GIP 16 - Oblige Goldfinch protocol borrowers (namely, credit funds) to submit monthly credit reports to GFI community

Authors : J.B. (dbektemissov), JeremyKim, mans9841

Summary : Goldfinch protocol borrowers, namely, credit funds submit a monthly credit report.

Motivation :
The proposal is to provide the beginnings of a standardized framework for Credit Fund Borrowers to provide a reasonable degree of transparent reporting for various investors on the Goldfinch platform. It is very important to note that this framework is only a starting point - as the Goldfinch platform grows, and both the borrower base and investor base grow and evolve, we envision the reporting template to grow and evolve in sophistication and transparency as well.

As a community of backers, we demand that credit funds deliver credit reports monthly at the “Borrower Level” and “Investor Level” (more in the Specification & Requirements section). For now, this reporting obligation for credit funds should be viewed as a requirement set by the Goldfinch investor community at large, independent of any additional compliance requirements.

Specification & Requirements:
Participants of the protocol sign a Non-Disclosure Agreement (NDA) and have access to the borrower’s data room. We propose that borrowers open a new folder in the data room named “Remittance Reports” and upload an updated report every month.

Remittance report for each month (cutoff date being the last day of that month) should be published no later than 15 calendar days after the start of the subsequent month. If any borrower is unable to submit a report by the above deadline, they should notify the investors and provide adequate justification, as well as a tentative reporting date (this also encompasses instances of retroactive corrections, amendments, or restatements of previously submitted remittance reports).

The report’s publication should be announced through verified/token-gated channels to ensure that backers and FIDU holders are notified.

We are attaching a template in an Annex to this document as a standardized minimum that the borrowers need to report on a monthly basis. However, nothing prohibits reporting more than the specified minimum, instead, it can set good practices.The reporting should be at “Borrower Level” and “ Investor Level”.

Borrower Level
For the purposes of this reporting template, “Borrower” refers to the borrower creating and managing the pool on Goldfinch. This is effectively a Borrower pool’s balance sheet and cash flow statement for any given reporting period. It describes the pool’s lending exposure to downstream fintech borrowers and associated collateral pledged to the pool. It also details movement of funds between a pool, its borrowers and its upstream investors (backers and the senior pool liquidity providers) for the reporting period.

In addition to detailing movement of funds, the template will report on borrower pool’s portfolio delinquency metrics and adherence to any financial covenants imposed on the borrower pool by GFI protocol (vis a vis its lending portfolio - delinquency, concentration limits etc.).

Investor Level
This is an investors’ (backers and senior liquidity providers) view of their monthly exposure to a borrowing pool. It details USDC allocation between junior and senior pools and movement of USDC to and from investors as a result of capital deployment by a borrower pool and as a result of interest and principal repayments made by a pool back to investors.

Example Reporting Structure: see proposed template

Benefits :

  • Increased transparency for both FIDU and Backer Investors
  • Reduces anxiety for less-sophisticated investors such as retail and family offices
  • Borrowers who present transparent reports gain more trust and reputation
  • Standardization of reporting metrics for other members of the community to build additional analytics and benchmarks
  • Institutionalization of reporting structure
  • Supports credibility and growth of Goldfinch DAO

Downside :

  • Slight operational burden for Borrowers on the Goldfinch platform
  • We believe there is no downside to the investors nor the broader Goldfinch community

Voting : “Yes” - Borrowers submit credit reports monthly. "No” - Do nothing.**

Resources : see proposed template

Authors : @jkim, @J.B., @mans9841

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Great work on this, authors.

Increased transparency will make the lending opportunities more attractive, resulting in higher TVL, while reducing FUD amidst existing borrowers. You are also right that borrowers that are willing to do such work will separate themselves positively.

Would love to see this implemented.

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Agree with it! More disclosures from borrowers will also gain more trust from lenders and expand user base in future.

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Thanks for the proposal, team!

Overall I agree that borrower reporting is key and is a close focus of the Warbler team. All of the deals to date include reporting requirements in the loan documents, including covenant compliance and other portfolio/business reporting requirements

So I feel the main blocker is getting backers/LPs easy access to such reporting and having some accountability to make sure borrowers report within deadlines. The Warbler team has been working on a tool to do so and it will be announced this week (it’s pretty awesome imo). I would suggest we wait until that launches and then cross-compare with this proposal to see what the new launch covers and where we could improve it

On the investor reporting, I feel like a lot of these details are already captured in the app, so am less convinced of this as a priority. I also believe the borrowers are not the ones best placed to do this reporting, it should be automated by the protocol (the beauty of having all transactions on-chain). Maybe I’ve missed something, please let me know what information is missing or difficult to access on the app

One word of caution: we need to be careful of how we phrase proposals to recognize what we can/can’t oblige borrowers to do. Specifically, we can’t “demand” anything from borrowers retroactively since their responsibilities are committed to when they sign loan docs. If we wanted anything incremental to what’s in loan docs, we would need to work collaboratively with borrowers and have them agree to the new reporting standards. The good news here is that these reporting requirements (or ones that are v similar) are already in the loan docs, so no need to change their existing responsibilities

My final thought is that I like the idea of templatizing the reporting process to make things comparable for potential investors. The project that will be proposed this week already captures some of this standardization, but I look forward to hearing feedback and how we can improve on it, once the community has had a chance to check it out this week

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“So I feel the main blocker is getting backers/LPs easy access to such reporting and having some accountability to make sure borrowers report within deadlines. …”

This needs to be “baked in” into the protocol. If the borrower pool is late on reporting it should be given a grace period to cure that. Once the grace period has elapsed there need to be on-chain consequences, such as inability to draw down on the line. In any real-world credit agreement, borrower reporting on covenant compliance etc. is a strict requirement and in failure to publish required information on time can be treated as an event of default.

"On the investor reporting, I feel like a lot of these details are already captured in the app, so am less convinced of this as a priority. "

I need to kindly disagree here. The RW collateral for GFI investors are mostly loans issued by fintech originators to downstream borrowers. Those are only as good as the underwriting that goes into them. Investors need some kind of ongoing visibility into downstream loan book performance. We can at least approximate that if the credit funds (that create borrower pools) publish data on how well their credit lines (that they open to fintech originators) are performing. I believe this will be a basic requirement for any institutional investors if they are to consider deploying their capital via GF protocol in the future.

“I also believe the borrowers are not the ones best placed to do this reporting, it should be automated by the protocol”.

If we are to have any kind of visibility on how well the underlying assets are performing we will be critically reliant on the borrowers to provide such data. It is then up to GFI contributors how to package and present that data to the broader community.

“One word of caution: we need to be careful of how we phrase proposals to recognize what we can/can’t oblige borrowers to do. Specifically, we can’t “demand” anything from borrowers retroactively since their responsibilities are committed to when they sign loan docs.”"

I fully agree here. That requirement is 100% forward looking and should not apply to existing borrower pools on GFI.

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Mostly agree with @dbektemissov opinion.

I beleive we should wait for this for cross-comparing, like aaron mentioned.

I’d echo a lot of what @aaron shared as well which I’d summarize as

1. Reporting: Reporting obligations already exist, and are **baked in** meaning they are cemented into every one of the existing funds real-world legal agreements. I’d encourage you to participate in upcoming pools so you can both assess, and help guide new reporting requirements for pools you might want to participate in.

2. Existing Backers: Already receive reports from the funds as part of the funds existing reporting requirements.

3. Access: As @aaron though highlights, while the beauty of decentralized underwriting means that investors are composable, a drawback has been that borrowers really didn’t know how to practically deliver their transparent reporting to the specific Backers who initially invested given backers and senior pool participants are fungible. This hurdle is thankfully being solved by the tooling eluded to and we’re pretty excited about this new level of transparency that hasn’t really existed before.

4. Demands: Fully appreciate the authors acknowledged the reporting requirments are on a go forward basis, I’d just like to emphasis the word of caution. It’s pretty easy to make demands and paint those who don’t want to kneel to your demands as being bad actors. So would suggest wording things more collaboratively.

@dbektemissov hopefully sharing some more context to help address some of your fair points:

This needs to be “baked in” into the protocol. If the borrower pool is late on reporting it should be given a grace period to cure that. Once the grace period has elapsed there need to be on-chain consequences, such as inability to draw down on the line. In any real-world credit agreement, borrower reporting on covenant compliance etc. is a strict requirement and in failure to publish required information on time can be treated as an event of default.

and

I need to kindly disagree here. The RW collateral for GFI investors are mostly loans issued by fintech originators to downstream borrowers. Those are only as good as the underwriting that goes into them. Investors need some kind of ongoing visibility into downstream loan book performance. We can at least approximate that if the credit funds (that create borrower pools) publish data on how well their credit lines (that they open to fintech originators) are performing. I believe this will be a basic requirement for any institutional investors if they are to consider deploying their capital via GF protocol in the future.

Kindly do see my #1 and #2 above as the reporting is already baked in, with #3 being the key that unlocks easier access to said transparent reporting. There’s additionally proposed work related to the Goldfinch roadmap (#2 under Front End Refresh) which should be surfacing more standardized data into the Dapp

All said, looking forward to working with the whole community to build more tooling, and bring even more transparency to the sort of markets Goldfinch is helping investors gain access to.

Agree with @dbektemissov 's comments, but just to add, particularly with this comment:

For the most part, the Goldfinch pools are effectively back-leverage facilities against two to three different asset-backed loans. In TradFi, the bare minimum for a capital provider considering a back-leverage facility for a credit fund is this sort of reporting. In fact, the conversation would likely come to a screeching halt if the borrower refused to put in the operational work required to deliver timely reporting.

Saying that in DeFi, borrowers are not obliged to actively provide any reporting may be great in the short term in ramping up scale, but opens up the pool investors to significant negative selection risks.

In terms of requiring borrowers to retroactively provide reporting - definitely understand the hesitation. Perhaps the priority should be placed on new pools being launched, since often times the loan docs will bake in the reporting requirements into the document itself. The hope is that at some point, the community will expect that higher level of transparency in reporting, and any existing pools that were grandfathered in without the reporting requirements could do so in good faith. But again, that could be something to be considered over the implementation timeline.

If Warbler is developing an app that automatically connects into the databases of the underlying lending companies borrowing from the credit funds that are borrowing from Goldfinch pools to report on performance at both the collateral and the asset-backed loan level, with a user interface that allows for current and potential investors to analyze the deals across the life of each of the deals within each pool (I suppose similar to how dv01app.com does so in TradFi securitizations, and extra points if this new app allows for running forward cash flows), then that may reduce the immediate need for a standardized reporting template (although even DV01 has such standardized reporting templates available for download on their platform).

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I think we’ve crossed wires here… you mention “ in DeFi, borrowers are not obliged to actively provide any reporting.” In fact, ALL of our loan docs have reporting requirements, so investors are entitled to this information (and some have already received it bilaterally if they are lenders to a deal)

The major defi challenge is setting up the right means of conveying this information in a standardized way that also gives automatic access to relevant investors. This is where the new project being announced this week will be a big improvement

I look forward to hearing the community’s feedback on the product and incremental changes that could be made

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Hi @JeremyKim @dbektemissov @mans9841 - wanted to surface the plans for borrower transparency that @aaron mentioned earlier. You can read about it here.

With this, borrowers will be mandated to maintain:

  • an open channel of communication with backers via a token-gated discord channel, and

  • a dataroom where they will post all necessary documents that they are obliged to provide as part of their off-chain legal agreements with Investors for compliance, reporting, and evaluation

This serves as a starting point to improve borrower transparency, which the Goldfinch community will build on in the coming months.

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Thanks @Obinna !

The token gated data room idea is definitely a good approach, though I wonder if there should be some way to override it based on approval from the pool manager (i.e. a scenario where an institutional investor is considering an investment, perhaps on a secondary market, but does not currently have any backer exposure or the requisite 10k FIDU).

One thing that the Medium post does not have is a template for that reporting. I can see the template attached to this proposal either being incorporated into what the Warbler Labs team is working on, or continuing with this proposal to approve of the template for the Portfolio Level Reporting (#5 in the data room document list).

Thanks for the feedback, @JeremyKim !

RE token gating - you raise a good point about these sorts of one-off situations. However, I think it’s important to maintain this threshold given the sensitivity of the borrowers’ information. Investors looking to participate in the secondary market are welcome to view the borrowers’ pre-close datarooms, which are accessible through the Goldfinch frontend, and are also welcome to request additional information directly from the borrower, if necessary. Additionally, prospective investors can directly communicate with Borrowers given the communication channels created during the pool due diligence process remain open through the life of a deal.

Re reporting - As a starting point, it’s important to remember that the protocol was created to cater to a wider range of Borrower use cases and that each pool’s Borrower and Backers mutually decide what covenants (including information covenants) they do or don’t want. Similar to the tradfi space, a single set of perspective covenants or reporting requirements that applies to all borrowers doesn’t exist. We, therefore, don’t borrowers should adhere to stringent reporting that may not apply to the type of lending business they run or the investment structure they stand up.

Nevertheless, for deals going forward, we’re going to share a (suggested) standardized format for covenant reporting. The metrics reported will still be different by deal, as a protocol-wide template probably isn’t a good fit yet, but we’re moving in the direction of this templatization as a first step

@Obinna , definitely appreciate this back and forth. A few thoughts:

I don’t believe the template we propose would cross the boundary of this sensitivity. In TradFi, deal-level data for most securitizations is typically fairly readily available (either through Bloomberg, Intex, or DV01, or even some of the rating agency pre-sale reports).

I suggest taking a look at the template that @dbektemissov attached with the proposal. We put in a few example covenants for the first few, but naturally, we would anticipate that the actual covenant descriptions would depend on the underlying deals (hence the Covenants from #5 onwards being listed as “Covenant Description”).

Actually, it does. In the securitization space, you have trustee reports with remittance report templates, which hit the same high level themes across asset classes (which we’ve attempted to mirror in this template). In the private credit world, a credit fund investor would likely have a certain format they prefer that their borrowers produce their borrowing base reports in (mainly so that it is easier to aggregate for their own portfolio level metrics).

I think this is a good middle ground. Just to clarify - it is important to understand the spirit and format of the template, not to try and force the template on all deals. Additionally, in the tradfi structured credit deals that I’ve done in the past (both as a lender to loan originators and as a borrower i.e. fund back leverage), the lender typically has the ability to enforce a reporting template (usually we included language in the loan agreement, with a template attached as an exhibit).