Alternative Lenders Use Social Media During Underwriting Process
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UPDATED: Sep 23, 2013
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Consumers are told frequently to monitor their social media usage to improve future jobs and relationships, but very few know that their posted content can impact their borrowing capabilities.
Several alternative lenders have recently announced that they focus on social media usage of both their applicants and their applicant’s social circle, creating a different scale for determining a borrower’s eligibility on funding such as personal loans and business loans. Two major companies that involve elements of social media in the lending process are Lenddo and Kabbage.
Lenddo, which did not respond to media requests in time for publication, utilizes social media during the initial loan application process.
Kabbage uses social media only after their business cash advances have been distributed to customers. Kabbage reviews social media usage, with consumer consent, only to determine if the borrower will be eligible to receive more funds at a later period.
Victoria Treyger, chief marketing officer at Kabbage, said their terms allow for Kabbage to see the owner-customer interaction of their active borrowers via social media monitoring. Some of the things they’re looking for are customer notifications about product launches, and how their borrowers deal with customer complaints. She said that service and interaction are both healthy signs for a business.
“Some of our best customers are the customers that are the most active in their social media accounts,” Treyger said. “It’s a measure of engagement and the level of service they are offering their customers.”
Most major lenders shy away from using social media at any stage of the lending process and utilize borrowers’ standard FICO credit scores, yet these alternative underwriting methods are gaining popularity. The social-media-friendly loans are creating new lending options for consumers that might alternately turn to payday lending or other high interest loans.
Patrick Shaughnessy, the former manager of international credit bureau products at TransUnion, does not agree with all of the methods of these newer lenders, but sees that they fill a void in the economy.
“If we can keep people out of payday lending, that would be one of the greatest accomplishments,” he said.
Marketing this new type of loan to the correct customers is a vital element to its success.
Borrowers who are open to this type of lending usually know that their social media lives will be taken into account at some point, according to Simon Zhen, resident expert and research analyst at MyBankTracker.com. If they are uncomfortable with this standard, borrowers can either choose a different lender, or make their profile security more private.
“Companies who accept social media influence in their underwriting process will usually market themselves to attract borrowers based on the fact that the companies look at social media,” he said.
Regardless of some expert support, others worry about issues of privacy and possible discrimination.
One opponent is Bianca Wright, managing partner for Sociallysavvykids.com. She said that although there are sensible ideas behind it, using social media for loans is just another invasion on consumer privacy.
Despite the increase of social media presence in the lending approval process, most consumers do not know about it. Zhen said this fact is not surprising because the decision whether to use social media for the underwriting process is ultimately up to the lender.
Technological advances have made it is easier for lenders to gain access to the social lives of borrowers, with both good and bad results.
For borrowers that maintain a positive social presence, Zhen said it would positively impact their loan opportunities and even reduce their interest rates.
“With more data that goes beyond just credit card scores, lenders can craft a more detailed profile of prospective borrowers,” he said.
Treyger said Kabbage only uses a businesses’ social media if they personally link their pages.
Zhen agrees that this occurs. Alternative lenders only use social media when the borrowers offer their pages willingly and accept the rules. Lenders do not go out of their way to search and find unoffered social media pages.
But privacy issues are not the only concern. Many worry about potential space for discrimination.
Gregory Meyer, community relations manager for Meriwest Credit Union simply stated that social media has “no place in loan underwriting.”
Transparency is becoming more valued, both by consumers and by companies. Due to privacy reasons, it is not clear exactly how much a borrower’s social media presence impacts their personal loan eligibility.
Zhen said that each lender has their own unique formula for analyzing an applicant’s data, but in order to prevent scammers, they hide the specifics.
“We don’t know how any particular lender weights a borrower’s social media influence,” he said.
This ambiguity can be concerning.
Meyer said using Facebook, Twitter or any other social media site when making a credit decision is discriminatory and could cause legal trouble for a lender.
“By law, we must lend on a color blind basis. We are also blind to religion, sex, sexual orientation, age and disabilities,” he said.
Steve Raquel, president of IOV Media, said that similar practices are used by Human Resources professionals, so while they can be discriminatory, it should not surprise consumers.
As a father, Raquel notices a personality change when his children associate with different people. He believes this “halo effect” is used by lenders to determine borrowers’ eligibility for a loan.
“I would think seeing the relationship and interaction of a potential candidate with their immediate network would be important in order to see a pattern, whether directly or indirectly, of a potential customer’s spending habits, attitudes and style,” Raquel said.
The financial efficacy of the new lending standards remains unknown, but the new lenders could face more serious legal issues in the near future. Laws such as the Community Reinvestment Act makes it illegal for lenders to discriminate based on a borrower’s city or neighborhood. Nothing else should matter besides the person’s credit history, their income and the value of their collateral in the case of a secured loan.
“This brings to mind one of the reasons the Community Reinvestment Act was developed because banks had redlined certain areas and would not lend there due to increased foreclosure activity or poor home values,” said Meyer.
Multiple documented cases proved that applicants with positive credit scores and good properties were repeatedly denied loans. This same occurrence could erupt with social media lending.
“If I had an 800 FICO score with a solid history of income and constant employment and was denied a mortgage, credit cards or auto loan because I had a couple of flakey relatives or friends on my Facebook page, I would not walk, I would run to my attorney,” Meyer said.
Although few lenders currently utilize social media for their lending process, it could grow in the near future. But Shaughnessy does not believe it will ever overtake traditional credit review standards.
And this is a good thing.
Traditional banking has virtually eliminated ways to discriminate borrowers. Human interaction can lead to judgement, so banks have eradicated these lending standards, making a better lending environment.
“The beauty of traditional lending is colorblind,” Shaughnessy said.