by Eileen | 9:14 am, February 1, 2013 | Comments Off
Two items in yesterday’s bloggage make an interesting contrast in the state of credit.
Salon reports on the news that Equifax, one of the big three credit agencies, has salary data and employment records of a third of American adults and readily – and legally – sells that data. Among their clients? Collection agencies and lenders. The libertarian soul instinctively recoils at the idea that a group has been secretly buying one’s personal data and secretly reselling it to the people of their choosing.
For one thing, it means a great many employers are secretly selling data about their employees, the same data they often prohibit employees from disclosing about themselves. If I can be fired for mentioning what I earn to one co-worker, where does my boss get off on selling me out to a company that resells me to more people? I’m banned from seeking to collect information about what my co-workers earn because I could use it as leverage in my own salary negotiations. Legally, employers can require this. And, legally, they can not only disclose but profit from my salary data. The profit, of course, coming from the fact that other people are willing to pay for that data about me in order to gain leverage.
When an employee tries to amass data as leverage in employment and salary negotiations, it’s grounds for termination. When anyone else tries to amass that same data, it’s kosher. That Equifax has been mum on this and declined any comment when the story broke belies any efforts to claim they don’t know they’re acting less than ethically here.
The point? Third parties should not be able to profit from your private data, let alone be able to do so and not even tell you.
Writing for Slate, Evgeny Morozov, well known scholar and curmudgeon on all things Internet, tells us that lenders are hungry for social networking data in order to make lending decisions – who gets a loan and under what terms. Frankly, I’m a bit surprised Equifax isn’t already offering that data. There are, though, already companies that scrape any available data from social websites and make it available for a fee.
The idea is that the way you behave on social networking sites is a treasure trove of information about reliability and maturity; what you post, when you’re online, how frequently you check into and update sites, etc can tell a lender what kind of a risk you are.
On the plus side, it could theoretically provide information that would allow people previously considered an unacceptably high a risk to get a loan. On the down side, it would give lenders more information to decide what are the most beneficial terms – for the lender – that an applicant would accept.
A lender has two aims; he wants to make loans to people who can and will repay the total debt. But he also want to charge the highest possible interest he can before the applicant goes elsewhere or doesn’t sign for the loan at all. From the lender’s view, the ideal borrower is someone who’s good for the note but whose situation if bad enough that he’ll take lousy terms.
Social networking data certainly might lead to people who can’t currently get a loan qualifying. One argument Morozov offers for the reader’s rumination is that people whose lack of credit history previously led to rejection or to horrifically bad terms could get loans or get them on better terms, if their social networking data paints a picture of a reliable and gainfully employed soul.
And it could also lead to lenders being better able to identify who is desperate enough to take bad terms. Airlines go to great lengths to price the same ticket differently for people based on how badly they want that exact flight. Online retailers are using data they gather about shoppers to charge higher prices to those who are more affluent, desperate, or just have inelastic demand. I don’t think it’s at all far-fetched to imagine lenders would happily use data to pick out those who would agree to higher interest and otherwise unfavorable terms. They’re self-interested, like the rest of us. It’s not realistic to expect a man to lend money at 5% if he reasonably knows the applicant will still sign at 8%, or at 18%.
Whether or not social networking data can provide that sort of information is an unknown. But I guarantee that if it’s somehow made available to credit agencies and lenders, we’ll soon find out. In addition to wondering whether lenders might start requiring access to FaceBook and Twitter, there is the ever-present threat that Mark Zuckerberg’s next revision to the Terms of Service will involve selling the largest dataset the world has ever seen to anyone he chooses. Anything related to FB is a three-way debate; what laws will the state pass, what will users tolerate, and what will that psychopathic warlord in a hoodie do?
One point Morozov makes, and it’s an important one, is that the proposal to use social networking data in assessing high risk applicants suggests that some people – the poor, those in societies with limited access to credit, first time borrowers – could be heavily pressured to allow access to highly personal data that people with better credit are able to keep secret. The question then is one of whether this is simply the cost of getting credit, a problem the market can solve, or something that calls for a legislative ban.
That lenders already conduct web searches about their applicants is a given. If an individual isn’t monitoring his own web presence, putting some care into what he publishes about himself, and taking advantage of privacy settings on social sites, I have little sympathy. You can’t blame people for using all available data in making decisions that materially affect them. Recently, I’ve argued that a woman cannot expect others to ignore the self-created data on a social networking site that she chose to make public. What the woman posted about herself certainly influences her credibility as a teacher. So, too, if readily available data about a loan applicant makes his financial irresponsibility clear, I wouldn’t fault a lender for turning him down.
It’s an entirely different question as to whether or not the law should say anything about lenders asking for access to social sites as a condition of offering a loan, to modify the terms of the loan based on what they see, or to deny a loan because of the applicant’s refusal to permit access to private social pages. Existing laws against conditioning loans on things like race might preempt this concern. It’s effectively impossible to view a FB account without learning all sorts of facts that are illegal to consider in a lending decision.
I’ve already come out in favor of banning the use both of credit reports and social networking data in employment decisions, and part of that is the preponderance of evidence that credit is not a reliable predictor of what kind of worker an employee will be and that a prospective employee’s personal life is not generally a material factor in hiring decisions. In those case the privacy violation is not justified, or even supported, relative to the gain. Those are also instances where the cost and the benefit are born by separate people. And I dislike negative externalities as much I like saying ‘externality’.
Loans are a slightly different beast. The borrower definitely gets a benefit; that’s the point. And the lender assumes a risk. Could social networking data be a meaningful predictor of ability and willingness to repay the loan? Would the use of social networking pages to make lending decisions become a way less-preferable borrowers are forced to pay for loans with private data? Even if that happened, would it be a matter requiring the state to intervene and effectively make a decision for everyone else?
Such a question is ripe for legislative debate. It will almost certainly be likened to recent strictures on payday lenders, who may be the only available credit for people with truly horrendous credit ratings and do technically offer a way to rebuild credit…going on the wobbly assumption to the sort of people who take out payday loans could ever completely repay such a loan.
Legally banning the unpalatable options available to those living on the very bottom without offering anything else or considering how to treat the problem is really just worsening the problem. Putting restrictions on the terms a lender might offer to someone who is a poor risk will obviously cause lenders to pull back from the high risk market, which still does nothing for a certain demographic’s efforts to build and repair credit, let alone understand credit and finance.
Then again, when people get into amounts of debt they will never be able to repay, they might as well default, declare bankruptcy, or create a new identity and bug out to the Caribbean. That leads to poorer terms for all borrowers as lenders seek to recapture their losses.
As for the outcome when the state forces lenders to offer loans to people that they will never be able to service because it makes politicians feel good about themselves, say it with me: Sub-Prime Mortgage Crisis.
We all know what the government wants. The government wants to buy votes and look like the hero by forcing the private sector to assume foolish risks – like providing loans on asinine terms to people who have no business getting a loan at all. I guarantee the state won’t stop at making it illegal to request access to social sites as part of a loan application. Even doing that much is patronizing; it assumes that loan applicants can’t make their own choices about balancing their desire for a loan with other interests.
A point well worth making is that the government that legally allows Equifax to buy and sell private financial information secretly is not on the citizens’ side in any matter of data privacy.
At least a person who knows he’s giving certain data to someone who is making a decision about offering him employment or a loan knows what data he is giving and to whom. One thing I do advocate is shifting the decision making to the individuals concerned. A lender asked to allow a bank officer to surf his FB page can at least make the choice to trade privacy for better loan terms. But is that a choice anyone should have to make?
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