Brokers and first-loss capital
3 minDifficulty Checked 2026-11-10- Underwriting happens off the ledger. The ledger only sees the signed loan terms.
- First-loss capital is optional. It covers part of a default, not all of it.
- Below the minimum cover, the broker cannot lend and its fees refill the cover.
The loan broker is the lending manager. It sets up the vault, picks borrowers and agrees each loan's terms.
Checking borrowers happens off the ledger. A broker might look at income, business records or a credit history. The ledger never sees that file. It only sees the signed loan.
To show it has something at stake, the broker can deposit its own money as first-loss capital, also called cover. If a loan defaults, part of the cover moves into the vault before depositors take the loss.
Cover is optional. A broker can run with none. A depositor should check how much cover a broker holds before trusting it.
Rules keep the cover in place. The broker sets a minimum cover, as a share of what it owes the vault. If cover falls below that minimum, two things happen:
- The broker cannot make new loans.
- The broker's fees go into the cover until the gap is filled.
Cover limits a loss. It does not erase it. With the settings in the spec's example, a 1,090-token default draws only 10.9 tokens of cover. The vault takes the other 1,079.1.
The broker earns fees:
- A management fee: a cut of interest, taken before it reaches depositors.
- An origination fee, taken from the principal.
- Fixed fees on each payment, on late payments and on paying a loan off early.
Settings on LoanBroker, set by LoanBrokerSet:
| Field | Meaning |
|---|---|
ManagementFeeRate | Share of interest kept by the broker, in 1/10 basis points, 0 to 10,000 (0 to 10%) |
DebtMaximum | Cap on debt owed to the vault; 0 means none |
CoverRateMinimum | Cover required, as a share of DebtTotal |
CoverRateLiquidation | Share of the minimum cover that one default can draw |
ManagementFeeRate, CoverRateMinimum and CoverRateLiquidation cannot change after creation. The two cover rates are either both zero or both non-zero.
Cover moves with LoanBrokerCoverDeposit and LoanBrokerCoverWithdraw. It sits in the broker's own pseudo-account, apart from vault funds. For a trust-line token or MPT, the issuer can use LoanBrokerCoverClawback. It cannot take cover below DebtTotal × CoverRateMinimum, and it does not apply to XRP.
LoanSet fails with tecINSUFFICIENT_FUNDS if CoverAvailable is below (DebtTotal + principal + interest) × CoverRateMinimum. While cover is short, LoanPay sends fees into the cover pool instead of to the broker.
On default, LoanManage draws:
DefaultCovered = min(DebtTotal × CoverRateMinimum × CoverRateLiquidation, DefaultAmount, CoverAvailable)
DefaultAmount is the loan's outstanding principal and interest, without the management fee. The vault's AssetsTotal falls by DefaultAmount − DefaultCovered.
Per-loan fees are set in LoanSet: LoanOriginationFee, LoanServiceFee, LatePaymentFee, ClosePaymentFee and OverpaymentFee. The management fee is a share of interest by design, so the broker earns only when depositors earn.
Related: Repayments, late payments and defaults.
- XLS-66 Lending ProtocolRead 2026-11-10
- Lending ProtocolRead 2026-11-10
