Facebook secured a patent for new technology last week that could allow lenders to use a borrower’s social network to determine whether he or she is a good credit risk. However, don’t rush to unfriend people, yet. The probability of the social media giant using the functionality is unlikely, as it would have a mountain of regulatory hurdles to cross first.
The patent, which Facebook applied for in 2012, describes a technology that could also be used for filtering out spam email and offensive content or it could improve searches. But, what’s making headlines is how the technology could be used as a way to determine a borrower’s credit risk.
This is how the patent describes the new technology:
“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.”
Here’s how it would theoretically work: You apply for financing and during the credit pre-qualification process, your lender would somehow examine the credit scores of your Facebook friends. The lender would then weigh friends’ credit ratings against yours when deciding whether or not to grant you a loan.
The recently secured patent was first discovered by the legal tech start-up SmartUp as part of a bundle of patents Facebook acquired when it purchased the social network Friendster in 2010.
The legal viability of the new functionality is questionable, as the Equal Credit Opportunity Act strictly regulates what parameters creditors can use when deciding on a loan and using someone’s social network isn’t one of them. Instead, the law directs lenders to look at criteria such as income, expenses, debts and credit history to determine someone’s creditworthiness. The Equal Credit Opportunity Act prohibits creditors from discriminating against borrowers’ age, sex, race, color, religion, nationality, marital status and other personal information.
The idea of financial institutions gathering information from an applicant’s social network isn’t new (Castle & Cooke Mortgage does not practice this) and is something regulators, like the Consumer Financial Protection Bureau (CFPB), are keeping a close eye on. In January, Patrice Ficklin, head of fair lending at the CFPB, told the New York Times that while they encourage the innovation, they are “monitoring the emerging market closely.”
However, before anyone cries foul, it’s quite likely that Facebook will never use this patent for that application, according to digital news outlet QZ.com. Major tech firms – like Google and Facebook – are known for filing more patents than they actually commercialize.
Some argue the new technology could help provide alternative lending and be beneficial to borrowers with little- to no-credit history. On the flip side, if the technology was put to use it could also potentially weigh down those with good credit.
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