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Researcher warns of risks with using alternative data in lending:
Traditional credit scoring is based on a person's demonstrated ability to take on debt and pay it off. But with the dawn of larger data pools and access to more sophisticated modeling programs, lenders and credit agencies are taking more nonfinancial factors into rating creditworthiness, particularly those without an extensive credit history. This group tends to include vulnerable populations who are often more susceptible to predatory lending practices.
The problem is the systems developing these alternative scores can be like a black box, according to University of Georgia financial regulation researcher Lindsay Sain Jones. With the pool of personal data available growing, Jones argues that it's time to take a second look at how the American credit scoring system works and is regulated.
[...] In their recent paper, Jones and her co-author argue further regulation of financial reporting entities — both large credit bureaus and new data collectors — is needed in the same way gas, electric and water providers regulated their services. They argue participation in the credit system has become as necessary as having a phone or electricity.
[...] Jones and her co-author are also concerned that much of the lifestyle-related data points lenders correlate with creditworthiness can connect to race, gender, age, socioeconomic status, a person's ZIP code or where they attended college. Successfully challenging this kind of disparate impact under the ECOA [Ed: Equal Credit Opportunity Act] is nearly impossible.
One agency pulled information on how often people pay for gas at the pump versus paying inside the store. People who paid at the pump were deemed more creditworthy.
"There are all kinds of factors that can be correlated with creditworthiness, but that doesn't mean they should be used," Jones said.
When they factor in the web sites that people visit, do you suppose SN would be an asset or liability towards creditworthiness?
[ed note: See also Black Mirror, Season 3 Episode 1, "Nosedive". - fnord]
Journal Reference:
Janine S. Hiller and Lindsay Sain Jones, Who's Keeping Score?: Oversight of Changing Consumer Credit Infrastructure [open], Am. Bus. Law J., 2022
DOI: 10.1111/ablj.12199
(Score: 2) by Joe Desertrat on Saturday May 21 2022, @02:18AM
Anyone unrelated employee who works a job for some entity, either corporate or private, on the receiving end of cash for transactions hates cash sales. They too often are forced to use too small cash drawers that really leave them scrambling for change (facing the ire of customers forced to wait) any time someone pays with a large bill, or even if too many people in a row pay with twenties (which are all most can get from ATM's). Not to mention the greater risk of a mistake for which an employee might be held liable. There are always customers who, either attempting to force mistakes by a cashier, or just enjoy complicating things for some perverse reason, like to start adding and subtracting items after the cashier has started ringing them up. Use a credit card and any mistakes get rectified later, with only the customer inconvenienced.
Credit worthiness seems to be for a great part determined by having credit but still having most of it available, while at the same time having a record of not missing or being late with payments. The ideal seems to require you to use your credit, but pay it off without accruing interest. Probably to your benefit having some sort of rewards card. Making a big purchase and paying it off ahead of time really makes them take notice. When I bought my car I paid cash, the dealer really, really wanted me to finance it (apparently there are some sort of kickbacks involved), and I could have saved a small sum had I financed it, made three monthly payments so he got his kickback, then paid it off in its entirety. He would have lowered the price by $500, I would have paid less than that $500 in interest for 3 months, but to me it wasn't worth the hassle.