New Social-Data Credit Reports May Be Legal. But Do They Make Sense?Written by Mark Rasch
Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today is a lawyer in Bethesda, Md., specializing in privacy and security law.
A scientific study several years ago indicated that the best way for people to lose weight was for them to have friends who were dieting. The impact of peer pressure on behavior has long been measured. Now, according to an article in CNN Money, a number of companies like Lenddo, Kreditech and Kabbage, are trying to bring this “peer pressure” mentality to the measurement of credit risk. It goes a long way towards answering the ultimate privacy question, “If I am not doing anything wrong, why should I care about privacy?”
The new credit reporting companies use data analytics to measure a consumer’s likelihood of default by measuring not only his or her personal factors, but also the factors of that person’s contacts, friends and associates on social networking sites like Facebook, LinkedIn and Twitter. It measures not only the identity of a consumer’s contacts, but the strength of his connections to each contacts, and determines his creditworthiness based upon the creditworthiness of his associates.
For retailers using those new-style credit reports, that probably sounds like a much more complete picture of the customer’s likely behavior. There’s just one problem: It may not answer the question of whether the new reports actually say anything about how credit-worthy the customer really is.
The concept is that birds of a feather tend to flock together, and if your friends are credit-worthy, you are likely to be as well. Of course, the converse is true as well—if your buddies are deadbeats (remember college, anyone?), you probably are too.
In addition to measuring friends, companies can use an increasingly detailed portrait of a consumer in determining not only whether or not to extend credit, but also the interest rates at which to extend credit. The federal Fair Credit Reporting Act requires consumer credit reports to be accurate, and gives consumers certain rights with respect to their use.
But the term “consumer credit report” is likely broader than most people anticipate. It is “any information [used] 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…”
These companies that scour Facebook postings and Twitter feeds are likely to be considered “consumer reporting agencies” under the FCRA, which are defined as any person “which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information … for the purpose of furnishing consumer reports to third parties …” Since they collect this information to help others determine a customer’s creditworthiness, they are regulated by the FCRA.
What that means then is that, if you’re a consumer, to the extent that a consumer reporting agency uses an analysis of your friends’ credit scores, your website postings, your twitter feed or other data to determine your credit risk, the FCRA requires that information to be accurate, and provides consumers with certain rights with respect to that information.
But what does it mean for the information to be “accurate?” Does it mean that you are, in fact, Facebook “friends” with Louis the lowlife and Dave the deadbeat? Or that Louis and Dave are in fact bad credit risks? Or that their status is an accurate predictor of your behavior?
Suppose some company determined (through big-data analysis) that people who wore black high-top Converse Chuck Taylor sneakers were 18 percent more likely to default on a mortgage than those who wore Adidas, and then combed your Instagram feed for pictures of your footware. Suddenly, for reasons unknown to you, you get a call from American Express stating that your credit limit has been lowered (what the FCRA calls an “adverse action”) based upon information it received from a credit reporting agency.