California-Based Online Lender SoFi Says No to FICO Score

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Written by Guest | Last Updated November 1st, 2019
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A notable online lender has introduced a new way to determine loan qualification, and those who have had or do have credit problems will be all smiles about it.

San Francisco-based SoFi, which has issued more than $6 billion in loans since its founding in 2011, announced that applicants' FICO scores will no longer be considered in the application process.

Sounds crazy? A pilot program for this seemingly radical change began last fall, and it officially was launched in earnest on Jan. 12. Rather than looking at an applicants' FICO scores, SoFi will now look at the person's employment history, monthly cash flow minus financial obligations, and track record of meeting those obligations. These will be factored into applications for personal loans, student loan refinancing, and mortgages.

This new approach was born out of SoFi's notion that the FICO model is antiquated and filled with flaws. SoFi leaders believe that the score is not an accurate reflection of how the prospective borrower's finances and financial behavior will look in the future. Instead, they believe it is simply indicative of what has happened in the past.

The financial industry as a whole is indeed going in the direction of looking at different factors other than FICO scores. Still, it is rare for lenders to omit this score from underwriting and other application processes altogether.

FICO

SoFi is now the first large lender to bypass the FICO score.

"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," said SoFi CEO and co-founder Mike Cagney. "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."

Bankrate, an aggregator for financial rate information, recently initiated a survey by Princeton Survey Research Associates. The survey revealed that adults ages 18-29 don't even possess a credit card. This information leads some lenders to infer that credit scores don't hold the same importance it did to preceding generations. Furthermore, officials in the financial industry are starting to study whether the FICO score is even an accurate depiction of credit-worthiness.

In fact, Legislation is getting involved. The Credit Score Competition Act of 2015 is on the table. If this action is passed, Fannie Mae and Freddie mac will no longer be required to use FICO in its approval models.

"Credit scores don't provide an accurate picture for financially responsible professionals with a strong employment history and monthly free cash flow," says Dan Macklin, SoFi co-founder and Vice President of Community & Member Success. "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."

 

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