FICO DOESN’T CONSIDER CHARACTER. WE THINK THAT’S A SHAME.

Phil Coggan, Economist On Planet Money

History is a battle between debtors and creditors.

Every so often, these two clash, there is a crisis and

the whole system is remade.

What is Equify.me?

Before there were FICO scores and credit tranches, character was used to evaluate credit worthiness. Character has been conspicuously absent from the lending process since we started to trust numbers more than we trust the people. We think it’s time to bring character back to consumer credit. Equify is a supplemental credit model that crowdsources information about a borrower’s character. Our proprietary algorithms combine traditional credit rating criteria, endorsement data and information from online social networks into a single score that offers insight into a borrower’s character. Borrowers get better rates. Lenders get better customers. Everybody wins.

greg@equify.me • (206) 786 - 7154

The borrowing and lending system in the U.S. is broken. Many lenders only look at

a borrower's capacity, collateral, and capital when assessing credit risk – a limited

view that does not adequately merit a borrower’s character. To make matters

worse, consumer credit models have not adjusted for recent macroeconomic

shocks. Lenders have been forced to refrain from lending to potentially creditwor-

thy people or ask them to pay interest rates that may not reflect their credit risk.

Microlending organizations the world over have proven there’s a better way – one

that embraces our humanity and considers character in the borrowing and lending

process.

Confidential - Do Not Redistribute

There used to be 5 C’s of credit...but what happened to character? Character is hard to define and even harder to quantify – however that doesn’t make it any less meaningful when evalu-ating a borrower’s default risk.

The process of borrowing and lending seems like it should be simple. Those with money to lend want to earn a financial return with reduced risk. Borrowers want

access to capital at a reasonable cost. But it’s not that easy.

demo.equify.me • (206) 786 - 7154

Over the past 60+ years, the FICO score has become the predominant method for evalu-ating default risk. The five dimensions of the FICO score have proven to be highly cor-related to a borrower’s probability of de-faulting on a loan. That said, there’s still room for improvement. Many have success-fully developed scorecards and models to supplement and outperform FICO...but char-acter is still conspicuously absent from the lending process.

Equify hasn’t given up on qualifying and quantifying character as a dimension of a borrower’s credit. Equify allows borrowers to collect endorsements in the process of completing a loan application and our credi-bility algorithm is used to assess the endors-er’s credibility. In the end, Equify provides lenders with a numerical score that offers in-sight into the borrower’s character that can be used as a supplement to traditional credit scores.

How it works

Confidential - Do Not Redistribute

Borrowing Inquiry

Borrower requests endorsements

Lender underwrites,

approves/funds loan

Lender offers checking/saving/

debit products. Funds deposited

in borrower account.

ACH to borrower

account

Equify exposes interest rate set

by lending partner.

Borrowers are offered incentives

to collect endorsements.

Borrower completes loan application

Equify’s target customers are members of communities of individuals with shared interests or characteristics. At launch we plan to attract the military community in Washington State. As borrowers request endorsements our offering will reach new communities such as alumni networks, church groups, and professional associations.

demo.equify.me • (206) 786 - 7154

Why military? Because these men and women have done so much for us...t’s time to return the favor.

Within this community, it is estimated that over 200,000 Servicemembers turn to payday lenders annually. The remaining 1.8 million use credit cards and traditional sources of unsecured debt (e.g., banks) to finance various aspects of their lives. They naturally belong to a tight-knit community that is well connected (physically and virtually). Additionally, this community places a high value on credibility while income and spending are highly visible to members of the community.

Endorsements serve a dual purpose. They offer insight about a borrower’s credit worthiness and they are the cornerstone of our customer acquisition strategy. When a military borrower requests endorsements, endorsers may be active duty military, veterans or family. Attraction theory suggests some portion of the endorsers will have

similar borrowing needs. As the second wave of customers request endorsements, awareness will spread further outside the military network – to friends in other cities, veteran’s professional networks, church groups, or college alumni networks.

In short, we’ve chosen the military because we want to give credit where credit is due:

Endorsements and credibility matter

Ideas diffuse quickly (~30% of active duty military are relocated every year)

Members of this community are relatively young and active users of online social networks

Salary and spending habits are visible to members of the community

Servicemembers frequently use payday loans/credit cards to bridge cash shortfalls and need an alternative

Borrowers get better rates. Lenders get better borrowers.

Using endorsements online is not a

new concept. Amazon.com uses

customer reviews to help shoppers

make informed buying decisions. Ebay

sellers readily collect feedback and

some sellers now have over 100,000

positive endorsements. Professionals

and job seekers

alike collect

endorsements on

LinkedIn in the

form of “recommendations” to elevate

their professional credibility.

In these instances an endorsement

takes information from people who

have unique, first hand knowledge of

the credibility of a

transacting party.

A third party

manages and

presents that

knowledge to a marketplace to

facilitate better decision making. In

each instance, a single endorsement

typically isn’t given much weight; but

many endorsements are often

considered trustworthy, reliable

sources of information.

There’s more going on when an

endorsement is included in a

transaction. When a seller in a

marketplace opts into a system with

mechanisms to capture endorsements,

a social contract emerges that provides

pressure to meet or exceed buyers’

expectations. Amazon and Ebay sellers

go to great lengths to protect their

seller ratings. Equify borrowers are

expected to behave in a similar

manner.

Endorsements

have been used in

peer-to-peer

lending – and the results, though not

scientific, are very compelling. In 2008,

netbanker.com published information

indicating that borrowers in the

Prosper marketplace with one

endorsement

were 35% less

likely to default as

compared to

borrowers with

similar loans and no endorsements.

Further, borrowers with more than

one endorsement were 50% less likely

to default than borrowers with similar

loans.

We realize an endorsement alone

doesn’t mean much…but a credible

endorsement could be extraordinarily

meaningful when evaluating a

borrower’s credit worthiness.

NOT JUST ENDORSEMENTS

...CREDIBLE ENDORSEMENTS

Equify's Credibility Algorithm con-

siders the credibility of individual

endorsers through factors such as:

Number of endorsements given

– how frequently or rarely do

they endorse?

Relationship between the en-

dorser and the borrower – how

well do they know the borrow-

er?

Performance of other borrow-

ers endorsed – do they endorse

people who repay?

Connections in online social

networks – are they well con-

nected and interconnected?

Other qualifying questions

asked by Equify during the en-

dorsement process

Fraud detection flags (e.g., bor-

rowers and endorsers who

share an IP address or specific

cookies, endorsers making unu-

sually high numbers of endorse-

ments within/across communi-

ties )

What are endorsements?

*Endorsers are individuals who offer positive

information about a borrower and bid on a

borrower’s loan in the Prosper Marketplace.

http://www.netbanker.com/2008/02/

prosper_helps_borrowers_tap_the_value_of_

their_social_capital.html

THE EQUIFY SCORE

The Equify Score examines the endorser’s

credibility in an effort to better understand a

borrower’s character. Our algorithm is a learn-

ing algorithm that is reweighted monthly to

favor dimensions of the credibility algorithm

that show the greatest predictive value. Cer-

tain information is made available to our lend-

ing partners for use in evaluating a borrower’s

loan application including the Equify Score,

which combines information from the endors-

er’s social networks and information provided

by an endorser.

When evaluating an endorser’s

credibility, we examine the following:

The Relationship: How does the borrower know

the endorser? Family members and peers are

not considered as credible as supervisors.

Further, those who have known the endorser for

10 or more years are considered more

knowledgeable than endorsers that have known

the borrower for less than 1 year.

Employment Information: What is the

endorser’s profession? How large is the

endorser’s employer? What is the average

tenure at the endorser’s last three roles?

Overall and Shared Connectedness: How many

connections does the endorser have? How many

shared connections do the borrower and the

endorser have?

Endorsement Portfolio Performance: How do

endorsed borrowers perform on their loans after

loans are issued?

The Endorsement: The endorsement is not

binary. Each endorsement consists of five

questions. These questions, wording, and the

endorsement algorithm will evolve over time.

Below are questions that may be used at launch.

How do you know the borrower? (List)

How long have you known the borrower?

(Number)

Would you consider loaning money to the

borrower? (Binary)

Is there anything you’d like to tell us about the

borrower? (Free text)

Do you want to create an endorser profile?

(binary)

Equify plans to employ natural language analysis on

free text portions of the endorsement and the

borrowing request to identify words and phrases that

are correlated to an increased probability of default or

increased probability full repayment. The natural

language analysis will take time to evolve, but we are

currently exploring these relationships with data

made available from peer-to-peer lenders: Prosper

and Lending Club.

COMMUNITY

Credit risk assessment is back-

ward, not forward looking. Tra-

ditional lending systems in the

U.S. only look at a borrower's

history when assessing credit

risk. This limited view does not

adequately merit a borrower’s

character. Individuals with high

social equity and insight that

could positively influence bor-

rowers’ access to capital are

unable to activate the value of

their social equity for the bene-

fit of their community...until

now.

Lending partners pay Equify a 2% referral fee for each

loan and include the Equify Score in underwriting crite-

ria – where a positive Equify score lowers interest rates.

Lending partners pay Equify a 4% referral fee for each

loan and Equify offers 20bps rebates for each credible

endorsement. The referral fees and rebates for credible

endorsements are paid at the time the loan is funded.

Proposed Structure: Lending Partner Benefits

Offer good loans to good people

Engage an online audience at a critical moment

in their financial life cycle

Asset diversification with a high interest

personal loan portfolio

Align the lending institution with communities

and target customers

Low cost loan/customer acquisition with little

or no up-front costs to the lender*

demo.equify.me • greg@equify.me • (206) 786 - 7154

*Any unique customization of the Equify loan

application may result in a small engineering

cost.