Financial institutions are finding value in the information on social networking sites like Facebook and Twitter.
“In the last year or so, financial institutions have started exploring ways to use data from Facebook, Twitter and other networks to round out an individual borrower’s risk profile—although most entrepreneurs working on the problem say the technology is three to five years away from mainstream adoption,” writes Adrianne Jeffries of the New York Observer.
For banks, the value of social media lies in its ability to help evaluate the credit quality of individuals with a thin or non-existent credit history. A limited past relationship with financial institutions is not indicative of poor credit quality per se, but nevertheless prevents a bank from making a confident risk assessment.
For others, this practice raises many concerns about privacy.
“… If banks learn how to use social media, they could gather information they aren’t allowed to ask for on a credit application—including race, marital status and receipt of public assistance—or worse, to redline segments of the social graph,” writes Jeffries.
Similar concerns are raised by consumer advocates who question the legality of using social media to generate credit reports as regulated by the Fair Credit Reporting Act. Legislators will likely raise this debate as the practice becomes more widespread.