Fed Governor Warns FinTechs Against Social Media Underwriting

FinTechs that want to use data from social media for credit underwriting got a warning from Federal Reserve Governor Lael Brainard, who said they could run afoul of fair lending laws if they rely on social media data.

According to a report, Brainard said at a conference that using nontraditional data, like social media information, to determine the creditworthiness of a borrower could prompt consumer protection questions since that data being used “may not necessarily have a broadly agreed-upon or empirically established nexus with creditworthiness and may be correlated with characteristics protected by fair lending laws.” Using nontraditional data may also raise concerns about transparency since people, including regulators, may not be privy to the specific information the FinTech used to make a decision. FinTech startups want to use nontraditional information, including social media posts and information, arguing that it is a better way to judge a person’s ability to pay back a loan.

While Brainard was urging caution, she was positive about FinTechs in general, saying they can help improve payment methods, as well as how people get paid, borrow money and manage their money. “‘Run fast and break things’ may be a popular mantra in the technology space. It is ill-suited to an arena that depends on trust and confidence … There are more serious and lasting consequences for a consumer who gets, for instance, an unsustainable loan on his or her smartphone than for a consumer who downloads the wrong movie or listens to a bad podcast,” the Federal Reserve governor said, according to the report.

Brainard noted that, while FinTechs are driving change at a rapid pace, the Fed is well-positioned to help the FinTech market innovate and help shape how it matures. “Ultimately, regulators should be prepared to appropriately tailor regulatory or supervisory expectations, to the extent possible within our respective authorities, to facilitate FinTech innovations that produce benefits for consumers, businesses and the financial system,” said Brainard.