Capital One Co-Founder Is Making a Bet on the Subprime Market

(Bloomberg) -- The co-founder of Capital One Financial Corp. is betting now’s a good time to lend to the riskiest borrowers.

Nigel Morris, Richard Fairbank’s partner in creating the company that became Capital One, is joining the board of LendUp Global Inc. and boosting his investment in the firm, which uses machine learning to look beyond traditional credit scores in the subprime market.

Morris, 59, said he’d been planning to build his own credit-card venture, then met his “philosophical soul mate,” Sasha Orloff, the founder of San Francisco-based LendUp. “This might be a platform we can work with,” Morris remembers thinking at the time. “They’re leveraging state-of-the-art technology, and it felt like a really good relationship.”

LendUp, which has made about 5 million loans totaling roughly $1 billion since its founding in 2012, uses an underwriting process that incorporates data such as rent and utility payments to evaluate subprime borrowers. It started out offering short-term loans, often acting as an alternative to payday lenders, and expanded into credit cards last year.

Its two Visa cards feature longer-than-usual grace periods before late fees kick in, and interest rates ranging from about 20 percent to 30 percent on credit lines of as much as $2,000. The card business is growing much faster than the firm’s lending product, according to the company. One of the cards is issued by TAB Bank and the other by Beneficial State Bank.

Data Mining

Some lenders have expressed concern about the potential for increased losses in consumer credit as interest rates rise. Total household debt in the U.S. hit a new peak in the first quarter, rising to $13.2 trillion, according to the Federal Reserve Bank of New York.

While subprime borrowers are perceived as the riskiest credits, Morris and Orloff said they’re actually safe bets, because it’s easier to project delinquencies using additional data that the credit bureaus don’t get.

“These borrowers often live their lives as if they are always in a recession,” Orloff, who was a credit underwriter at Citigroup Inc. during the financial crisis, said in an interview. “We want to offer fair products, even though they aren’t as price-sensitive as someone with a prime credit score.”

©2018 Bloomberg L.P.

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