There are now more reasons than ever to keep that Facebook friend request in “limbo.” In early August, a patent was bought by Facebook to curtail spamming; however, a section of the patent allows lenders to examine the credit scores of your Facebook friends in order to determine if you are eligible for a loan. This suggests that your Facebook friends, even if you have not seen them since high school, can keep you from getting a mortgage.
While this patent may raise some eyebrows and create some legal challenges, its approval in the Patent office is perfectly legal. Patent approval is not based on the legality of the application of the patent, only the patent functionality itself. The exact wording of the language in question states that: “When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual through authorized nodes. If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.”
There is already concern that loan screening based on social relationships is similar to the de facto discrimination in the 1900s, where banks denied people loans based on the applicants residential neighborhood. This new approach may have an equally challenging result because one’s friend group is usually identical to his/her own race and economic status. A recent study states that nine out of every ten people known by a white middle class person is also a white middle class person. Using Facebook data could further pigeon-holing people into a certain economic class during a time where it is becoming statistically more difficult to move up economic classes.
Does this mean that you need to go on a friend cleanse and start cherry-picking your friends? No. At least the proverbial 1984 Orwellian future is still a couple years off. Facebook purchased this patent from Friendster, along with five others, for 40 million dollars, and there are no signs yet that Facebook intends to use it for loans. In fact, the primary purpose of this patent is to prevent spam. Additionally, this application of the patent for loans may need to be vetted by federal law, such as the Equal Credit Opportunity Act, which strictly regulates what information creditors can use when determining if a person is eligible for a loan—such as income, expenses, and credit history.
The closest to reality that currently exists is through an algorithm created by Lenddo. This three-year old company uses an algorithm to lend money to members of the emerging middle class around the globe by using voluntarily given data from social media sites. Most remarkable is that this algorithm has proven successful as 250,00 people have used this application successfully, mostly from the Philippines. Additionally, is that it is a reliable predictor about who is likely to pay back loans. Lenddo’s default rates on the loans are in the low single digits, which closely mirrors the average default rates in the microfinance industry. However, there is a growing concern that this alternative method will enable predatory lenders new ways to find vulnerable consumers.
Lenndo is now selling its algorithm to main-stream lenders with the tag line “empowering the middle class.” What remains unknown is if using social media information voluntarily will actually empower the middle class when this algorithm hits more mainstream markets. The use of social networking to determine loan status is new and we need to be careful we do not revisit the neighborhood discrimination loan practices of the past. However, in Lenndo’s current form, it appears to help the middle class and the economy as data suggests that the loans are getting repaid and more people than ever can get loans.
*Sarah Wesley Wheaton is in her second year law student at Wake Forest University School of Law. She holds a Bachelor of Arts from UNC-Chapel Hill in Communications with a concentration in New Media and minors in History and Cinema. A former app developer, she is interested in working with established and emerging businesses in corporate, technology and new media matters. She adores dogs, recently rescuing a seventy-five pound Golden Retriever/linebacker named Chewbacca.