Would you take out a loan from the company you work for? Plenty of new lenders are betting that you might. But even if you wouldn’t, a new crop of lending products is bound to impact your privacy.
The National Consumer Law Center released a report recently called “Big Data: Big Disappointment for Scoring Consumer Credit Risk.” The report examines a new segment of the small loan industry that is looking to compete with payday lenders. Firms with names like LendUP and MySalaryLine are inventing new business models for short-term, emergency lending products. In a typical example, a consumer borrows $500 for two weeks, and the amount is deducted from subsequent pay checks. The interest rates are very high — ranging into triple digits — but proponents claim the loans don’t trap borrowers into repeat cycles the way payday loans do.
Other versions don’t use paychecks as loan payments, but use similar techniques to determine who gets their loans. What does this have to do with credit reports and your rights? These new lenders say they use Big Data to determine the creditworthiness of potential borrowers, and by Big Data they mean everything from Facebook posts to average salary in your ZIP code.
Data like that typically comes from data brokerage firms like Intelius or Spokeo.
For years, data brokers like Intellius or Axciom, the marketing firm, have collected oodles of information about us using everything from public records to supermarket shopping habits. The data is sold to marketers, or to angry ex-girlfriends. It’s often riddled with mistakes, and rarely can consumers really know everything these companies collect, because the data these firms keep is not subject to the Fair Credit Reporting Act.
Now, companies offering short-term loans vetted through Big Data research are re-energizing the data brokerage business.
A quick moment for a definition: Data Broker is a catch-all term for a wide group of companies that include everything from marketing giant Acxiom to the kind of sketchy stalk-your-ex-girlfriend websites you find through Google. The distinction is inexact, but the difference between credit reporting agencies and data brokers is basically this: If the firm sells your data for use in determining credit, housing, job applicant status, etc., then it’s a credit reporting agency. If the firms sells your data for marketing, it’s not a credit reporting agency.
That matters a lot, because credit reporting agencies are subject to the Fair Credit Reporting Act and its amendments, which give consumers a long list of rights. Chief among them: Rights to see their reports and dispute errors. As you might imagine, the Fair Credit Reporting Act and its expensive, pro-consumer requirements are something that data brokers probably don’t want to wrangle with.
Intelius, for example, tries to make this abundantly clear in its fine print: “You shall not use any of our information as a factor in establishing an individual’s eligibility for personal credit or insurance or assessing risks associated with existing consumer credit obligations,” it says in its terms of service. “Intelius is not a consumer reporting agency as defined in the Fair Credit Reporting Act.”
Spokeo’s similar terms prohibit use of its data “to evaluate a consumer’s eligibility for credit or insurance to be used primarily for personal, family, or household purposes, to evaluate a person’s eligibility for employment or volunteering purposes, to evaluate a person’s eligibility for a government license or benefit, to evaluate a person for renting a dwelling property, or for any other purpose specified in the Fair Credit Reporting Act.”
Other data brokers cited in the NCLC report as claiming they are not covered by the Fair Credit Reporting Act include Accurint for Collections and Rapleaf.
The so-called Big Data lenders do not reveal details of their data collection strategies, other than to say they examine hundreds of pieces of data when determining the creditworthiness of a potential borrower. This is important because up to 60 million Americans don’t have traditional credit reports.
And even if you have a credit report and you could never imagine taking out such a short-term loan, this new industry is bound to put a charge into the data collection business. The bigger the collection of Big Data, the more such firms can lend, and they better they think they’ll be at assessing risk.
In its report, the National Consumer Law Center claims that if big data lenders use information from data brokers, that would make the brokers subject to the Fair Credit Reporting Act. Today, to obtain a report from one of these firms, a consumer must pay for it. And often, those reports are incomplete. If they were subject to the Fair Credit Reporting Act, it would be free, as it would be considered a specialty report — free to all, once each year.
The NCLC report does not say the lenders are using any particular data broker for information; it states merely that wherever the information comes from, that database must be considered covered by the Fair Credit Reporting Act.
Spokeo has run into allegations in the past that its data was used for prohibited purposes. In 2012, the firm paid $800,000 to settle charges from the Federal Trade Commission after it alleged that Spokeo marketed its data to human resource departments for help in hiring decisions, in violation of the Fair Credit Reporting Act.
For now, data broker reports are not subject to Fair Credit Reporting Act requirements, which means you aren’t entitled to a free peek at their data every year. It’s unclear when or if that might change.
Borrowing money from your boss sounds like a terrible idea for me – imagine how easy it would be for managers to abuse an employee who owes money. While the money isn’t really borrowed from the firm employees work for — the paycheck merely acts as a repayment mechanism — the practical impact on the worker could be the same. How will it feel when next week’s work hours are already spent?
But you don’t have to be living paycheck-to-paycheck to see the risk of relying on Big Data to determine who does and doesn’t get loans. In its report, the NCLC had employees obtain some reports on themselves, and they are often riddled with errors. Here’s one example: data brokers use zip codes to predict a person’s possible income, but the NCLC found such a guesstimate was off by 50 percent. One can only imagine the errors that will arise with loans based on Internet usage – such as a Facebook score.
I hope for your sake that when workplace loans find their way into your human resources department, federal banking regulators have arrived there first.