Privlo, a Los Angeles-based alternative mortgage company, expanded to Chicago in mid-April, bringing its focus on lending to contract-worker Millennials, entrepreneurs and others who don’t earn steadily throughout the year. The four-year-old company has raised about $6 million in venture funding and $350 million in debt financing, which founder and CEO Michael Slavin says the company will use to serve the $150 billion market of borrowers who aren’t likely to be approved by traditional lenders. He discusses how his company determines an applicant’s ability to pay, how it makes money and more.
Q. What challenges do entrepreneurs or startup founders who don’t earn an income face?
A. That’s a really tough question. A lot of time they need a co-signer or else they need that money in the bank because we still have a standard of care where we have to ascertain the ability to pay. For instance, even in my case, I purchased a home while I was building a company. I had zero revenues for two years, and the bank wasn’t very excited about that. In my case, I had my parents co-sign on a loan, which was somewhat embarrassing at 29, but it was the only way to get into the housing market when values were still really good. It can be tough because you still need to have a certain amount of assets or an income stream so we can check the box for the federal government standards.
Q. How do you assess loan applicants differently than do traditional lenders?
A. What we’re able to do using data science is get a reasonable amount of confidence looking at spiking and essentially smooth it out and find the probability that the borrower’s still going to maintain a pretty normal income stream or even a growth track on income stream. Definitely it’s a bunch of pretty cool math we do, but we also have to display within the federal government’s confines the ability to repay. And that’s also a new thing that’s happening in mortgage loans today that was never the case in the past.
Q. How do you determine that loan applicants have the ability to repay?
A. There’s eight tenets
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that we have to assess every borrower upon and what they allow for are compensating factors. So imagine your income is somewhat cyclical but you have more bank savings. We can smooth out your income because you have a compensating factor given you have more cash in the bank. There’s a pretty cool balancing act that can take place, and that’s where we’re able to step in with some data science and we’re able to make a justifiable argument.Q. How do you make money?
A. We charge an origination fee up front, which is very standard of all lenders. Usually there’s a gain on sale of the loan; what’s different with us, we’ll originate a loan and rather than selling it at par, we’re selling it a premium. It might be because we’re dealing with a pretty unique asset, so there’s a lot of investors that want it, so it drives the price up.
On every single loan, we’re selling them to partners that we have long-term relationships with, so we’re actually retaining part of the interest strip over time as well. If the loan fails, we lose our income off of that particular loan, and in many cases we actually have to purchase the loan back, which isn’t the case with other lending arrangements.
Q. How do you assure that you’re not preying on these applicants?
A. It gets down to justifying the ability to repay on a loan-by-loan basis. We have to document from an actual data perspective, meaning what their income is on an annual basis or even a monthly basis. It’s really pragmatic. Essentially you put an entire system and framework in place and it can’t move from loan to loan. We strike it at the credit-policy level.
Q. What opportunities do you see in Chicago?
A. Chicago as a city has a large and embedded group and a pretty steady economy over time, which is pretty exciting. We really look for the biggest populations in the country, and that’s where we start. From there we do look at variables that seem to be favorable to credit performance over time, and Chicago and Illinois are definitely up on that list. It’s a more steady lifestyle in general, which generally translates into steady credit.
Q&As are edited for length and clarity.