{"id":11774,"date":"2017-06-29T00:00:00","date_gmt":"2017-06-29T00:00:00","guid":{"rendered":"https:\/\/oportundev3.wpengine.com\/news\/this-online-lender-uses-data-analytics-to-serve-borrowers-who-lack-credit-scores\/"},"modified":"2017-06-29T00:00:00","modified_gmt":"2017-06-29T00:00:00","slug":"this-online-lender-uses-data-analytics-to-serve-borrowers-who-lack-credit-scores","status":"publish","type":"news","link":"https:\/\/oportun.com\/es\/noticias\/this-online-lender-uses-data-analytics-to-serve-borrowers-who-lack-credit-scores\/","title":{"rendered":"This online lender uses data analytics to serve borrowers who lack credit scores"},"content":{"rendered":"

(Repost from Fast Company<\/a>.)<\/p>\n

Oportun has managed to operate profitably while making a dent in a difficult-to-serve market, the 45 million Americans with little-to-no credit history.<\/h3>\n
BY JESSICA GOODHEART\u00a0<\/cite>9 MINUTE\u00a0READ<\/span><\/div>\n
Capital & Main<\/a>\u00a0is an award-winning publication that reports from California on economic, political, and social issues.<\/em><\/div>\n
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S<\/span>trict underwriting criteria are part of the reason that online lender\u00a0Oportun has been hailed by many as a responsible outlier in a subprime market where \u201cpayday lenders\u201d dominate. The company, which primarily targets Latino borrowers, declines half of all applicants.<\/p>\n

So it was perhaps no surprise to meet one hopeful applicant, Salvador Rivera, outside Oportun\u2019s storefront office in Altadena, California, after he had just been turned down for a loan. He had arrived at the office with his cousin and stepdaughter in tow. A letter suggesting that he could \u201cbuild a better financial future with an unsecured personal loan\u201d had led Rivera to try his luck at obtaining a $1,000 loan to put toward a deposit on a first apartment, one he\u2019d share with his girlfriend and her daughter.<\/p>\n

Instead, the 22-year-old received a lesson in tough financial love. \u201cThey told me I failed,\u201d said Rivera, unsure of his next steps after being promised that another letter would be mailed to him\u2013one explaining why his loan was denied.<\/p>\n

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[Photo:\u00a0Jessica Goodheart, courtesy of Capital & Main<\/a>]<\/figcaption><\/figure>\n

\u201cSometimes the best thing you can do is tell someone that you can\u2019t make a loan now because they don\u2019t have the resources to pay us back,\u201d says\u00a0Oportun\u2019s chief executive officer, Raul Vazquez, who grew up on the Mexico-Texas border and headed Walmart.com before taking the helm at Oportun in 2012.<\/p>\n

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Founded in 2005 and based in Redwood City, California, Oportun has managed to operate profitably while making a dent in a difficult-to-serve market\u2014the 45 million people that the Consumer Financial Protection Bureau identifies as having little-to-no credit history.<\/p>\n

The company has made nearly two million installment loans and earned, from the U.S. Treasury Department, a Community Development Financial Institution certification that is reserved for companies that meet the financing needs of underserved communities.<\/p>\n<\/div>\n

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Because Oportun reports to credit bureaus, its customers have the opportunity to build credit histories and access less expensive credit in the future. Credit scores are also used as screening tools by employers and landlords.<\/p>\n

A LOT OF TECH, A LITTLE BIT OF TRADITION<\/h4>\n

A key ingredient in Oportun\u2019s secret sauce is advanced data analytics. The company has developed the ability to score applicants, even if they lack a FICO score\u2014as do half of Oportun\u2019s borrowers.<\/p>\n

That scoring system, developed with the help of $260 million in venture capital, contributed to Oportun\u2019s reaching profitability just over two years ago, according to Vazquez. Another key to its profitability has been the company\u2019s ability to reach scale all while adhering to a business model that recalls earlier days of consumer finance.<\/p>\n

\u201cWhile some institutions continue to close physical branches, we have added over 150 locations in the last five years,\u201d wrote Vazquez in an email during his paternity leave. He notes that Oportun has more than 230 locations in six states, some of them stand-alone offices, while others are housed inside Latino-oriented grocery stores. In all, the company has 1,500 employees.<\/p>\n

O<\/span>portun swims in the same waters as a handful of fintech\u00a0lenders that are attempting to step into a space left vacant by traditional banks and serve the underserved. They include Elevate, LendingPoint, and Ascend. These companies offer credit to customers at subprime rates, use data analysis to score loan applicants, and may promise them lower rates in the future by helping them build credit. Many of them, however, have only an online presence. They are, in some sense,\u00a0the tech sector\u2019s response<\/a>\u00a0to the increasing income volatility and economic insecurity that have been on the rise since the 1970s.<\/p>\n

But unlike some of its competitors, Oportun is also a throwback. It resembles the middle and working class-oriented consumer credit firms of the 1950s, like Household Finance Company, says Todd Baker, a senior fellow at the Mossavar-Rahmani Center for Business & Government at Harvard Kennedy School, who published a working paper about the fintech industry last month.<\/p>\n<\/div>\n

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\u201cWhat Oportun did is combine the technology for credit analysis with a very high-touch, office-based delivery system to help customers succeed,\u201d says Baker.<\/p>\n

BEYOND LOANS: BUILDING\u00a0A CREDIT HISTORY<\/h4>\n

Stephanie Gonzalez worked on Oportun\u2019s front lines as a customer service representative handling the holiday rush at an El Super grocery store location in Huntington Park at the end of 2015.<\/p>\n

She processed paperwork for loans and reviewed contracts with customers whose lack of knowledge about the importance of building and maintaining good credit \u201creally opened [my] eyes,\u201d she said. It concerned her that many of her customers\u2014especially young people and borrowers she thought might be undocumented immigrants\u2014seemed focused on securing a loan but would \u201cnot know the importance of maintaining a good credit score.\u201d<\/p>\n

Nevertheless, the data suggest that a significant number of Oportun\u2019s customers are seeing improvements in their credit scores. Over a four-year period, 61% of borrowers who took out multiple loans increased their credit scores, according to a California Department of Business Oversight report. In 2014, the change in score for all customers was a net positive of 198 points. Yet the report lacks data on the percentage of customers who saw declines in their credit scores.<\/p>\n

What about the loan product itself? Consumers Union\u2019s Suzanne Martindale says she would like Oportun to offer lower rates to borrowers, but understands the company is trying to strike a balance.<\/p>\n

\u201cI know that they have tried really hard to thread that needle and to make their loans affordable while, obviously, sustaining their business,\u201d says Martindale.<\/p>\n<\/div>\n

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A sample $1,000 loan listed on Oportun\u2019s marketing literature can be repaid over the course of 13 months in fixed bimonthly payments of $49 for a total cost of $295 at an average percentage rate (APR) of 49.1%. That rate is significantly higher than that of a high-cost credit card (which is\u00a0about 23 percent<\/a>), but once borrowers repay, they can earn their way toward lower rates on their next loan.<\/p>\n

The average interest rate\u2014which, unlike the APR, doesn\u2019t take into account fees\u2014across the Oportun portfolio is 33%, according to Vazquez\u2019s\u00a0<\/a>recent interview<\/a>\u00a0with Lend Academy\u2019s Peter Renton.<\/p>\n

Targeting this demographic is \u201cvery expensive to do,\u201d according to Nick Bourke, consumer finance director of the Pew Charitable Trusts. \u201cA company has to spend a lot of money finding and acquiring those customers.\u201d Banks have easy access to capital and a built-in customer base but, says Bourke, federal regulations make it difficult to for them to engage in so-called small dollar lending.<\/p>\n

THE BIG CHALLENGE OF SMALL LOANS<\/h4>\n

G<\/span>oing back decades, banks have not had much of a track record making small loans, says Harvard\u2019s Todd Baker. They typically will invest in the high-risk consumer lending businesses \u201cduring the early parts of the credit cycle when losses are low,\u201d but \u201cdon\u2019t have the stomach to stick with them\u201d when the going gets tough during the latter part of the cycle, according to the working paper Baker published last month.<\/p>\n

Payday lenders, whose storefronts\u00a0outnumber McDonald\u2019s<\/a>\u00a0in the U.S., have filled the gap left by banks with loans that have triple-digit interest rates and are notorious for creating debt traps. When borrowers can\u2019t repay those loans, they must take out another loan and another. Auto title loans, another alternative to traditional banks, put borrowers at risk of losing their means of transport.<\/p>\n

It was this state of affairs that led founder James Gutierrez to launch Oportun\u2013first called Progreso Financiero\u2013as a booth inside a San Jose grocery store when he was just out of Stanford Business School. He\u2019d grown up in Southern California\u2019s Inland Empire in a Mexican immigrant family and wanted to find a way to serve a community with \u201chigh moral capital\u201d but poor access to financial resources, he says.<\/p>\n<\/div>\n

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He began by administering a lengthy eHarmony-like questionnaire, says Gutierrez, but over time the information requirements have been whittled down. Today a would-be borrower is simply asked to bring in a pay stub or bank statement, her landlord and work supervisor\u2019s contact information, identification, and five references.<\/p>\n

\u201cYou can\u2019t actually build wealth if you don\u2019t have access to capital,\u201d says Gutierrez, who left the company in 2012 and started another, Insikt, which has developed a platform that allows other companies to lend to a similar demographic.<\/p>\n

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[Photo:\u00a0Jessica Goodheart, courtesy of Capital & Main<\/a>]<\/figcaption><\/figure>\n

In 2010, Gutierrez worked with California legislators to craft a pilot program, since revised twice, that permits Oportun to impose higher interest rates than what is allowed under current lending law for consumer loans between $300 and $2,500. In exchange, the company committed itself to strict underwriting standards, mandatory reporting of loans to credit report bureaus, and a set of other requirements. (Oportun recently failed to expand into Florida by winning similar concessions in that state.)<\/p>\n

MORE SCRUTINY, LEGAL CHALLENGES<\/h4>\n

Oportun\u2019s social mission has not prevented it from facing some legal difficulties. In March, a borrower from Montebello seeking class-action status accused the company of violating California\u2019s debt collection law. The borrower\u2019s lawsuit alleged that the company\u2019s debt collection letter threatening legal action listed an amount several thousand dollars in excess of the $2,500 than it intended to\u2013and is permitted to\u2013sue for in small claims court. The litigation could increase regulatory scrutiny of the company\u2019s compliance with consumer protection laws, according to a report by the Kroll Bond Rating Agency published in May.<\/p>\n

Oportun declined to comment on the litigation. \u201cWe always strive to ensure that our collections efforts are compliant with all the applicable laws, rules, and regulations and that they are also aligned with our overall mission,\u201d Marivi Lerdo de Tejada, a company spokesperson, wrote in an email. Lerdo de Tejada added that the company will always try to work with a borrower before taking legal action.<\/p>\n

California consumer advocates offer qualified support for the work Oportun has done under the pilot program and they have joined together with the company on some legislative efforts, as well.<\/p>\n<\/div>\n

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\u201cOportun isn\u2019t perfect. The pilot isn\u2019t perfect,\u201d says Liana Molina, director of community engagement at the California Reinvestment Coalition. \u201cI think they\u2019re really trying to be the good guys, and we have a friendly relationship.\u201d<\/p>\n

But loans are not always the answer for communities struggling financially, she adds. Good public policies that guarantee living wages, access to health care and to safety net services are key.<\/p>\n

\u201cIt\u2019s easy to say, \u2018Oh, go get a loan,\u2019 and solve your problem today, but then you\u2019ve just created another problem that\u2019s going to last for who knows how long\u2014months, years?\u201d<\/p>\n

Oportun seems to have found the customers who can, for the most part, avoid those debt traps. Its loss rate has remained in the single digits, according to Vazquez.<\/p>\n

Arturo Banuelos is one customer that Oportun is willing to bet on. He lost his job as a waiter at a country club after injuring himself playing soccer. He took out a $3,000 loan to tide him over until he found a new job.<\/p>\n

Interviewed as he made his way to his car after visiting Oportun\u2019s Altadena office, he appeared pleased that he been able to reduce his $89 biweekly payments to make them more manageable. He acknowledged the interest rate was high, but, he said, \u201cthey helped me a lot.\u201d<\/p>\n<\/div>\n

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He still had a noticeable limp from his injury but seemed optimistic about his future. He had found work as a plumber\u2019s assistant.<\/p>\n<\/div>\n<\/article>\n<\/article>\n","protected":false},"featured_media":0,"template":"","meta":{"_acf_changed":false},"class_list":["post-11774","news","type-news","status-publish","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/oportun.com\/es\/wp-json\/wp\/v2\/news\/11774","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oportun.com\/es\/wp-json\/wp\/v2\/news"}],"about":[{"href":"https:\/\/oportun.com\/es\/wp-json\/wp\/v2\/types\/news"}],"wp:attachment":[{"href":"https:\/\/oportun.com\/es\/wp-json\/wp\/v2\/media?parent=11774"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}