights, then lead to the mismatch of maturity and amount of a loan between the lender and the borrower.

For example, a borrower borrowed RMB 1,000 from a P2P platform, and the agreed maturity of the loan was 365 days. But the borrower repaid the principal and interest of the loan on Day 300. In this case, the maturity of the loan is not yet due, so the P2P platform shall broker without delay a new loan with a term of 65 days to match with the lender. But in practice, it is very difficult to succeed. If a P2P platform is backed up by strong big data ability and willing to standardize its operation, it may be able to guarantee certain degree of matching of creditor’s rights and integrity of credit assignment data, but it is still difficult to spread to all matching transactions in the case of early repayment or overdue repayment by the borrower.

In the case of overdue repayment by the debtor, in theory, a P2P platform should pay off the debts to the old creditor by making a new creditor purchase the overdue debts. But in reality, the P2P platform may not inform the new creditor of the fact that he/she is about to purchase an overdue debt, and will still deal with the new creditor’s credit and debts according to the “normal, new debtor-creditor relationship” and charge interest accordingly. Therefore, the P2P platform actually has established a legal relation of “new loans for old debts” on the overdue debtor, but both parties to the transaction know nothing about it, and fail to constitute crediting behaviours or establish a debtor-creditor relationship in a real sense.

On the level of legal structure, the “new loans for old debts” model is suspected of deceitful invitation to bid without real borrowing demands. For the debtor, because the old debtor-creditor relationship is cleared off with new loans and the new debtor-creditor relationship is not yet due, there is no direct legal basis for the P2P platform to charge the debtor the subsequent principal, interest, default interest, etc. For the new creditor, the P2P platform, which remains engaging in the matching activity with a fictitious object of debt in the knowledge that the debtor is overdue, is suspected of violating the obligation of good faith.

From the above analysis, it can be seen that amount mismatch and maturity mismatch generally do not exist in an isolated way. They are always accompanied by other illegal cases. That’s also why the central and local governments nowadays are so strict with the supervision of P2P platforms.

Jiang Fengtao is the founding partner and Si Rui is a capital market associate at Hengdu Law Firm