following a successful pilot program that began in the fall of 2015, leading online lender SoFi announced that it no longer factors FICO scores into its loan qualification process. Instead, the company considers three criteria — employment history, track record of meeting financial obligations and monthly cash flow minus expenses — to determine if an applicant is qualified for its loan products, which include student loan refinancing, mortgages and personal loans.
Banishing traditional credit scores stems from SoFi’s belief that the FICO model is flawed and outdated; it’s less of an indicator of how a borrower will behave in the future, but rather, a reflection of past behavior. While the industry is moving toward evaluating non-traditional factors during the application process, most lenders still incorporate FICO scores into their proprietary algorithms and underwriting models. Having now funded more than $6 billion in loans, SoFi is the first large lender to become an entirely “FICO-Free Zone.”
“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,” says 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.”
A recent survey commissioned by Bankrate and compiled by Princeton Survey Research Associates International found that 63 percent of Millennials – ages 18 to 29 – don’t have a credit card, showing that credit scores are becoming less relevant for this generation. The industry at large is also examining the accuracy of FICO; if passed, the Credit Score Competition Act of 2015 will allow Fannie Mae and Freddie Mac to use credit scoring models other than FICO.
“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.”