FICO-Free ZoneJanuary 15, 2016 | By: Sean Murray
In a blog post, SoFi co-founder Daniel Macklin vented that his 15 years of credit history in the UK prior to moving to the US counted for nothing at all. To fix that, he felt pressured to obtain and use credit just to build his score, which he referred to as counterintuitive. For those that have been in this country all along though, his gripe was that things that should matter in a credit score for some reason don’t. “The FICO score calculation doesn’t consider things like your savings, your cash flow, your ability to pay non-credit bills like water and electric or your future earnings,” he wrote.
That’s the opposite of how other marketplace lenders are thinking.
In an online discussion I had six months ago with some members of the Lend Academy forum regarding a borrower’s ability to repay as evidenced by their bank statements, the feedback was resoundingly negative. “I have a feeling if you ask to crawl someone’s bank account, they’ll just go elsewhere,” one user said. “Seems that’d only work on subprime borrowers who have limited bargaining power,” he added.
The logic behind the defense of a continued FICO-oriented approach was steeped in competitive advantage, basically that no sane borrower would ever consider disclosing additional information about their financial situation to one lender when another would just give them a loan on FICO score alone. Ironically that translated to, anyone who wants their creditworthiness to be judged on their ability to pay probably can’t afford to pay, at least that was my takeaway from it.
But over in SoFi land, the student lender “has chosen to not use FICO scores when evaluating the financial wherewithal of applicants.” They alternatively examine your more complete financial situation and well-being, things marketplace lending investors on other platforms (at least for consumer loans) seemed to argue couldn’t and shouldn’t be done.
SoFi is no small fish. To date they have issued around $7 billion in loans.Last modified: January 15, 2016
Sean Murray is the founder of deBanked, an 11-year veteran of the merchant cash advance industry, a casual Lending Club and Prosper note investor, the co-founder of Daily Funder, an alternative lending speaker, consultant, writer, and enthusiast. Connect with me on LinkedIn or follow me on twitter.