Summers’ Lending Club makes money by bypassing the Equal Credit Opportunity Act
Don’t know about you, but for some reason I have a sinking feeling when it comes to the idea of Larry Summers. Word on the CNBC street is that he’s about to be named new Fed Chair, and I am living in a state of cognitive dissonance.
To distract myself, I’m going to try better to explain what I started to explain here, when I talked about the online peer-to-peer lending company Lending Club. Summers sits on the board of Lending Club, and from my perspective it’s a logical continuation of his career of deregulation and/or bypassing of vital regulation to enrich himself.
In this case, it’s a vehicle for bypassing the FTC’s Equal Credit Opportunities Rights. It’s not perfect, but it “prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because you get public assistance.” It forces credit scores to be relatively behavior based, like you see here. Let me contrast that to Lending Club.
Lending Club also uses mathematical models to score people who want to borrow money. These act as credit scores. But in this case, they use data like browsing history or anything they can grab about you on the web or from data warehousing companies like Acxiom (which I’ve written about here). From this Bloomberg article on Lending Club:
“What we’ve done is radically transform the way consumer lending operates,” Laplanche says in his speech. He says that LendingClub keeps staffing low by using algorithms to screen prospective borrowers for risk — rejecting 90 percent of them – - and has no physical branches like banks. “The savings can be passed on to more borrowers in terms of lower interest rates and investors in terms of attractive returns.”
I’d focus on the benefit for investors. Big money is now involved in this stuff. Turns out that bypassing credit score regulation is great for business, so of course.
For example, such models might look at your circle of friends on Facebook to see if you “run with the right crowd” before loaning you money. You can now blame your friends if you don’t get that loan! From this CNN article on the subject (hat tip David):
“It turns out humans are really good at knowing who is trustworthy and reliable in their community,” said Jeff Stewart, a co-founder and CEO of Lenddo. “What’s new is that we’re now able to measure through massive computing power.”
Moving along from taking out loans to getting jobs, there’s this description of how recruiters work online to perform digital background checks for potential employees. It’s a different set of laws this time that is subject to arbitrage but it’s exactly the same idea:
Non-discrimination laws prohibit employers from asking job applicants certain questions. They’re not supposed to ask about things like age, race, gender, disability, marital, and veteran status. (As you can imagine, sometimes a picture alone can reveal this privileged information. These safeguards against discrimination urge employers to simply not use this knowledge to make hiring decisions.) In addition to protecting people from systemic prejudice, these employment laws intend to shield us from capricious bias and whimsy. While casually snooping, however, a recruiter can’t unsee your Facebook rant on immigration amnesty, the same for your baby bump on Instagram. From profile pics and bios, blog posts and tweets, simple HR reconnaissance can glean tons of off-limits information.
Along with forcing recruiters to gaze with eyes wide shut, straddling legal liability and ignorance, invisible employment screens deny American workers the robust protections afforded by the FTC and the Fair Credit Reporting Act. The FCRA ensures that prospective employees are notified before their backgrounds and credit scores are verified. Employees are free to decline the checks, but employers are also free to deny further consideration unless a screening is allowed to take place. What’s important here is that employees must first give consent.
When a report reveals unsavory information about a candidate, and the employer chooses to take what’s called “adverse action,”—like deny a job offer—the employer is required to share the content of the background reports with the candidate. The applicant then has the right to explain or dispute inaccurate and incomplete aspects of the background check. Consent, disclosure, and recourse constitute a straightforward approach to employment screening.
Contrast this citizen-empowering logic with the casual Google search or to the informal, invisible social-media exam. As applicants, we don’t know if employers are looking, we’re not privy to what they see, and we have no way to appeal.
As legal scholars Daniel Solove and Chris Hoofnagle discuss, the amateur Google screens that are now a regular feature of work-life go largely unnoticed. Applicants are simply not called back. And they’ll never know the real reason.
I think the silent failure is the scariest part for me – people who don’t get jobs won’t know why.
Similarly, people denied loans from Lending Club by a secret algorithm don’t know why either. Maybe it’s because I made friends with the wrong person on Facebook? Maybe I should just go ahead and stop being friends with anyone who might put my electronic credit score at risk?
Of course this rant is predicated on the assumption that we think anti-discrimination laws are a good thing. In an ideal world, of course, we wouldn’t need them. But that’s not where we live.