ZestFinance, an online lender targeting previously untouchable sub-prime borrowers, has received $150 million from investment-management group Fortress Investment Group.
The Hollywood financial tech firm has developed a machine-learning software program that assesses the risk of lending to sub-prime borrowers. Previously, it had sold that software to financial institutions, but now it aims to use its program to manage the risk around originating loans to near-prime borrowers, the top slice of the sub-prime category.
ZestFinance’s software uses nontraditional, often nonfinancial factors to judge credit worthiness.
“One of the things we look at is the way you fill out an application,” said ZestFinance Chief Executive Douglas Merrill. “If you are typing your name in on an application in all upper cases you are slightly higher risk than someone who types in all lower case or upper and lower case.”
Merrill said they don’t know exactly why that is true, but rather see it as one of many factors used to judge credit worthiness. To determine credit ratings, the company sifts through more than 70,000 variables, including how long applicants have had their current phone number, social-network connections and Web-browsing habits.
The company launched its sub-prime loan Basix product this summer across 15 states. Early success convinced Fortress to boost the effort with extra funding.
ZestFinance is part of an emerging financial sector that believes it can nimbly avoid the risks of sub-prime lending through savvy data crunching. Last week, two other data-driven lenders raised significant funding: SoFi of San Francisco raked in$1 billion, while Chicago’s Avant, which has a research and development office in Playa Vista, raised a $325 million round.
ZestFinance loans are often used for consumer needs such as credit-card consolidation or large ticket medical items, said Merrill. Its Basix program offers an unsecured installment loan available for a three-year term at fixed annual percentage rates from 26 percent to 36 percent. Monthly payment amounts and APR are fixed over a loan’s lifetime. Loans range from $3,000 to $5,000.
Armed with heaps of data and a new cash infusion, Merrill said his company can take a piece of a highly profitable sector deemed too risky and left for dead by big banks.
“Ever since the crisis in 2008, banks have really tightened lending. The amount of credit for near prime has really dwindled,” said Merrill. “It’s no longer served well by the financial services.”