Lendbuzz CEO Amitay Kalmar started his company after an unpleasant credit experience.
The former Israeli army officer arrived in the U.S. to attend Massachusetts Institute of Technology. He had $50,000 in the bank. But he was turned down when he applied for a credit card.
Mainly because he lacked a FICO score, something lenders traditionally look at to determine creditworthiness.
“I was surprised but as I learned about the system, I understood why I was declined,” Kalmar (pictured, below left) tells Wards. “After a few hours, I stopped taking it as a personal insult. I got it that Bank of America didn’t dislike me. It was an automated-decision issue.”
He decided to do something entrepreneurial about it after graduating with an M.B.A. from MIT.
He founded Lendbuzz in 2015, a digital finance company that uses algorithms to render car-loan decisions based on thousands of alternative credit data points beyond lenders’ traditionally weighed factors such as FICO scores, mortgages and car loans.
Instead, Lendbuzz considers alternative factors such as whether a car-loan applicant with little credit history nonetheless has conscientiously paid things such as phone, cable TV and utility bills.
“We focus on car financing for a segment of the market that has been underserved or overlooked: people with a thin credit file or no file at all,” Kalmar says.
Forty-five to 50 million Americans are considered credit invisible. “Not all are great credit risks, but 20%, 30%, 50% could qualify for some basic credit products,” including auto loans, Kalmar says.
Today, even major credit bureaus have started to use alternative credit histories as part of their rating services to lenders.
Kalmar’s Boston-based company works with car dealerships to approve and finance loans for that segment.
“Dealerships submit the credit applications,” he says. “We do the decisioning and then extend approved loans. These aren’t subprime loans.” Most are near-prime."
The lending process requires working closely with dealerships.
“We like the in-person sales model,” Kalmar says. “The dealerships explain our programs and how to get funded fast. We hire people who have worked in the industry and understand dealership F&I managers needs and pain points.”
The loan applicants must agree to Lendbuzz accessing their bank accounts.
In doing so, “we focus on a cash-flow profile rather than the consumption of credit products that credit bureaus often look at,” Kalmar says. “Everything is done digitally. We’re looking at income, sources of it, balances and spending patterns.”
What if someone lacks a bank account?
“We’re not able to serve people who are considered underbanked or basically without bank accounts,” Kalmar says. “The problem is, I don’t have the necessary data (to serve them). If we find a way to collect meaningful data in that segment to assess risk, I’d be excited to serve them.”
But how reliable is alternative credit? If someone manages to cover a monthly phone bill, does that telescope to an ability to pay back a heftier car loan?
Kalmar’s short answer: Yes. But that doesn’t mean there aren’t car-loan defaults, regardless of credit histories, alternative or traditional.
“When you think of consumer credit, there always are two elements: the ability to pay and the willingness to pay,” Kalmar says. “We’re able to find answers to both, but it’s sometimes difficult to assess. Credit scoring and credit assessments are statistics.”
That means lenders can play the statistical odds but aren’t able to completely eliminate risks of a loan going bad. As a veteran banker once said, if you want to totally eliminate risk, don’t lend money.
“It’s a risk-based industry but on average you are usually right in your lending decisions,” Kalmar says.
(Auto loan payback problems are relatively rare. For example, delinquencies of two months or more were 1.69% of auto lending in last year’s fourth quarter, according to TransUnion.)
Credit bureaus, such as Equifax and TransUnion, that had historically relied solely on traditional credit scoring, have in recent times incorporated alternative credit-assessment models.
“We’re investing in alternative data,” Satyan Merchant, TransUnion’s senior vice president and automotive business leader, says.
“We do want that data, from short-term loans to magazine subscriptions to utility bills. We find it valuable both alone and as a supplement to traditional data.”
The alternative data particularly applies to young people and immigrants, he says, adding that credit assessing is “ever evolving.”
And expanding. “More data is usually better,” Merchant says. “Lenders are thirsty for it.”
Alternative credit scoring helps paint a credit profile, says Justin B. Gasman, a 20-year dealership F&I veteran who formerly was financial services director at McCaddon Cadillac Buick GMC in Boulder, CO.
“Using alternative credit to get a good picture makes all sorts of sense,” he says.
But it has its limits like any auto-loan decision-making criteria, adds the CEO and founder of Gasman Automotive Solutions, an enterprise that includes F&I training and development.
“If you are looking at subprime, a phone bill alone won’t help much,” Gasman says. “There’s a succession of how bills are paid. Today, phone bills are paid first because nearly everyone has, wants and needs a phone.”