Can You Be Rejected for a Loan Based on Social Media Usage?

No lender wants to make a bad loan.  Following the 2007-2008 financial meltdown, millions of people with good credit defaulted on their debt in the U.S, most notably through foreclosures and short sales of homes. Since then, the financial industry has looked for ways to improve predictions on who will be a good credit risk. Financial institutions are very interested in alternative forms of credit scoring, and one of the growing segments in alternative models is social media usage analysis.

What Does Social Media Have to do with Loan Decisions?

Advertisers have long been using online behavior to make predictions of offline actions and decisions.  If you’ve ever noticed how well ads are targeted to you while on your favorite website, you’ve experienced the result of a “big data” analysis of your Internet profile.  The amounts and types of information collected by the major online companies is staggering, and we are only just beginning to be able to analyze it in any meaningful way. Social big data, data collected about social interactions online, is the latest and greatest trend in the big data world.  The amount of data collected by Facebook is estimated to be 500 times the information collected by the NYSE on a daily basis, measured in exabytes (1×10¹⁸ bytes).  Advances in “deep learning”, cutting-edge artificial intelligence that programs machines to perform high-level thought and abstractions, are helping companies capture meaningful trends from an ocean of unstructured social media data.

The leading credit scoring companies have already taken notice of the possibilities of social media big data.  Equifax, one of the three major credit bureaus in the U.S. was quoted in December 2011 about the possible inclusion of social media data in their VantageScore model, “Our corporate development professionals are very aware of the opportunities to enhance our proprietary data and partner with companies who add value to the accuracy of our reporting, which helps our customers make better decisions prior to lending,” said Equifax in an email.  Earlier this year, Myfico.com Senior Consumer-Credit Specialist Anthony Sprauve told the Wall Street Journal, “There could be a time where certain social media could be predictive and we’re looking at that, but it isn’t yet.

Are Companies Using Social Media to Make Lending Decisions?

There are companies currently using social big data to make lending decisions.  Lenddo, an online social media financial community, offers the opportunity to get financing for the un- and under-banked based on profiles on popular social media websites.  From their website: “Lenddo’s community members can use their reputation on social networks such as Facebook, Linkedin, Twitter and Yahoo! to obtain life-improving loans, to use for education, healthcare, home improvement or a small business.”  Lenddo currently makes loans in 35 countries and claims to be doubling membership every 60-90 days.

Other companies who have adopted the use of social media data in their underwriting decisions:

• Kabbage, an Atlanta, Georgia company who makes loans to small businesses, has developed the Kabbage Skore, touted as a social media credit score.
• Kreditech, a German company that makes short term and long-term loans in Australia, Poland, Spain, Russia, the Czech Republic and Mexico, uses big data to make credit lending decisions, foregoing the use of data from any traditional credit bureau.
• Wonga, a short-term loan lender in the UK, uses both traditional credit bureaus and social big data when evaluating potential customers.
• ZestFinance, founded by former Google CIO Douglas Merrill, is an underwriter for the American payday loan industry and uses social big data in their analyses.

In stark contrast to a traditional credit-scoring model, which uses 10-15 pieces of data, a big data credit risk analysis uses thousands of data points in its machine-based algorithms. Some of the social media data points considered:

• Numbers of social media connections
• Type of social media connections
• Education
• Job History
• Quality of connections
• Location and seniority of connections
• Location of the computer used to access social media sites

What if you’ve locked down your privacy settings in Facebook and other social media sites?  The good news: your information cannot be accessed without your permission.  Some consumer advocates are not thrilled at the prospect being forced to divulge your Facebook or Twitter profiles in order to get financing, saying it violates privacy.  California passed social media legislation in 2012.  California AB-1844 prevents employers from asking workers for social media usernames or passwords or logging into social media in their presence.  California SB-1349 provides the same rights to students at the state’s public and private colleges.  Other states, most notably Maryland, Delaware and Illinois, have passed similar measures.  Since the use of social media to determine credit worthiness is not present in major U.S. financial institutions, there are no known state bills on the docket to regulate the use of social media in lending situations.

However, the FTC has already regulated companies offering alternative credit-scoring models based on social media data.  Using big data to make lending decisions smacks of being a credit-reporting agency (CRA), and if ruled to be one, a social media data analysis company would be subject to the Fair Credit Reporting Act (FCRA).  Consumer reports are defined in the FCRA as information “bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, generation reputation, personal characteristics, or mode of living which is used or expected to be used or collection in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for credit or insurance; employment purposes or any other purpose authorized in [15 U.S.C. 1681b].

In 2012, the FTC imposed an $800,000 fine against the company Spokeo for failure to adhere to the FCRA when collecting social media data and passing to prospective employers.  The complaint alleged that Spokeo had acted as a CRA and had failed to ensure the information it sold was accurate and failed to ensure that the consumer reports were used for legally permissible purposes. Not all social media companies can be painted with the same brush.  Social Intelligence, a company who sells its social media data for insurance profiling and employment screens, has been ruled by the FTC to be a CRA, and was also ruled to be compliant with the FCRA.

What about the disputing process should the information in your social media credit profile not be correct?  This may be another area for the FTC to weigh in.  With social media, there is no process for borrowers turned down for a loan to dispute incorrect items.

Though not quite mainstream yet, social media credit screening is coming soon to a lender near you.  In December 2013, the Federal Financial Institutions Examination Council (FFIEC) issued its final guidance on the use of social media.   It covers social media data in relation to the Fair Credit Reporting Act, Truth in Lending, Fair Lending Laws and Fair Debt Collection Practices Act.