SoFi will no longer lean upon FICO as a means of powering its lending decisions.
SoFi – the preeminent student lending platform which recently crossed the $6bn mark in cumulative lending – has completely stripped FICO data out of its student loan refinancing, mortgage and personal loan offerings. The platform had been running a pilot non-FICO lending scheme since the fall of 2015, today announcing that the pilot operation will now become the norm. The platform will henceforth focus its credit analyses on three core criteria: employment history, track record of meeting financial obligations, and monthly cash flow minus expenses.
SoFi has not been bashful in outlining the causes of the divorce – calling the FICO model “flawed and outdated”. For SoFi, FICO is merely a reflection of past behaviour, rather than an indicator of future creditworthiness. The online lending space is famed for its innovative approach to credit. Evidence comes in the form of the recent collaboration between JPMorgan Chase and OnDeck, through which the former will leverage OnDeck’s technology-enabled credit scoring capabilities in order to more effectively lend to its vast swathes of small business customers.
FICO is the dominant Credit Reference Agency (CRA) in the States – one so pervasive that lending platforms often use FICO scores as a means of describing their target borrower niche (i.e. FICO 660 to 700). Few of the US’ online lenders are wholly reliant upon FICO data, but SoFi believes itself the first major US platform to become an entirely “FICO-Free Zone”.
CEO and Co-Founder Mike Cagney weighed in:
"Our approach to underwriting is based on transparency and balancing the needs of our members and investors, and we found that the FICO score was anything but transparent. So we threw it out. We're proud to be the only major lender that does not use the score for any lending. Instead of relying on a three digit number to tell us who's qualified, we look for applicants who have historically paid their bills on time and make more money than they spend. It's that simple."
Does this high profile departure spell trouble for CRAs? A recent survey – commissioned by Bankrate and compiled by Princeton Survey Research Associates International – revealed that 63% of Millennials (18-29 year olds) do not own a credit card. Clearly this renders the FICO score a less relevant tool for assessing the creditworthiness of young people. Dan Macklin, another of SoFi’s co-founders, described a fundamental disconnect between the service offered by the likes of FICO and the needs of the new wave of cutting edge online lenders:
"Credit scores don't provide an accurate picture for financially responsible professionals with a strong employment history and monthly free cash flow. These scores tend to be inaccurate, hard to dispute and even harder to pin down, with the onus falling to consumers to monitor multiple databases. We're more interested in a comprehensive and forward-looking approach to assessing an applicant's financial wellness."