Imagine this: You just found your dream home and you can actually afford it. Your friends live up the block and there’s a perfect neighborhood pub around the corner.
Or maybe you've spent countless hours studying and acing tests to get into that expensive private school that lets you study with your academic idols.
Either way, without a loan to pay that through-the-roof expensive tuition or the little house tucked behind that white picket fence, your dreams are on hold.
Lenders look at lots of things when they deny a loan, but would you believe your Facebook account could be to blame?
During the underwriting process, the lenders can dig up some information on your Facebook friends, including that one guy from high school who insisted on friending you...you know, the one whose house was foreclosed on last year for failing to make payments.
Your supposedly shady association just cost you your chance at getting a loan.
Not at all. Silicon Valley lending companies like LendUp and Neo regularly check Twitter, Facebook and LinkedIn when making loan decisions, according to a recent report by Mother Jones. New York-based Moven goes even further, using information harvested from Twitter, Facebook, and other social networking sites in the loan underwriting process.
Right now these companies make up a small fraction of the lending pool. They are largely an online alternative to the shady, payday loan offices that have sprung up in recent years in disenfranchised neighborhoods.
But how long until the big boys follow suit? It isn't clear that they haven't started already. Privacy Rights Clearinghouse policy director Paul Stephens tells TakePart that it's happening but it's unclear how prevalent it is, or to what extent your Facebook friends factor into your loan application.
"I’m not aware, from a legal standpoint, of any provisions that would prevent this. It will likely require legislative activity to do something about it,” Stephens said.
Both the Fair Credit Reporting Act and the Equal Credit Opportunity Act are supposed to protect consumers from unfair lending practices, but there are no rules about how lending companies are allowed to use harvested social media information to make their decisions.
Should we be punished for having financially unreliable Twitter followers?
LendUp CEO Sasha Orloff insists that’s not how his company uses harvested social media information.
"Social media is not used for making credit decisions," he told TakePart. "Social media can be a contributing factor for helping validate identity and predict stability."
Orloff has said geographic networks are surveyed to predict stability.
So, how would that impact a new college freshman who doesn't have many friends on campus, but needs textbook money? Or an immigrant to the United States trying to buy their first car? What about the military serviceman whose job moves them so often that their geographic network is more global than local?
"For people that move around frequently, what would be more important here would be a record of length of time at address, whether they were paying rent on time and regularly, and here social media could play a factor here in matching data between moving records, or rental payments, or location of your employer, or location of where you currently live and how long you have been there," Orloff said.
In LendUp's case, the company doesn't lend to veterans, says Orloff, due to the Defense Act of 2007, "which effectively cuts off the military from non-bank lenders."
As far as immigrants, Orloff says LendUp's model can actualy be beneficial because they lack a credit history, and traditional banks often don't extend them credit.
"When data is thin or non-existent, we are always looking for FCRA compliant ways to find enough information to have confidence in validating their identity and predicting their stability, and proof of income, job, location can be helpful to both underwrite and make sure we are compliant with state laws," Orloff said.
“We just don’t know how this information is being used,” Stephens said, adding that the practice could result in unfair inferences based on your social media activities.
“If your social media friends happen to have characteristics that might happen to be considered not-credit worthy, what bearing should that have on your loan?” Stephens asked.