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Alternative lending has been a saving grace for many borrowers that had nowhere else to turn when the credit market dried up in the wake of the 2008 housing bubble collapse. For borrowers, alternative finance became the only option when banks tightened lending standards. But have alternatives simply moved subprime risk to a new conduit? Let’s dig into the question.
Subprime loans and risky borrowers: A recipe for disaster
During the housing bubble, the number of subprime mortgage loans being originated in the U.S. exploded. Many loans were made to risky borrowers with FICO scores below 620, while “Alt-A” loans -- those made to borrowers with good credit scores but poor employment history -- also ballooned. Often, these loans had unfavorable terms, like 2/28 hybrid mortgages, which have low fixed interest rates for two years before costs increase dramatically. The stats are staggering. The subprime mortgage loan market grew from $65 billion in 1995 to $625 billion by 2005. As of March 2008, the subprime market was estimated to be 11.8% of the total mortgage loan market -- a recipe for disaster.
The bubble had to burst
When the mortgage bubble burst, many of the world’s largest lenders found themselves fighting to survive at all costs. Between 2007 and 2009, real estate values in the U.S. dropped by $6 trillion. The world’s 100 biggest financial institutions wrote off over $370 billion in subprime-related losses. Part of this struggle to remain solvent included a drastic reduction in lending. Not only could subprime borrowers no longer get loans, many borrowers with solid credit were left out in the cold as well.
The alternative finance revolution: A better way?
In the aftermath, alternative lenders like LendingClub and Prosper recognized the huge opportunity the crisis created and quickly established a sizable new market. LendingClub alone reports it has now issued over $13.4 billion in alternative loans. Notably, leading alternative lenders are taking steps to make sure their platforms avoid the dangers of pre-crisis subprime lenders faced. Many members of the industry have higher lending standards than subprime mortgage lenders did before the housing bubble. LendingClub, for example, requires a minimum FICO score of 660 for its borrowers and Prosper requires a FICO score of at least 640 -- both fall above the 620 threshold that classifies a borrower as subprime. This duo also doesn’t issue deceptive or irresponsible terms seen in subprime mortgages, such as the aforementioned 2/28 hybrids; all of LendingClub’s and Prosper’s personal loans have fixed rates and equal payments over time. Of note, Avant does have less stringent credit requirements than other players in the space. The startup offers what it calls near-prime loans to borrowers not quite prime, but not as risky as their subprime peers. Understanding borrower risk and assigning appropriate interest rates isn’t the only advantage alternative lenders have in their corner, though: They’re also using more advanced underwriting models than those used by traditional banks. Upstart, which advertises “data-driven” personal loans, is just one example of a company using an income-prediction algorithm that takes profession, college, major, standardized test scores, grades, projected inflation and more into account.
A higher standard
America’s mortgage lending market certainly wasn’t always as wildly irresponsible as it became during the height of the housing bubble. Lending standards gradually loosened over time right under the nose of regulators. This underscores a key reality: As the explosive growth in marketplace lending continues, governments will need to monitor the practices of the industry’s leading players. For now, though, it’s clear the space is holding itself to a much higher standard than subprime mortgage lenders did almost a decade ago.
Disclamer: The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the suitability of any Even Financial product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional. Any information or statistical data sourced by Even Financial through hyperlinks, from third-party websites, are provided for informational purposes only. Although we promote products and services form our partners, our opinions are our own.
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Goldman Sachs-backed Even Financial, a digital matchmaker between banks and customers, just bought an insurance startup as life insurers are seeing policy applications boom
Even Financial has acquired LeapLife, a leading insurtech platform. The addition of LeapLife allows Even to immediately commence its insurance capabilities, aimed at simplifying and enhancing the way consumers search, compare, and get matched with insurance policies (LeapLife’s existing platform will continue to operate from leaplife.com). Business Insider wrote an article about it, interviewing our CEO and Founder Phill Rosen.
Even Financial Launches Insurance Offerings With Strategic Acquisition of LeapLife, a Leading Insurtech Platform
Pioneering B2B Fintech Expands its Industry-Leading Financial Services Monetization Platform to Help Insurance Carriers Find and Connect with Consumers New York, New York – April 22, 2020 – Even Financial (Even), the leading API for financial services search, acquisition, and monetization, announced today that it will be launching services for the insurance industry through the acquisition of LeapLife, an insurtech platform and digital life insurance agency. The addition of LeapLife allows Even to immediately commence its insurance capabilities, aimed at simplifying and enhancing the way consumers search, compare, and get matched with insurance policies (LeapLife’s existing platform will continue to operate from leaplife.com). Even and LeapLife now offer the only full end-to-end, multi-carrier digital life insurance marketplace experience. Over the coming weeks, Even will further integrate LeapLife’s technology and insurance offering into its industry-leading API, making turnkey insurance marketplaces programmatically available to a vast network of channel partners — when and where their consumers are most in need — while also enabling the company to expand to other insurance sectors, including homeowners, renters and auto insurance. This adds to Even’s peerless breadth of real-time, personalized financial product offers — an expansive suite that already includes loans, savings, credit cards, and more. “Even’s goal to evolve how financial institutions find and connect with consumers is not limited to loans or credit cards, but applicable to all financial products and services, including insurance,” said Phill Rosen, Even Founder and CEO. “Despite its importance, purchasing life insurance is often an overwhelming and inconvenient experience. With more than $600 billion in premiums paid each year, and only 6% of policies sold completely online, we see tremendous opportunities to help modernize the life insurance industry and offer solutions that solve challenges for consumers and carriers alike.” LeapLife is an established insurtech platform and digital life insurance agency that utilizes data science, deep underwriting knowledge, and proprietary technology, enabling consumers to apply for instant-decision life insurance policies with real-time quotes. LeapLife works with many best-in-class insurance carriers to offer consumers a seamless experience from beginning to end. This approach made Even and Leaplife a perfect match. As a digital insurance broker, LeapLife offers personalized life insurance recommendations based on a consumer’s unique needs. Paired with the Even API, which enables customer acquisition for insurance to be native and programmatic, consumers benefit from a more streamlined, transparent, and highly personalized experience when shopping for life insurance. Just as Even’s 2018 acquisition of Birch (the award-winning credit card rewards app) allowed the company to accelerate its expansion into credit cards, the addition of LeapLife will similarly put Even at the forefront of consumer insurance offerings. Charles Svirk of MassMutual Ventures, an investor in Even, said “The Even and LeapLife teams share a vision that the future of insurance acquisition will rely on the power of data-driven, programmatic distribution. We are thrilled to support them as their industry experience, impressive technology, and trusted relationships will help scale Even’s insurance offering and build partnerships to provide these critical innovations in insurance acquisition.” The Even API and platform solve significant, long-standing pain points in financial services acquisition by seamlessly connecting supply and demand. Even has continued its rapid growth trajectory in 2020, surpassing over $1.5 billion in credit issued through its API and expanding its platform to over 400 partners. Even has secured over $55 million in funding from major financial institutions, venture capital firms, and fintechs to back its goal to evolve the financial services acquisition ecosystem. About Even Financial Founded in 2015, Even Financial is a B2B fintech company that is transforming the way financial institutions find and connect with consumers. By seamlessly bridging financial institutions (including American Express, Goldman Sachs, and SoFi) and channel partners (such as TransUnion and The Penny Hoarder) via its industry-leading API, Even turns any consumer touchpoint into an ROI-driven, fully customizable, programmatic acquisition source for financial product offers with full compliance, security, and scale across loans, savings, credit cards, insurance, and more. Even is backed by leading financial services firms and VCs including American Express Ventures, Canaan Partners, Citi Ventures, F-Prime Capital (Fidelity), Greatpoint Ventures, Goldman Sachs, LendingClub, and MassMutual Ventures. Even is the leading search, comparison, and recommendation engine for financial services. Media Contact: email@example.com
Even CEO/Founder Phill Rosen quoted in Protocol Braintrust Newsletter
Our CEO and Founder Phillip Rosen was included in the most recent Protocol Braintrust newsletter along with answers from some thought leaders from Plaid, Slack, and DuckDuckGo!