WO2020008160A1

WO2020008160A1 - Debt refinancing system and method

Info

Publication number: WO2020008160A1
Application number: PCT/GB2019/000082
Authority: WO
Inventors: Walter CRAIG; Tomasz PAWELEK; David Michael Scanlan
Original assignee: Ids Loans Corp.
Priority date: 2018-06-08
Filing date: 2019-06-07
Publication date: 2020-01-09

Abstract

A computer implemented system and method for debt refinancing which refinances delinquent debt through lower APR credit so as to provide immediate relief to the consumer through a settlement with the current title holder of the debt. The system has a lending software application for assessing a loan application made by or on behalf of the debtor to a third-party lender such that if approved, the third-party lender issues a loan amount for the purpose of repaying some or all of a debt to a collections agency, a transaction software application for paying the loan amount from the third-party lender to the collections agency, and issuing the loan amount on a blockchain ledger and a payment software application for receiving payments of the loan amount made by the debtor to the third-party lender, determining an amount of a loan repayment and removing a portion of the loan amount from the blockchain ledger in response to the loan repayment and distributing said portion between the collections agency and the third-party lender.

Description

Debt Refinancing System and Method

Introduction

The invention relates to a computer implemented system and method for refinancing debt or new financial obligations and in particular for refinancing delinquent debt which is collected by receivables management companies including, but not limited to, collection agencies and debt buyers.

Backqround to the Invention

Refinancing is the replacement of an existing debt obligation with another debt obligation under different terms. The terms and conditions of refinancing may vary widely based on economic factors such as inherent risk, projected risk, currency stability, banking regulations and borrower's credit worthiness. Refinancing can also cover a brand new financial obligation, where the refinancing party promises to pay a service provider for services rendered to consumer.

If the replacement of debt occurs under financial distress, refinancing might be referred to as debt restructuring. A debt might be refinanced for various reasons:

1. To take advantage of a better interest rate (a reduced monthly payment or a reduced term)

2. To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees)

3. To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees)

4. To reduce or alter risk (for example, switching from a variable-rate to a fixed-rate loan) 5. To free up cash (often for a longer term, contingent on interest rate differential and fees)

In the case of personal debt, the debt is often the result of a consumer buying goods and/or services from a business using credit. Typically, a consumer credit provider has a relationship with the business such that, when purchasing the goods and/or services, the consumer will enter into a consumer credit agreement with the consumer credit provider. Consumer credit comes in many forms including credit cards, lines of credit and loans. Consumer credit is also known as consumer debt.

Alternatively, customer might be denied access to services partially funded by other means, such as medical procedures covered by insurance, but subject to a substantial deductible or another out of pocket experience. Since the consumer cannot afford this deductible, they are effectively unable to receive a service, even when deductible is a small portion of its total cost. In such cases, refinancing refers to having the out of pocket cost settled and guaranteed to the service provider through digital promissory note.

It will be appreciated that, as referred to herein, a consumer may be any type of legal person including but not limited to, an individual, an association, partnership, limited company or corporation who buys goods and/or services. A business is any type of legal person including but not limited to, an individual, an association, partnership, limited company or corporation who provides goods and/or services. Consumer credit is divided into two classifications: revolving credit and instalment credit. Revolving credit can be utilized for any purpose. Loans are made on a continuous basis for purchases until the consumer reaches his credit limit. Customers receive bills periodically to make at least a minimum monthly payment. Instalment credit is used for a specific purpose, for a defined amount and for a specific period. Payments are usually the same amount each month. Examples of purchases made on instalment credit include large appliances, automobiles and furniture. These kinds of loans usually offer lower interest rates than revolving credit. For example, a car company holds a lien on the car until the car loan is repaid. The total amount of the principal and interest is repaid within a predefined period. If the customer defaults on the loan payments, the company can repossess the car and charge penalties.

If a consumer fails to pay all or part of the debt, it can be written off, sold or placed with a receivables management company. In order to recover the defaulted value, collectors can enter into an arrangement with the consumer in a form of a pre-approved repayment plan. Total amount owed is split into regular payments, similar to an instalment loan. In all cases, the consumer has a legally enforceable duty to repay the debt in the amounts and timescales agreed under the consumer credit agreement or the collection repayment agreement.

Summary of the Invention

It is an object of the present invention to provide a computer implemented system and method for debt refinancing.

Another object of the invention is to provide a computer implemented system and method which refinances delinquent debt through lower APR credit so as to provide immediate relief to the consumer through a settlement with the current title holder of the debt. In accordance with a first aspect of the invention there is provided a computer implemented system for refinancing debt owed to a creditor by a debtor, the system comprising:

a lending software application for assessing a loan application made by or on behalf of the debtor to a third-party lender such that if approved, the third-party lender issues a loan amount for the purpose of repaying some or all of a debt to a collections agency;

a transaction software application for paying the loan amount from the third-party lender to the collections agency, and issuing the loan amount on a blockchain ledger; and

a payment software application for

receiving payments of the loan amount made by the debtor to the third-party lender, determining an amount of a loan repayment and

removing a portion of the loan amount from the blockchain ledger in response to the loan repayment and distributing said portion between the collections agency and the third-party lender.

In accordance with a second aspect of the invention there is provided a computer implemented method for refinancing debt owed to a creditor by a debtor, the system comprising:

assessing a loan application made by or on behalf of the debtor to a third-party lender such that if approved, the third-party lender issues a loan amount for the purpose of repaying some or all of a debt to a collections agency;

paying the loan amount from the third-party lender to the collections agency, and issuing the loan amount on a blockchain ledger; and

receiving payments of the loan amount made by the debtor to the third-party lender, determining an amount of a loan repayment and removing a portion of the loan amount from the blockchain ledger in response to the loan repayment and distributing said portion between the collections agency and the third-party lender. Preferably, the blockchain ledger ensures transparency and consistency in the transaction software application.

Preferably, the loan amount is issued on the blockchain ledger by the third-party lender. Preferably, the loan amount issued on the blockchain ledger represents the value of the loan.

Preferably, the loan is secured by one or more unconditional payment instruments. Preferably, the total amount issued on the blockchain ledger represents the value of a plurality of loans in current good standing and fully secured by unconditional payment instruments.

More preferably, the loan amount issued on the blockchain ledger represents the principle value of the loan.

It is effectively a promise to pay by the Third-party Lender to the blockchain balance holder once the principal is repaid back by debtors. Preferably, the blockchain ledger is a US Dollar ledger.

Preferably, the loan value in the blockchain ledger is classified into free and frozen funds which are associated with lending risk. Preferably, the frozen funds may only be held by the collections agency or returned to the Third-Party Lender.

Preferably, the free funds are available for use by the collections agency including resale to other parties.

Preferably, the loan value in the blockchain ledger is liquidated in real time in response to the receipt of payments from the debtor to the third-party lender. Preferably, the loan value in the blockchain ledger is mandatorily written off for delinquent loans.

Preferably, the lending software application comprises a risk assessment procedure. Preferably the risk assessment procedure evaluates one or more of the following factors: past performance records of other refinanced accounts for the same delinquent product and other placements of the particular collection agency to evaluate the probability of default on this new loan. Brief Description of the Drawings

The present invention will now be described with reference to the accompanying drawings in which: Figure 1 is a schematic diagram which shows the use of an embodiment of the present invention; and

Figure 2 is a block diagram which shows an embodiment of the present invention ; Figure 3 is a swim lane flowchart which shows an example of account refinancing using the system and method of the present invention;

Figure 4 is a swim lane flowchart which shows an example of blockchain ledger fund reclassification in accordance with the system and method of the present invention;

Figure 5 is a swim lane flowchart which shows an example of loan repayment in accordance with the system and method of the present invention;

Figure 6 is a swim lane flowchart which shows an example of loan write-off in accordance with the system and method of the present invention; and

Figure 7 is a swim lane flowchart which shows an example of blockchain ledger liquidity in accordance with the system and method of the present invention.

Detailed Description of the Drawings

The present invention relates to a system and method for refinancing debt owed to a creditor by a debtor. In the present application a creditor may be a credit agency, credit title holder or the like.

Figure 1 is a block diagram which shows an example of the system of the present invention and its relationship with the other parties in the financial transactions which provide for refinancing debt owed to a creditor by a debtor. The block diagram 1 shows a third-party lender system 3, which interacts with a collections agency 5, a debtor 7 and a blockchain ledger 9. Figure 2 shows the detailed features of the third-party lender system 3 which comprises a lending software application 15, a transaction software application 17 and a payment software application 19. In the example of the invention, the computer implemented system for refinancing debt owed to a creditor by a debtor is show as the third-party lender system 3 in the block diagram 1 of figure 1. The third-party lender system 3 comprises a lending software application for assessing a loan application made by or on behalf of the debtor 7 to a third-party lender. In this example, the loan is approved in a communication (process a) to the debtor 7 who commences payment instalments to the third-party lender system (process b) up to the final payment instalment (process c) which clears the loan.

Upon approval of the loan to the debtor 7, this information is communicated to the collections agency (process d) and the transaction software application 17 pays the loan amount into a blockchain ledger from the third-party lender application 3 to the collections agency 5. The blockchain ledger is accessible by the collections agency 5 and the and third-party loan application 3. The blockchain ledger funds are split into free funds 13 and frozen funds 11 such that the frozen funds 11 are only accessible by the third-party lender application 3.

The payment software application 19 receives payments of the loan amount made by the debtor to the third-party lender application and calculates the amount of a loan repayment and removes a portion of the loan amount from the blockchain ledger in response to the loan repayment which is distributed between the collections agency and the third-party lender.

The present invention will be described with reference to figures 3 to 7 and in the context of the procedures which are used to provide a loan which replaces a creditor’s loan to a debtor. In the following example, the following definitions are used: the Debtor 30 is the original consumer of a now delinquent debt placed in collections;

the Collection Agency 24 is the current servicer/owner of the debt; the Third-Party Lender 28 provides a loan in place of the Collection Agency; the Creditor 22 is the original provider lender of a now delinquent debt; and the Investor 20 is an optional third-party investing in refinanced loans. As shown in figure 3, 21 one aim of the present invention is to improve the rate at which money is recovered from delinquent debtors by collections agencies by introducing an incentive to pay for the debtor, who can settle their debt, stop the collections activities and experience improved credit score immediately upon being approved for a loan. The original creditor provides a credit line to a debtor such as an instalment loan, credit card, account overdraft - or other type of receivable: property rental, retail product purchase or any post-pay service provided. In circumstances where the debtor 30 fails to meet his obligations to repay the debt, the creditor 22, reports to credit bureau the delinquent debt is written off 23, a bad debt report is created 25, which has a negative credit score effect for the debtor 26 and the debt is placed for collections 27 with a collections agency 24. In some circumstances the agency fails to collect on part or whole of the debt, because, by the time the debt is placed with the collections agency, the debtor has a long history of being unwilling and/or unable to pay and is not incentivized to change their behaviour.

At this stage, the debtor is offered third-party loan refinancing using reference criteria 29 and a decision 31 is made regarding refinancing. If rejected, the account remains in collections 35. If the third-party loan refinancing is approved 33, subject to terms and conditions agreed between the Third-Party Lender, the collection agency and the debtor’s ability to pay, the debtor is presented with a Loan Agreement that must be signed electronically 34. This agreement includes a repayment plan and future-dated checks for every single repayment that must also be signed in order to proceed. Once the agreement is completed, the third-party lender settles the debt 37 with the collection agency who can now report that the original debt has been resolved 43, thus cancelling the negative impact of the bad credit report on the consumer’s credit score 45.

Once the loan is originated, the Third-Party Lender28 reports the new credit to the credit bureaus 39, immediately improving the consumer’s credit score 41. A fresh, affordable low-APR repayment plan 47 is applied to the new account along with reminder emails and text messages for the consumer. In addition, a parallel process takes place on the blockchain. When a debt is refinanced by the Third-Party Lender, its principal is secured in a form of a blockchain ledger transaction. A trust given to the Third-Party Lender by the collection agency is increased by the USD value of the capital 49. Afterwards, this corresponding USD value is issued by the Third-Party Lender. In this example, the Third-Party Lender secures the principal placed for refinancing with a USD balance on a digital blockchain based ledger 51 , 53 as shown in figure 4.

When an account is refinanced, a corresponding balance is issued by the third-party lender. It is then subject to two adjustments 53: one for processing fees, and one for free funds.

The total value of capital is first split between the Third-Party Lender and the collection agency as per an agreed Processing Termsheet 55. It defines servicing cost due to the Third-Party Lender as a percentage of the loan principal (for instance: 20% for the Third-party Lender / 80% for the agency). It could also contain additional provisions, like minimal fee value. Once the split is applied to the loan amount, processing fees are transferred into the USD wallet of the Third-Party Lender, while the rest is to be held by the collection agency 59. The final step involves running a Risk Assessment 64 procedure 61 , which takes into consideration past performance records 63 of other refinanced accounts for the same delinquent product and other placements 66 of the particular collection agency to evaluate the probability of default 67 on this new loan. In addition to analysis of its own records, the Third-Party Lender incorporates various third-party underwriters. The goal 69 is to ensure that, should this new loan be written off by the Third-Party Lender, the collection agency will have enough currency in its blockchain wallet to accept it back and return the blockchain currency to the Third-Party Lender. Once the risk evaluation is complete, the USD blockchain value held by collection agency is split into Free 71 and Frozen funds 73. While the collections agency can trade their free funds with other third parties, frozen balance can only be retained in their blockchain wallet or returned to the Third-Party Lender.

To sustain the improved credit rating, a debtor must make their Third-Party Lender loan payments on time as shown in figure 5. When a single instalment is received by the Third-Party Lender 81 , in addition to reducing the remaining owed balance, it must be distributed between parties involved in the refinancing deal.

Once the Third-Party Lender receives a payment, via check, credit card or ACH direct debit, it immediately reduces the debtor’s owed balance 83. It also reduces the loan principal 85, used for interest accrual calculations. If all payments are made according to loan agreement schedule, then by the time a loan reaches its due date, both its principal and interest should be repaid in full. Payments on time are reported to credit agencies 86, which improves the account holder’s credit score 88.

To properly account for the received payment, the Third-Party Lender must break the payment down into interest 87 and principal 89. It incorporates a traditional model, where interest is paid off first, followed by principal: The Third-Party Lender loans are low-APR, and there is a limit for the maximum aggregated value of interest that can be accrued on a given debtor’s account. As a consequence, interest portion usually represents a small percentage of received payment. The interest amount is retained by the Third-Party Lender as its profit, while the principal amount is subject to USD blockchain liquidation.

The received principal amount 91 must be removed from the USD blockchain, to ensure its consistency and the classification balances adjusted 92. To complete this process, its total value needs to be split between the Third-Party Lender 93 and the collections agency 95 (or another blockchain balance holder). This split mirrors the original

Processing Termsheet 55 percentage values, which were used previously to generate the initial blockchain balances. For instance, if the Termsheet defined the Third-Party Lender processing fee as 20%, then 20% of received principal would be liquidated against the Third-Party Lender balance and 80% would be liquidated against agency balance.

The process keeps its part of the fiat currency (20% in this example) and removes its USD value from the blockchain. The remaining part of received principal (80% in this instance) is transferred over to the agency 99.

The collections agency accepts 101 its part of received principal as fiat currency funds from the Third-Party Lender. It then reduces the blockchain trust 103 by its value and sends the blockchain USD amount 105 equal to cash received back to the Third-Party Lender. The Third-Party Lender then removes this value from the blockchain 107. Through these two abovementioned steps, USD blockchain balance has now been reduced by the total value of received principal, maintaining its consistency. One part of securing the blockchain balance value is removing delinquent principal from the ledger as shown in figure 6. As a consequence, all Third-Party Lender loans are subject to strict write-off terms, similar to those of traditional banking products. Since Third-Party Lender loans interest is not represented on the blockchain, it does not participate in the write-off procedure.

Advantageously, the present invention allows the refinancing of existing delinquent debt through low-APR credit. In addition, it can provide immediate relief to the debtor through a settlement with the current creditor.

In this example, the Third-Party Lender employs an internal collection department in an effort to rectify missed or late payments 11 1. If instalments are not paid on time, it affects the credit score 1 13 of a debtor 115. Should these internal collection efforts fail 1 17, the Third-Party Lender would cancel the loan 119 and report the default to credit bureaus 121 , further amplifying the negative credit score effect 1 15.

Any written off principal 123 is returned to the collection agency 125 who provided the original account for financing. This ensures that the agency’s original debt face value remains intact, albeit the nature of the debt is changed (the original creditor is now replaced with the Third-Party Lender.). Agency can now resume its collection attempts and try to recover the remaining balance and may involve the original creditor 126. The interest accrued on the Third-Party Lender account is discarded.

Written-off principal amount 127 must be removed from the USD blockchain, to ensure its consistency. To complete this process, its total amount needs to be split between the Third-Party Lender 129 and the Collections Agency 131 (or another blockchain balance holder). This split occurs exactly the same way as it does for repaid principal. The Third-Party Lender write-off 133 consists of one step only: removal of the associated balance from the USD blockchain 135. The Collections Agency reduces its blockchain trust by the write-off amount 137 and returns the blockchain balance back to the Third-party Lender 139. This balance is then removed from the blockchain. It is critical that there is enough balance held in the agency’s blockchain wallet to complete this step. This availability is guaranteed by the frozen funds, described in detail with reference to figure 4.

As shown in figure 7, the implementation of blockchain technology in the present invention allows for safe and transparent participation of a third-party 20, willing to invest in the USD blockchain balance held by agencies. This procedure is optional and does not directly affect the Third-Party Lender loan book operations.

Since the value of all free funds held on the USD blockchain is guaranteed by the Third- Party Lender and secured by unconditional payment instruments issued by debtors, it might attract a potential third-party investor, who offers to purchase some of the balance from its current holder (agency) 141. The Third-Party Lender will pay 1 USD of fiat currency for 1 USD of blockchain balance and the investor is then be offered a reduced price to achieve profit upon the loans maturity.

Once both parties (investor and agency) agree on a purchase price, the funds are transferred between them directly 141. Afterwards, investor is introduced to the blockchain as a new wallet holder. He increases the trust value by the amount of purchased USD balance and receives this balance from the agency’s wallet 145,149. The transferred balance value is secured by corresponding principal of the Third-Party Lender loans. Through this purchase, the investor replaces agency as beneficiary of appropriate portion of these loans liquidation 151. The association of individual loan principals to transferred balance is calculated by an algorithm, which ensures a fair participation in future liquidations for all USD blockchain balance holders. Once a payment 153 is made against any principal associated with investor’s blockchain balance, he is eligible for a partial participation in its liquidation. This process is exactly the same as agency liquidation described in prior paragraphs: investor receives monies from the Third-Party Lender 155 and returns corresponding USD blockchain balance 157, which is then removed from the blockchain. It is worth noting that - since investors can only purchase free funds - there is no corresponding “investor write-off’ step, as all of their blockchain balance is guaranteed to be liquidated by fiat currency at some point in time. Payment 153 also results in the third party lender sending USD 161 to the investor 163.

If the investor is a licensed debt buyer, then it is possible for him to buy both free and frozen funds from other parties. In this scenario, the investor becomes a de facto collection agency, assuming all the risks associated with frozen blockchain balance. In that regard, his role would be identical to the role of a collection agency.

Advantageously, the use of blockchain technology to keep records of inter-party obligations and security of its balance guaranteed through electronic signatures, satisfies the existing obligation of a debtor with a legally binding digital promissory note fully secured by unconditional payment instruments. At the same time, no additional financial risk is introduced for any party involved in the transaction.

The benefits of the present invention include:

for consumers/debtors, the immediate settlement of

a debt, removal of negative effect on the consumer’s credit score and

consequently, access to cheaper financial products on the market;

for current title holders/creditors, increased return on a receivable that would otherwise require more aggressive and expensive collection practices or would not be possible to collect from at all; for the third-party lender, proceeds from servicing fees and low APR interest charges;

for Investors, a low risk, fully secured product with complete transparency and consistency guaranteed by the blockchain ledger technology.

Improvements and modifications may be incorporated herein without deviating from the scope of the invention.

Claims

1. A computer implemented system for refinancing debt owed to a creditor by a debtor, the system comprising:

a lending software application for assessing a loan application made by or on behalf of the debtor to a third-party lender such that if approved, the third-party lender issues a loan amount for the purpose of repaying some or all of a debt to a collections agency; a transaction software application for paying the loan amount from the third-party lender to the collections agency, and issuing the loan amount on a blockchain ledger; and a payment software application for receiving payments of the loan amount made by the debtor to the third-party lender, determining an amount of a loan repayment and removing a portion of the loan amount from the blockchain ledger In response to the loan repayment and distributing said portion between the collections agency and the third-party lender.

2. A computer implemented method for refinancing debt owed to a creditor by a debtor, the system comprising:

3. A system or method as claimed in claim 1 or claim 2 wherein, the blockchain ledger ensures transparency and consistency in the transaction software application.

4. A system or method as claimed in claim 1 or claim 2 wherein, the loan amount is issued on the blockchain ledger by the third-party lender.

5. A system or method as claimed in claim 1 or claim 2 wherein, the loan amount issued on the blockchain ledger represents the value of the loan.

6. A system or method as claimed in claim 1 or claim 2 wherein, the loan is secured by one or more unconditional payment instruments.

7. A system or method as claimed in claim 1 or claim 2 wherein, a total amount issued on the blockchain ledger represents a value of a plurality of loans in current good standing and fully secured by unconditional payment instruments.

8. A system or method as claimed in claim 1 or claim 2 wherein, the loan amount issued on the blockchain ledger represents the principle value of the loan.

9. A system or method as claimed in claim 1 or claim 2 wherein, the blockchain ledger is a US Dollar ledger.

10. A system or method as claimed in claim 1 or claim 2 wherein, the loan value in the blockchain ledger is classified into free and frozen funds which are associated with lending risk.

11. A system or method as claimed in claim 10, wherein the frozen funds may only be held by the collections agency or returned to the Third-Party Lender.

12. A system or method as claimed in claim 1 or claim 2 wherein, free funds are available for use by the collections agency including resale to other parties.

13. A system or method as claimed in claim 1 or claim 2 wherein, the loan value in the blockchain ledger is liquidated in real time in response to the receipt of payments from the debtor to the third-party lender.

14. A system or method as claimed in claim 1 or claim 2 wherein, the loan value in the blockchain ledger is mandatorily written off for delinquent loans.

15. A system or method as claimed in claim 1 or claim 2 wherein, the lending software application comprises a risk assessment procedure.

16. A system or method as claimed in claim 15 wherein the risk assessment procedure evaluates one or more of the following factors: past performance records of other refinanced accounts for the same delinquent product and other placements of the particular collection agency to evaluate the probability of default on this new loan.