The subprime borrower does not exist.
Which is not to say subprime borrowers do not exist. Defined by a FICO score of 620 (or by some standards 640) or below, there are millions of subprime borrowers in the United States today. The problem is other than a low credit score, these borrowers often do not have much in common with each other.
When subprime borrowers are written about - often in the context of short-term lending - there is a standard operating picture that comes into play- the working poor in need of a loan to manage standard operating expenses. PYMNTS last week explored some of the reasons that even viewed through the narrow lens of short-term lending, that picture is actually off - subprime borrowers are actually far more likely to be what is generally considered working middle class (with an income of $35K or more a year).
And, in fact, the field is even more diverse than that. Consumers who can't get credit may be young and without much of a history, they may have been one of millions of Americans foreclosed upon when the real-estate bubble burst or they may genuinely just not be good at paying their bills on time. Unfortunately, on paper, the inexperienced, unlucky and feckless in recent years have all looked similar to the mainstream purveyor of credit in the world – unreliable and not to be trusted with credit.
And, in the aftermath of a subprime lending crisis in mortgages that managed to sink the world’s economy for several years, credit tightened up for everyone.
“Since the onset of the financial crisis, households have reduced their outstanding debt by about $1.3 trillion. While part of this reduction stemmed from a historic increase in consumer defaults and lender charge-offs, particularly on mortgage debt, other factors were also at play,” the Fed noted in a recent report. “Household choices, along with banks’ stricter lending standards, helped drive this deleveraging process.”
However, simply not offering credit to anyone without an already exemplary credit history did not turn out to be much of a long-term solution, nor one that did an economy trying to get back on its feet any great favors. While the number of “bad bets” went down, by 2013 it was obvious that automotive, retail and housing markets were simply unable to recover because too many good bets were being turned away from the market - either because of bad credit, or, even more unfair, no credit.
Oportun wants to fix that unfairness. Until last year the firm was known as Progreso Financiero, and it proffers short-term loans (usually, not solely to Hispanic borrowers) to thin or no-credit file applicants by using an alternative proprietary data analytics backed risk engine. CEO Raul Vazquez joined the firm in 2013 after heading global eCommerce for Walmart. He replaced founding CEO James Gutierrez. The name change, Vazquez noted, is derived from the Spanish word “oportunidad” and is more closely aligned with the firm’s goals.
“We really want to help open up our customers' opportunities ,” Vazquez noted. "Our commitment is to building a sustainable business that provides responsible, affordable, credit-building loans that help the Hispanic community build a healthier financial future."
[pullquote] "Our commitment is to building a sustainable business that provides responsible, affordable, credit-building loans that help the Hispanic community build a healthier financial future." - Oportun CEO Raul Vazquez [/pullquote]
The focus on the Hispanic community, Vazquez noted, grew from an obvious need. His firm estimates that there are around 23 million Hispanics in the United States who are locked out of mainstream borrowing simply because they lack credit files. In fact, he said, around half of the company's borrowers have no credit score at all - as far the bureaus are concerned, they do not exist.
“We debunked that traditional view that there’s just a group of people here who are not creditworthy. That happened to be Hispanics, immigrants, who were hard-working but without a credit score. And because they lacked a credit score, banks didn’t have enough data and declined them out of hand. With big data we found a way to approve them and have low losses,” former CEO James Gutierrez told PYMNTS in a recent interview.
While Vazquez has not put a specific figure to on the company's default rate, he has noted in the past that the company’s default rate is in the “single digits.” And that low default rate seems to be constant, even as the platform is expanding. The company has over $1.3 billion in loans out, to roughly 700,000 customers.
And the customer - by paying those loans - can usually expect an improved credit rating. Oportun reports that on average after completing three successful loans with the company, their typical borrower has a credit score of about 672. When asked if he is concerned that he will eventually send his best customers away, Vazquez responded in the negative.
"As we passed the billion dollar mark in loans and as we’ve seen how fast the platform has grown and how much underserved need there is out there for us to serve ... we’ve made great progress, but we’re still serving less than 2 percent of the underserved Hispanic market,” Vazquez said.
And this is one of many things that separates Oportun from its competitors in the short-term lending arena - who often don’t report to the main credit bureaus for fear of driving their best customers into the arms of mainstream lenders by helping them improve their credit. Oportun, unlike a more typical short-term lender, is also more intensely focused on building a tailored repayment plan with flexible payment periods and schedules.
On average, borrowers take out around $1,600 in loans and repay them over a period of 14 months. The loans are expensive and carry a higher than average interest rate - but that rate is generally between 30 percent and 39 percent - as opposed to the more shocking triple digit inflation rates charged by competitors.
[pullquote]"Progreso is redefining small-dollar lending in America." - IVP Partner and board member, Jules Maltz[/pullquote]
"Progreso is redefining small-dollar lending in America," IVP Partner and board member Jules Maltz told the San Francisco Business Journal (before the early 2015 name change). "The company's underwriting model and responsible construction of its loan products give consumers affordable access to credit."
And it is an approach that has drawn investors. Earlier this year, the firm announced it had snagged $90 million in equity financing from Fidelity Investments - Institutional Venture Partners (a previous investor) was also part of the round - as was an unnamed mystery large investor, who Vazquez declined to name.
"This investment will enable us to continue leveraging our advanced analytics and technology to address our customers' unmet needs and scale our business," Vazquez said. "On a daily basis, we are not only providing financing to the underserved Hispanic community, but we are also providing our customers a life-changing opportunity to build their credit and achieve a healthier financial future."
A goal that is hard to argue with.
And one, it seems that is increasingly shared as the economy is increasingly opening up to a wider variety of credit profiles - pushed by alternative lenders like Oportun. And it seems that is increasingly viewed as a necessary course correction. While no one wants to see a return to full tilt subprime lending - nor a recurrence of the worst possible outcomes thereof - the economy can’t grow unless it can find a way to expand by having tools that help lenders take better risks.