February 12, 2015

Lending startup Earnest harnesses innovative underwriting approach

While many bemoan the challenges less-experienced borrowers face, San Francisco-based startup Earnest has been using an innovative new approach to assess their creditworthiness. 

Targeting the young and responsible
The company, which was founded in 2013, offers personal loans and student loan refinancing, according to The New York Times. Earnest frequently grants borrowers credit for professional training or relocation costs. The amount of these loans are generally only a few thousand dollars each, but can reach as much as $30,000. 

The firm primarily targets college graduates in the 22 - to 34-year-old range, and CEO Louis Beryl contends that young borrowers who are financially responsible get the most unfavorable terms when lenders use traditional methods for evaluating applicants, The New York Times reported. 

Using a thorough approach
To remedy this problem, Berly and his team have been using an approach that is far more comprehensive than pulling credit reports, which involves asking applicants for a wealth of information including bank accounts, retirement and investment accounts, loan balances and credit-card statements, according to The New York Times. In addition, the San Francisco-based startup asks that applicants ensure the education and job background section of their LinkedIn profile is current. 

Using this new approach, which includes between 80,000 and 100,000 data points in total, Earnest processed $8 million worth of personal loans - stretching across a few dozen states, which contain 70 percent of the U.S. population - by the end of 2014, wrote Forbes contributor Laura Shin.

Student loan refinancing
The San Francisco-based startup announced the launch of its student loan refinancing tool in January, providing borrowers the ability to renegotiate the terms of this debt and lock in fixed rates as low as 1.9 percent. This offering gave these graduates the ability to get repayment schedules ranging between five and 20 years. 

"Student loan debt is the home loan of my generation," Beryl stated at the time of report in January, Shin wrote. "It's nearly a universal problem for my age demographic. I am still repaying nearly $100,000 of student loan debt myself," he stated, emphasizing that customers have been asking for a student loan refinancing tool since the company opened in May. 

Constantly evolving market
Currently, disrupters such as Earnest are helping to fuel constant change in the lending environment. Moody's Investors Service recently rated two classes of securities based on debt originated through peer-to-peer lender Prosper. 

As the number of opportunities banks have to purchase loan portfolios expands, these financial institutions must be discerning to ensure they only acquire pools of assets that will help them achieve their investment objectives. 

One way they can greatly increase the chances of meeting this goal is working with Garnet Capital Advisors, a loan sale advisory firm with experience in many different debt types.