This Lender Says It’s Going FICO-Free

January 15, 2016

SoFi, an online lender, is making a bold move: Eliminating FICO scores from its consideration when reviewing borrowers’ for a mortgage. It claims to be the first large lender to embrace the “FICO-Free Zone.”

The company says it plans to use three other factors instead to determine whether borrowers are credit-worthy: Employment history, the applicant’s record of making on-time payments and meeting financial obligations; and monthly cash flow minus expenses.

"Banishing traditional credit scores stems from SoFi's belief that the FICO model is flawed and outdated; it's less of an indicator of how a borrower will behave in the future, but rather, a reflection of past behavior,” the company states. “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.”

The move could help millennials, a group where credit scores could be becoming less relevant too. Sixty-three percent of millennials between the ages of 18 and 29 say they don’t have a credit card, according to a survey by Bankrate and Princeton Survey Research Associates International.

"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 Mike Cagney, CEO and co-founder of SoFi, a company that has funded more than $6 billion in loans. "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.”

SoFi’s announcement comes at a time when the industry has been taking a closer look at the accuracy of FICO scores. For example, a current bill being considered – the Credit Score Competition Act of 2015 – would allow Freddie Mac and Fannie Mae to be able to use credit scoring models besides FICO, if approved.

Source: “Lender Drops FICO From Underwriting Decisions; Stearns’ TRID Defects,” Mortgage News Daily (Jan. 14, 2016)