It turns out the company you keep does matter—especially online.
Companies have been using online social networking sites to assess job candidates for some time, but now, some start-up lending companies are reportedly using sites like Facebook (FBOOK) and Twitter to determine potential clients’ lending risks.
For example, when Lenddo assess a person’s creditworthiness, it takes into account whether a person interacts or is friend with a lender who has defaulted on one of its loans. Along the same lines, LendUp, another startup, takes into account users’ social media profiles to fact check their loan applications.
While users do reap what they sow when it comes to over sharing and interacting on social media, Credit.com expert Gerri Detweiler says it’s unlikely these techniques will become mainstream anytime soon, especially when it comes to personal loans. The Fair Credit Reporting Act and the Federal Trade Commission have made it clear that online data cannot be mined for credit decision purposes, she says, without giving consumers the opportunity to dispute.
“It’s a fascinating issue, but the Fair Credit Reporting Act is pretty broad in its consumer protections,” she says. “When you are making personal loans, if you start using Facebook information to try and make decisions, you could run afoul of the act. But a [lending] company, that is strictly for business lending purposes, is wide open.”
One such company is small businesses financing company Kabbage, which mines data from company’s online payment accounts including eBay (EBAY) and PayPal accounts to determine credit worthiness, and also transfer loan money in minutes, according to FBN.
It’s also important to stipulate that these companies are reportedly looking at clients overseas in the Philippines, Colombia and Mexico, rather than in the U.S., says Randy Padawer, vice president of credit repair services at LexingtonLaw.com. Those who have established credit histories won’t be taken into consideration for this type of monitoring, he adds.
“A well-established payment history is the best predictor of future payment history,” he says. “Even though Lenndo has isolated a statistical correlation between who your friends are [and their credit histories], that will never be as strong a predictor.”
As soon as those with little-to-no credit establish a credit history, other factors including friends on social media will have even less bearing on decisions.
“Certain subprime lenders who right now have great difficulty predicting who will repay loans among a group that is under banked may find it useful to have any metric that can help predict credibility. But if you have a regular credit score—it won’t matter who your Facebook friends are,” says Padawer.
While it may be illegal to use this information to strictly determine lending guidelines, Detweiler says this doesn’t mean it isn’t happening. Consumers should be selective with what they post online, as private information can easily become public knowledge thanks to social media.
“As consumers, you have to be very careful because if someone is not officially using that information, that doesn’t mean they aren’t unofficially using it,” she says. “Whether it’s your local bank happening to notice what you are doing on Facebook, your landlord or your debt collector – maybe they aren’t supposed to use that information in certain ways, but can it happen? Sure.”