Despite all the recent warnings in the news media that your Facebook friends’ or Twitter followers’ financial problems might hurt your credit scores, you can relax. You don’t need to cut ties with your friends with bad credit just yet.
If you take a closer look at the companies featured in stories about this phenomena, such as Lenddo and Kreditech, you’ll notice they aren’t working with lenders in the U.S. And one that is currently using social data — Kabbage — focuses on small business lending, which isn’t regulated the same way personal lending is in the U.S.
“In places like the Philippines (using social media for lending) makes sense,” says Eric King, CEO of Sociogramics, a firm that provides identity verification and scoring solutions for online consumer lending. In countries like that, there is little in the way of a credit reporting system.
But here in the U.S., we have a robust credit reporting industry, and longstanding federal laws that regulate it.
Credit Reporting in the U.S.
The two main federal laws that protect consumers are the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA). The FCRA governs credit reports, credit reporting agencies and the companies that supply information used to compile credit histories.
Any company that wants to gather and share information for credit purposes has to comply with this law, which is pretty broad.
Just take a look at the definition of a “consumer report” (that’s the term that is used in the FCRA, rather than “credit report”). It includes any “written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for (credit or insurance).”
While there are some exceptions to this definition, none of them specifically exclude social media data.
And then there is the definition of a credit reporting agency, which basically includes any company that regularly gathers and “compiles consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties.”
The FCRA doesn’t stop a company from mining and selling data from a consumer’s social activities online for credit purposes, but if those activities fall under the definition above and the firm is deemed a consumer reporting agency, it will be held to strict standards for disclosure, accuracy and investigation of consumer disputes.
And that is no simple task. “How do you judge accuracy in social media?” asks Persis Yu, a staff attorney for the National Consumer Law Center. “That’s going to be an interesting issue if this becomes more pervasive.”
You also have the ECOA, which prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or because you get public assistance. It’s possible that social information could inadvertently be used improperly if it falls into one of those categories. “There is a concern about digital redlining,” says Yu. (Redlining is an illegal practice in which lenders deny or charge certain populations more for financial products usually based on race or gender.)
Justin Hosie, a partner in the law firm Hudson Cook, LLP, says he’s talked with lenders who are interested in using this data, and he advises they tread carefully. He believes some companies offering these kinds of services appear to be “quasi credit reporting agencies” because they meet the definition of a credit reporting agency.
Lenders are apparently heeding the warnings.
“The bottom line is, in the U.S. lenders are not using social data to make credit decisions,” says King. But he thinks the regulatory environment isn’t the only reason. Another issue is that this information tends to be “self-reported data,” which lenders are reluctant to trust. After all, if the consumer reports it, the consumer can change it.
But the other big reason lenders aren’t rushing to use social media data to screen out applicants, King says, is that they don’t feel they need it. “Lenders tell me all that time, ‘We have a hundred reasons to say no, we need another reason to say yes’,” he says.
His prediction is that this kind of information will be used in ways that allow consumers to opt in for more personalized offers. “Who is more likely to buy additional services? That’s where you’ll see more social (data used),” he says.
It’s Your Reputation
Still, that doesn’t mean your social media data can’t affect your financial life. There’s always the risk that sharing too much information can make you an easy target for identity theft. And if a creditor wants to poke around your public Facebook, Twitter or Pinterest postings, they are probably free to do so, as long as they don’t discriminate based on a prohibited factor, agree Yu and Hosie.
“It almost seems un-American, but creditors can have a policy that says that anyone who walks in with a blue shirt isn’t getting credit,” says Hosie. “Unless you know people of one of the protected classes (under ECOA) tend to wear blue shirts, you can decide not to lend to blue-shirted people.”
So who’s to say a lender might not notice while perusing your Facebook page that you just took an expensive vacation and decide not to approve your application for a debt consolidation loan? “It’s somewhat akin to doing a drive-by to assess collateral before you give a mortgage,” says Hosie. “If I am, as a creditor, simply looking at someone’s page, that may be different than drawing an assessment based on (their) friends.”
King says consumers don’t need to be paranoid.
“Your friends are not going to ding your credit, your activities on social media are not going to ding your credit,” he says. “Just be yourself and these things will shake out.”