SAN FRANCISCO--(BUSINESS WIRE)--Scratch, a new financial technology company started in 2015 to transform the antiquated business of getting America’s $13 trillion household debt repaid, today introduced the first loan servicing platform to align the financial interests of lenders and borrowers.
The Scratch loan servicing platform empowers borrowers with a simple web application for understanding, managing and paying back their loans while providing lenders accurate, real-time portfolio insights. And, by automating the back-office complexities of loan management, Scratch can devote more resources to giving borrowers the attention and guidance they deserve.
Loan Servicing Crisis Persists
Today, U.S. household debt is at a high of $13 trillion and 8 out of 10 Americans carry some type of debt, including mortgages, credit cards, student loans, and auto loans. And everyone who has a loan has a loan servicer.
Loan servicers are the companies that handle all of the inbound and outbound communications with a borrower after a loan is originated. Servicers administer all of the loan accounting, manage all money movement from the borrower to the lender and conduct all lender, borrower, and investor reporting. It is also the responsibility of the servicer to ensure full compliance with regulations.
But the loan servicing industry – overwhelmingly manual, using old systems, and reliant on massive, outsourced call centers for collections – is broken.
Loan servicers, for instance, were in the middle of the mortgage crisis during the 2007-2010 Great Recession and were fined $9 billion by regulators from 2013 to 2017 for improperly administering loss mitigation options to avoid foreclosures, mishandling documents, and misallocating paperwork, among other infractions.
Similarly, servicers are now at the center of the student loan crisis and have been under increased scrutiny for misleading and mistreating borrowers as well as improper billing, overcharging, and false credit reporting, and have collectively been fined over $200 million since 2014.
And, just like airlines today, rather than attempting to improve, loan servicers are consolidating and have become even more egregious in their practices, while also collectively increasing prices and ultimately making it more expensive for people to get a loan.
Misaligned financial interests are at the root of the problems in loan servicing. Although timely loan payments equally benefit lenders and borrowers, to this day, loan servicers receive greater financial benefits when loans are not paid on time.
The less effort loan servicers put into helping borrowers, the less cost they incur and the more profit they make. As borrowers fall behind, loan servicers charge them late fees and simultaneously charge lenders more for their service. And as loan servicers are increasingly dependent on these punitive fees to generate profits, there are few to no incentives to helping borrowers make timely payments and get out of debt.
“This is why we started Scratch,” said Sameh Elamawy, co-founder and CEO of Scratch, which to date has raised $17 million from investors including Index Ventures, Ribbit Capital, Founders Fund, Nyca Partners and CFSI JPMorgan Chase. “We knew it couldn’t be just some app tacked onto the existing infrastructure or ecosystem. Real change would have to be more foundational. Rather than trying to build a better loan servicer, we set out to replace the loan servicer altogether with a platform for debt that empowers borrowers and brings them closer to their lenders.”
Transforming An Antiquated Industry
Built over the last three years by a team of Silicon Valley consumer technologists, Washington D.C. regulatory experts, and former Wall Street bankers, the Scratch platform is designed to work with loan originators and investors of all sizes, as well as with any loan structure.
The unique blend of technology developed by Scratch is designed to simulate and unwind any loan transaction, which means no human needs to touch loan accounting, treasury management, or reporting. It easily adapts to support lenders’ new products and services. And the platform includes application programming interfaces (APIs) that make seamless the processes of transferring loan and account data to Scratch and providing real-time reporting to the lender on portfolio performance.
Unlike traditional loan servicers, Scratch charges lenders the same amount for all delinquent loans in a portfolio it services, regardless of how long the borrower’s payment has been overdue. In addition, Scratch assesses delinquent borrowers’ ability to repay their loans and only charges late fees to those able to make payments. And those late fees, rather than going to Scratch’s bottom line, are used to keep borrowers on track through education and coaching.
“Scratch brings together advanced technology and innovative borrower support to improve loan performance and ensure consistently stellar service for our borrowers,” said Phillip Stegner, CFO for Meritize, a skills-based education lender that uses an individual's academic, military and work achievements to improve credit evaluation and loan options. “Scratch gives us modern tools for modern borrowers with built-in regulatory compliance and technology that’s flexible enough to meet our unique specifications.”
Said Zac Prince, founder and CEO of BlockFi, a crypto asset-backed lender, which evaluated nearly a dozen loan servicers before choosing Scratch: “For us, Scratch is all about the technology – their APIs and our ability to pass information. No one else even came close to checking those boxes.”
The First Borrower-First Approach
“We believe you can do well by doing good, and we were surprised loan servicing was still such a mess,” said Chris Walters, Scratch co-founder and CTO. “To figure out where the high costs and borrower harm came from, we looked at the problem from the ground up. We realized that if we could solve the hard technical problems, we could dramatically change borrowers’ relationship with debt, often their largest stressor, for the better.”
By automating the back office functions of loan administration, the Scratch platform dramatically reduces the cost to service a loan, which in turn, allows Scratch to provide borrowers with knowledgeable, empathetic, personalized guidance that isn’t economically feasible for traditional loan servicers.
The combination of that attention and self-service tools leaves borrowers feeling in control of their loan repayment, enhancing lenders’ brands and increasing customer loyalty, leading to an improvement in payment outcomes and customer satisfaction.
“If you ever have a question their support team tries to get back to you as soon as possible,” said Jordan, a borrower in Arizona. “It makes it feel like they care about you and recognize you as more than just an account number.”
Pricing and Availability
The Scratch loan servicing platform is now available in the U.S. Pricing is volume based: either a set of fees per loan per month or a percent of outstanding loan amounts per month.
“Business models based on borrower mistakes or misfortune are no longer sustainable,” said Elamawy, who was appointed to the Bureau of Consumer Financial Protection’s Consumer Advisory Board last week. “In contrast, we’re on a mission to help borrowers change their relationship with debt for the better, and create a world where debt plays a healthy role in more people’s lives.”
To learn more about Scratch go to www.scratch.fi.
About Scratch
Scratch is transforming the antiquated business of getting America’s $13 trillion household debt repaid by aligning the financial interests of lenders and borrowers. The Scratch loan servicing platform empowers borrowers with tools to better understand, manage and pay back their loans, while providing lenders accurate, real-time portfolio insights. By automating the complexities of loan management, Scratch can devote more resources to giving borrowers the attention and guidance they deserve. Built by a team of Silicon Valley consumer tech nerds, Washington D.C. regulatory wonks, and recovering Wall Street bankers, Scratch’s headquarters are in San Francisco. Scratch investors include Index Ventures, Ribbit Capital, Founders Fund, Nyca Partners and CFSI JPMorgan Chase.