it takes is a keystroke, maybe two, to hurt your chances
of borrowing money from online lender Basix.
a growing number of personal and small-business lenders,
Basix looks at much more than your financial history
when determining whether you’re likely to repay a
thousands of factors is whether you type your name with
proper capitalization or in all capital letters.
you fill in your name in all caps, you’re a much
higher risk," said Douglas Merrill, founder and
chief executive of ZestFinance, the Hollywood parent
company of Basix.
that sounds absurd, consider the motto in big block
letters on ZestFinance’s website: "All data is
a philosophy that a growing number of lenders and
credit-scoring firms are living by as they use more and
more data — much of it unrelated to money — to
augment traditional underwriting practices.
types of credit scoring have been around for years,
taking into account factors not always captured by
traditional scores, such as whether borrowers pay their
cellphone bills promptly. They’ve been used to assess
the creditworthiness of consumers with little or no
traditional credit history, including those in
a new generation of startups has developed scoring
models that look at such things as what a borrower
studied in college and how a restaurant rates on Yelp
— and they’re using them more widely with businesses
and individual borrowers with middling or even good
abundance of digital information, and the rapidly
growing storage and computing power able to comb through
it all, is changing industries including agriculture and
health care. It should come as no surprise, then, that
it’s shaking up consumer finance.
say these new methods should help borrowers get credit,
just as it has helped farmers increase their yields.
banking, it’s inconceivable that in the future we’ll
be making financial decisions in the way we do today. We’re
making decisions about people based on less than 5
percent of the information about them," said Asim
Khwaja, a professor of international finance and
development at the Harvard Kennedy School who has
studied alternative credit scoring in the developing
world. "There’s a lot of excitement in this
there’s also plenty of skepticism.
Chi Wu, an attorney with the National Consumer Law
Center, said traditional credit scores are a known
quantity, having been used for decades. What’s more,
traditional credit-scoring firms offer tips on how
consumers can improve their credit scores.
underwriting models, though, have little to no track
record, she said.
have they been tested to show they’re predictive and
relevant?" Wu said. "What if a data point is
your astrological sign? Does that mean anything about
then there’s the question of whether it’s ethical to
use certain kinds of information — such as information
pulled from a Facebook account.
a question that blew up last summer after the social
network secured a patent for a program that would assess
a borrower’s creditworthiness based on the credit
scores of Facebook friends. Facebook declined to
doesn’t use social media data — not because it
wouldn’t be useful but because Merrill is
uncomfortable with it. And he thinks customers would
feel the same way.
take a lot of time to make sure there’s nothing being
used that we find personally creepy," he said.
these new companies, founded by a mix of tech and
finance industry veterans and backed by venture capital,
say their models work — and that they should provide
not only more access to credit, but also better terms.
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systems crunch numbers in different ways, but they all
have the same goal: "We try to re-create the
holistic view of the borrower," said Merrill, a
former Google executive and Rand Corp. researcher.
way to think about it: Lenders are trying to use vast
troves of data, financial and otherwise, as a modern
replacement for the gut feeling a banker might have had
about a potential borrower a generation or two ago.
collects thousands of pieces of consumer information —
some submitted in an online application, some obtained
from data brokers — and runs them through algorithms
that judge how likely it is a borrower will repay.
acknowledges that in many cases, there’s no
explanation for why a particular data point helps or
hurts a credit score. For example, borrowers who write
in all-caps are riskier, the firm’s credit scoring
system discovered after underwriting thousands of loans.
don’t know why. It just is," Merrill said.
other firms, the connections between nonfinancial
information and creditworthiness are a bit clearer.
Finance, which goes by SoFi, was founded in 2011 by four
entrepreneurs with backgrounds in finance, software and
looks at how long prospective borrowers have been
working in their professions and what they studied in
information points to how likely it is borrowers will
remain employed, or find a new job if they lose their
current one, said Teresa Jackson, SoFi’s vice
president of credit.
would venture to say someone who is a surgeon is more
likely to become re-employed than someone who got a
degree in art," she said.
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borrower Alfonso Brigham earned a bachelor’s degree in
business administration from the University of Southern
California in 2005. Those credentials and his job at a
major financial institution helped him quality for a
$711,000 mortgage on a one-bedroom condo in San
Francisco’s Nob Hill neighborhood.
said he went to several banks but was told he’d need
to come up with a 20 percent down payment, which would
have amounted to nearly $160,000.
let him put just 10 percent down without having to pay
for pricey mortgage insurance. He closed escrow Dec. 1.
who underwrites loans for a living, said he can see how
the nonfinancial information may have burnished his
working in the financial district, which is a big part
of the economy here. If I were going to look at a
customer [like me], at the end of the day, I’d say,
‘This guy is employable,’" he said. "If
someone’s majoring in Russian literature, what can
they really do with that?"
also get judged on factors beyond their finances.
online business lender IOU Financial gleans tidbits from
social media sites.
Marleau, the publicly traded company’s chief
executive, said terrible online reviews could be a sign
of trouble, even if a business has a healthy
the end of the day, we’re really trying to judge the
reputation of the business … by looking at what the
crowd is saying," he said.
old-line credit bureaus are considering tapping the new
sources of information.
is examining social media data to provide credit scores
for businesses too young or small to have a credit
history, said Eric Haller, executive vice president of
research unit Experian Data Labs in San Diego.
firm’s data scientists took business credit
information and combined it with information from
Twitter, Facebook, Yelp and others. Based on that
analysis, the firm is working on a credit-scoring system
that could be based solely on social media information.
is kind of the earliest picture you can get of somebody’s
success," Haller said. "If you’re a
consumer-facing business, you’re going to have some
type of digital footprint. You might not have anything