Loan Protection
Protecting a loan is the core product feature of the borrow flow.
How does loan protection work?
After a user takes out a loan through Concrete they have the possibility to protect their loan from being foreclosed due to collateral depreciation.
Borrowers can protect loans either at the moment of creation of the loan or later down the road while their loan is active.
It is important to note that only loans originated through Concrete can be protected. For the current version of the product, loans originated directly in the lending protocol and not through Concrete can't be protected.
At the UI level, when a borrower goes through the protection flow, the UI will display a set of protection plans that offer different credit line amounts with their corresponding opening fee that the user can choose from.
Protection terms
Each of the offered protection plans have terms that are defined in the system by these parameters:
LTV Protect
ltv_protect
This is the LTV level at which the protocol will deposit collateral if this threshold is breached. Typically, this will be 1-2% under the lending protocol liquidation threshold.
Promised Amount
promised_amount
The exact amount in stablecoin that we will convert to the collateral base and deposit to protect the position if ltv_protect is breached. This is the credit line or disbursed amount.
Number of disbursements
num_disbursements
The number of time/parts that the promised_amount will be divided into. For example, if it’s 3, the protocol will disburse ⅓ of promised_amount every time ltv_protect is breached and a claim event is triggered.
Opening Fee
open_fee
A percentage of promised_amount (around 0.5%), paid in stablecoins at the moment of purchasing the protection plan.
Claim Fee
claim_fee
A percentage of the effectively disbursed amount (around 1.5%), paid by borrowing from the user position each time a claim is triggered.
Protection rules
During the duration of a protection (30 days) whenever a loan LTV breaches its ltv_protect threshold, a claim is triggered and the protocol will deposit the equivalent collateral amount corresponding to 1 disbursement (promised_amount / num_disbursements) to the loan position of the user on the lending platform until all the credit line (promised_amount) is used completely or the protection reaches the expiration date.
Three strikes:
As for the V1 of the product, the number of disbursements is set to 3. This allows for 3 claim events to be triggered in a protected loan.
It is worth noting that the amount disbursed on each claim event is of a one-time use. Credit lines are not refillable. This means that even if a user repaid the credit line, it can not be used again to protect the loan's LTV.
For example, if a protected loan initially has $3,000 worth of credit line (promised_amount), in an ltv_protect breach scenario, a claim is triggered and $1,000 are disbursed to get the LTV back to health, even if the user repaid the $1,000, they would only have 2 disbursements of $1,000 left to service 2 more claims during the remaining protection period.
Interest rates hike
Sometimes, the loan position can be altered by other factors other than price action like spikes on the interest rates, making the amount owed larger and thus affecting the LTV in such a way that the LTV protect level could be reached, triggering a claim even without a price drop.
In such a case, the protection operates by disbursement the corresponding amount set by the protection plan to keep the loan in good health.
This rare case can also happen in unprotected loans (or protected loans that already used their three strikes) leading to potential foreclosure due to LTV deterioration.
Increased LTV
The main benefit of protecting a loan with Concrete is that by adding the extra credit line, the loan LTV is synthetically increased providing more leverage to the borrower.
Figure 1 shows how the Concrete LTV (blue line) increases after each claim (C1, C2 and C3) reaching up to 90%. and the Lender LTV (green line) is always kept in safe levels.
Loan Position
It is important to note that while a loan is protected, the user can't modify the position. Meaning they can't add or withdraw collateral from the position or reduce or increase borrowings.
This is due to the fact that when the protection plan was issued, it was priced by the probability engine considering a risk profile based on the loan LTV at that moment.
Any modifications to the loan positions of already protected loans that increase the LTV of the position may affect the risk profile of the loan portfolio of the protocol.
The only allowed modification to the position is depositing more collateral once all the promised amount has been disbursed. This is a necessary action that a borrower might take to reduce the risk of foreclosure.
Read more about this in the managing a loan position section.
Protection duration and expiry
As mentioned before, protections are for fixed time periods (30 days).
This means that during the duration of the protection, the credit line could be used according to the rules mentioned above for protecting the loan from being foreclosed.
After the 30 days, when the protection has expired these are the possible outcomes:
If there is no owed credit and the LTV is in good standing, the protection expires, the loan remains open and becomes an uncovered loan.
If there is an unsettled credit line and, by collecting the outstanding debt from the collateral, the position remains healthy, the protocol deducts the owed amount from the position and the loan remains open as an uncovered loan.
Deducting from the position can be done by either withdrawing collateral or increasing the borrowing.
If there is an unsettled credit line and, by collecting the outstanding debt from the collateral the position LTV would reach the foreclosure threshold , the protocol forecloses the position, deducts the owed amount (loan and disbursed amounts) plus foreclosure fees and leaves the remainder collateral available to the user.
Read more about this on the Loan Foreclosure section.
Exclusions
Loans that are run through the probability engine to get protected may be rejected due to reasons like the protocol not having enough liquidity available to guarantee protection or due to being very risky.
Check out the Loan Protection - Functional Overview section for more detail.
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