Here Comes The New Subprime------Payday Loans From A Computer Program

by Noah Buhayar at Bloomberg

Douglas Merrill has peacock feathers tattooed down his left arm, black fingernail polish, chin-length hair and, now, $150 million from Fortress Investment Group LLC to lend to borrowers with checkered credit.

The partnership with Merrill, set to be announced Tuesday, isn’t as unlikely as it seems. For starters, he holds a Ph.D. in cognitive science from Princeton University and used to be Google Inc.’s chief information officer. He now runs ZestFinance, a six-year-old online lender that uses algorithms to extend credit to subprime borrowers. So, he makes no apologies about his appearance.

“I don’t lie about who I am,” he said in an interview from the startup’s headquarters among the pawn shops and souvenir stores on Hollywood Boulevard in Los Angeles. “I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”

The funding from Fortress, which manages about $72 billion, will help ZestFinance make more of its Basix installment loans, which are capped at $5,000, last as long as three years and carry annual rates of up to 36 percent. Borrowers often use the money to consolidate credit-card debt or pay for medical expenses, Merrill said.

His unusual appearance in the financial world is a luxury he can afford. ZestFinance is among a crop of startups leading a technology-driven push to make lending easier and cheaper. Wall Street firms and other large institutional money managers have taken note, writing big checks to participate in the fast-growing businesses.

Avant Inc., one of ZestFinance’s competitors, said last week that it had raised$325 million from investors including private-equity firm General Atlantic and JPMorgan Chase & Co. Social Finance Inc., which helps borrowers from elite colleges consolidate student debt, said a day later that it raised $1 billion from investors including Japan’s SoftBank Group Corp. and affiliates of Dan Loeb’s hedge-fund firm Third Point LLC.

ZestFinance gained notoriety in recent years for its approach to underwriting some of the most challenging borrowers. By sifting through oceans of data, Merrill and his colleagues created models that are being used to provide an online alternative to payday loans. Still, they’re not cheap: Some carry annual percentage rates of as high as 390 percent.

The company also is using a data-driven approach with Basix, which was introduced in July and is targeted at middle-income borrowers. It’s a business that Merrill said is poised for expansion.

“The subprime market is being very poorly treated by banks,” he said. “If we were sitting here in 12 months and we haven’t done hundreds of millions of dollars of loans, I’d be disappointed.”

Source: Meet Fortress's New Subprime-Loan Partner on Hollywood Boulevard - Bloomberg Business

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