It turns out that when SoFi executives and employees weren't banging the "collateral" out of each other in parked cars or office bathrooms, they were being less than honest with loan applicants about how their loan applications were being evaluated.
According to conversations with numerous former SoFi employees, the company's "FICO-Free Zone" loan product actually relied quite heavily on evaluating applicants by their FICO score. After very publicly announcing in early 2016 that SoFi would no longer use FICO scores to evaluate loans, sources tell Dealbreaker that the company saw defaults tick up and made the internal to decision to reintegrate FICO data. No announcement of the shift back was ever made, the "FICO-Free" language disappeared from the website and some evidence of the SoFi's move away from FICO was even scrubbed from the company's blog.
Because of the shift, applicants looking for loans when "FICO-Free" was on the homepage were almost certainly not aware that FICO was indeed a large factor in their application.
But this whole thing seems less like a concerted effort to deceive than a big idea getting quickly out of hand. Our sources describe a hungry and motivated startup bent on disrupting the lending industry but handicapped by an inadequate algorithm and one simply too shorthanded to deal with a deluge of loan applications.
It almost feels like Theranos 2.0, but with less turtleneck and more Fintech.
"They made up a FICO free zone, that wasn't true," said a former business development associate. "But that's what they wanted us to sell to customers. They were saying SoFi focused on the profession of the applicant, but you can't get the necessary info like that. And how else are you going to get that? It's not like you can can just trust what you see on GlassDoor."
One former employee claiming to be very familiar with the underwriting process told Dealbreaker "They told everyone that they weren't being put through FICO. Everyone was put through FICO and it was a deciding factor."
When asked in a phone conversation if SoFi was not truthful about its use of FICO, one former senior executive said "Yeah, that wasn't true. FICO was used all the time."
When SoFI started touting its "FICO-Free" product in 2016, it was part of a Fintech movement looking to disrupt the old accepted ways of evaluating credit. Then CEO Mike Cagney told WSJ, "We just don’t think the score itself is a real driver to credit performance." While there seems to have been some gray area about what "FICO-Free" meant at the time (SoFi made it clear that it would still collect FICO data), co-founder Daniel Macklin seems to have made it very clear in January 2016 that SoFi wouldn't use the results of FICO reports in evaluating who got loans from SoFi:
The FICO score calculation doesn’t consider things like your savings, your cash flow, your ability to pay non-credit bills like water and electric or your future earnings (for example, if you just landed a job with excellent pay). Plus there’s the fact that a growing number of millennials are forgoing credit cards entirely, which is reflected negatively in their credit scores – even though they may be perfectly able to pay off a loan. All of these factors can have a major impact on your creditworthiness, but your FICO score doesn’t take them into account.
Because of these gaps, SoFi has chosen to not use FICO scores when evaluating the financial wherewithal of applicants. We still consider your track record of meeting financial obligations, but we also look at a more complete picture of your financial situation than what your credit score can provide.
What's even more interesting about that quote from Macklin is that it still exists in a post on Business Insider but is no longer on the SoFi blog website. As the BI post suggests, Macklin's statement was once on the SoFi blog (this web archive scrape proves it) but the original URL of the post now leads to an error page.
While the internet is a confusing place and links get broken all the time, it seems particularly odd to see such a strong statement about SoFi stepping away from FICO get erased from SoFi's blog. According to one former employee with knowledge of the decision, the post was removed specifically because it was evidence of a process that SoFi had decided to abandon.
"They did stop using FICO, but then they saw defaults go up," says our source. "So they just started using it again." But while the FICO-Free experiment was over internally, no official announcement was made of the change and SoFi clearly went as far as to erase blog posts about it. We have found no reporting whatsoever between January 2016 and today that SoFi is once again using FICO as a deciding factor in loan approvals.
On the website homepage today, there is no direct reference to FICO other than this statement at the very bottom:
"To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit."
SoFi's language now has it looking "behind credit scores," a vague but helpful clarification for anyone who applied during the "FICO-Free Zone" days.
But again, this feels to us less like a devious plot than a panicky pivot made worse by cowardly management decisions. And that seems especially true in light of what we're hearing from people that were actively selling the "FICO-Free" product for SoFi at the time. What seems to have predicated the shift is strategy was a corrosion of trust in SoFi's revolutionary algorithm and disruptive process.
"The volume of applications coming in were crazy," said the former business development associate. "I was impressed at first. I said 'You've got this powerful, revolutionary engine to do this volume, that's impressive. Can I see it?' So I went to Healdsburg and saw. I tore back the curtain so to speak, and it wasn't so much a powerful engine, it was more like a VW 4 cylinder motor on the floor."
According to our source, the underwriting process at SoFi in early 2016 was "A bunch of kids in Healdsburg with no experience whatsoever." One Healdsburg employee claims that the company once promoted the guy tasked with emptying the office paper shredder to review loans because the application volume was so high.
One former employee recalls being ordered to tell applicants that the turnaround time on applications would be 72 hours even though "We all knew it was really 30 days at least." The same source tells Dealbreaker that loan applications decisions were "Never FICO-Free."
If that is indeed what was happening (and two other sources paint a very similar picture) it is almost a relief that SoFi reversed its decision to apply FICO to loan decisions. SoFi has funded billions of dollars worth of loans since its inception and it started packaging RMBS at the end of 2016. If SoFi is going to become a systemic actor in the lending economy, or a Utah-based bank (and best of luck with that after this week) it would be super-helpful if it relied more on safety and risk management than untested disruptive marketing ideas that don't actually work.
In response to questions from Dealbreaker, A SoFi spokesperson defended FICO as a tool, “SoFi has built one of the best performing unsecured credit models in the lending space. We rely on this model to determine the creditworthiness of applicants and are constantly refining it to improve our ability to identify what attributes indicate that someone is more likely to pay back their loan. FICO scores are one of the hundreds of credit data points that our algorithm considers when making lending decisions."
But that same spokesperson did not deny that SoFi shifted back to using FICO (although not to assuage the glut of applications), and even confirmed that the shift happened almost immediately after the "FICO-free" campaign was launched at the beginning of 2016. "As part of ongoing improvements to our credit model, we have tested removing FICO altogether from our decision-making process, but found it didn’t improve repayment rates so have since reintroduced it. We didn’t use FICO scores as part of our evaluation process during the period when it was marketed as “FICO-free” on our website and removed any of those communications after they were reintroduced in Q1 of 2016. We use FICO scores solely to deliver better loan performance and any claim that FICO was used to make it easier to manage higher volume is false.”
While the conflicting reports of when or if FICO was removed from decision-making at SoFi might never be fully resolved, there is one question that really needs to be answered; Why did a disruptive startup built on marketing and attention-seeking suddenly get shy and quiet when it had to disrupt itself?