These days, it can be tough to distinguish your business from others. Even worse, many customers, or potential customers come with preconceived notions that may not be favorable to you. Sometimes because of poor understanding, and sometimes because of legitimate history. For example, the most common kind of car dealership commercial you see today is one that says, “We aren’t like other car dealerships,” because people have soured on the entire concept.
Enter SoFi whose marketing tagline is, “We are not a bank.”
Is SoFi Really Not a Bank?
Ironically, it’s really pretty easy to not be a bank. In fact, of the big financial institutions that you probably think of when you do think of banks, they have several branches, subsidiaries and affiliated companies precisely because being a bank, is a very specific, legally defined thing. In fact, it is impossible to accidentally, kind of, sort of, be a bank. As soon as a company puts the word bank in its name, or claims to be a bank in anyway, all manner of laws, rules, and regulations kick in. In other words, most companies are not a bank.
SoFi is not a bank for the simple reason that it does not have customer deposits. No deposits, no bank. Easy. So, this isn’t some SoFi scam marketing. They really are not a bank, of course, neither are lots of other financial companies.
What Is SoFi?
So, what is SoFi exactly if they are not a bank?
SoFi is a lender. In fact, if you scroll to the bottom of their webpage, you’ll see in the fine print that officially, SoFi (the lending part) is SoFi Lending Corp. NMLS #1121636. You see, lending corporations are real things that exist and are also heavily regulated.
Believe it or not, there is no need, nor requirement to be a bank to give out loans. It just means you have to get the money you are going to lend out to people from somewhere else. In this case, investors supply the money the company lends out.
Now, as it turns out, SoFi is more than a lender, it’s also an advisory firm, known legally as “SoFi Wealth, LLC, an SEC Registered Investment Advisor,” and also a brokerage called, “SoFi Securities LLC, and affiliated broker-dealer registered with the Securities and Exchange Commission.” (SoFi, then would take brokerage deposits, but not banking deposits.) We’ll talk about the SoFi wealth management and investing part in a separate post since most people intrigued by the “not a bank” slogan aren’t necessarily looking for those services.
At this stage, SoFi focuses on just a few lending products. I suppose this also makes SoFi not a bank. A bank usually will lend you money pretty much anyway you want to borrow it.
SoFi offers student loans, personal loans, and mortgages. No car loans, credit cards, or home equity loans or lines are offered.
As far as mortgages are concerned, SoFi only originates mortgage loans in 23 states. (AL, CA, CT, DE, DC, FL, GA, IL, IN, MD, NH, NJ, NC, ND, OR, PA, RI, TN, TX, VT, WA, WI and WY) If you live in one of the other 27 states, you can only use the company’s student loans, personal loans, or wealth advisory services.
What Makes SoFi Different?
It is really hard to be different structurally in the financial services industry. That is by design. Finance is heavily regulated, and for good reason. The legal structure of SoFi is the same as any bank that runs a lending company, advisory company, and brokerage company under the same name. The only difference is that it doesn’t have the banking part.
So, semantics aside, what makes SoFi different than banks?
For the most part, it’s the usual stuff that all banks say make them different. They care more. They have better rates. They have better customer service. You know, all the same stuff all the banks say that makes them better than other banks. You would have to actually open an account to verify the veracity of those kinds of statements.
Not Using FICO Scores
The one thing that is potentially different, is that the company claims to not use FICO scores. The company markets this as the FICO Free Zone. Instead of using a FICO score, they will look at your whole situation and make a credit determination based on their own analysis, rather than a mathematical score calculated by a computer. Ironically, this is not revolutionary. Instead, this is how they used to do credit in the old days before FICO scores existed.
A bank loan officer would look at all of you papers, and statements, and tax returns, and so on, as well as your reputation in the community and then determine whether or not to give you a loan, and at what interest rate. This, is where banks became the primary lenders. Not only did they have the money, but if you were a customer, they already knew something about you, like how much you have in the bank, and how often you bounce checks, without even looking at a credit report. As far, as I can tell, SoFi still uses your credit report, they just don’t use the FICO score. (Note that the company discloses that it does pull your FICO score and keeps it up to date in their records because their investors might want to know.)
This doesn’t mean that they dish out loans blind to anyone regardless of how bad their credit history is. It just means that they use their own manual criteria rather than use a FICO score. Whether they are more or less lenient in their lending is something you have to take their word for.
Low Rates Cheaper Fees
SoFi does seem to offer lower rates and fees than you’ll typically find if you go into a financial company blind. That is, if you contact a bank or lender without ever having a relationship with them. On the other hand, if you have a hometown credit union that waives fees and gives low rates to existing clients that use other products (like the banking services) then, you might be able to match what SoFi offers.
Better Mortgage Deals?
Where SoFi looks really interesting is the mortgages they offer. For starters, they advertise the ability to get a mortgage with 10 percent down, without having to pay mortgage insurance. That could be huge for a lot of people, but it is only for those who are, “well-qualified applicants.” They also say that there are no application fees or origination fees which is also a good deal. Don’t confuse this with closing costs though, which they do have, and which the company only has limited control over.