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ZestFinance Moves Into Near-Prime Lending With New Basix Loan

July 15, 2015
Forbes
by Laura Shin

ZestFinance, a financial technology company that has previously used its algorithms to make smarter loans to a payday-type borrower, announces Wednesday a new product targeted to near-prime borrowers whose credit scores put them just below a bank’s cutoff for a loan.

The Basix loan will also give these borrowers a chance to build a positive credit history, since ZestFinance plans to send the payment data back to the major credit bureaus (although this feature will not be immediately available upon launch).

“We decided as part of our new and expanding uses of our underwriting platform to launch a product into this underserved market of these near-prime customers who are actually a pretty good credit — they have good jobs good income, etc. — but they don’t have fair and transparent credit,” says ZestFinance chief executive Douglas Merrill.

ZestFinance is one of several companies that have developed alternative underwriting models to serve borrowers whose risk is not easily captured by a traditional credit score. While other startups such as SoFi, CommonBond,Earnest, Upstart and others have targeted prime and super-prime borrowers, ZestFinance has, until now, applied its algorithms to subprime borrowers.

Now, it is branching out to near-prime, a market that Merrill says has not been well-served by banks after the 2008 financial crisis, which cut back loans to this group for safety and regulatory reasons.

In this credit range, where typical applicants will likely have FICO scores of 600 to 680, many borrowers have multiple debts, or have had an unexpected medical expense knock their credit from prime into mid-prime. Borrowers can instead use a Basix loan to consolidate many payments into one, or pay back a large medical expense over time.

The loans, offered only online for sums ranging from $3,000 to $5,000, will be available for three-year terms at fixed APRs that range from 28% to 36%. The monthly payment amount and APR are fixed over the payment period, and borrowers have a 15-day grace period to make on-time payments. There are no early repayment fees.

The loans will initially launch in Alabama, Georgia, Missouri, New Mexico and Utah, and be available nationwide sometime in 2016, depending on how quickly the company obtains licensing in each state.

An applicant at Basixloan.com will submit her name, Social Security Number, address and other basic information, and then ZestFinance will pull data about the applicant from alternative credit bureaus, which can offer information such as her rent or whether she’s ever been in a bankruptcy.

Since it does not look at a credit score, ZestFinance’s underwriting technology would instead note unusual signals in that data. For instance, if the potential borrower’s two income data sources disagree widely —i.e. one says $80,000 and the other says $15,000 — that is considered a high risk signal as opposed to two sources that claim the applicant’s income is $10,000 and $13,000 respectively.

This is similar to the approach taken for the product it has offered to a payday-type borrower since 2010, both through ZestCash as well as by licensing its technology to partners such as Spotloan, which offers a subprime loan product. Whereas lending conventional wisdom would look at a borrower’s income against her expenses, Merrill says the differential is meaningful only in the context of the borrower’s city. For instance, “If your income minus expenses is 10% and you’re in Conway, AR, which is where I grew up, you spend too much money. If your income minus expenses is 10% and you live in San Francisco, well, you live in San Francisco, and it’s expensive,” he says.

ZestFinance is applying its alternative underwriting algorithms to new markets. In addition to branching out from payday to near-prime borrowers in the U.S., it recently announced a partnership with one of the largest online retailers in China, JD.com, to power the underwriting of loans in the China market, in which 80% of consumers do not have a credit score. As part of the deal, JD.comalso made an undisclosed investment in the Los Angeles-based company.

ZestFinance Moves Into Near-Prime Lending With New Basix Loan

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