During the loan pricing phase, the components of the one-year forward-looking expected loss calculated during the risk scoring phase above are used to generate a lifetime expected cash flow curve. The calculation is done using pre-payment curves; default curves, including never-paid default estimates; and recovery curves that are expected to be applicable to the proposed loan in question. The data used to construct the curves was largely collected during a period of economic contraction and weaker underwriting and servicing practices, and is expected to reflect loan performance in an adverse economic environment.
The lifetime cash flow model built using the methodology is used as an input to establish a fair interest rate for the loan. Bondora uses data from its loan marketplace and the larger structured credit market to determine expected returns for different levels of risk. This data is fed into its cash flow model to determine an interest rate that would deliver an internal rate of return (IRR) equal to the expected return on a static pool with the characteristics of the proposed loan. The loans are grouped to risk classes, as described in the previous section.