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Auckland, August 8, 2022
Discrimination in the home loan market is rife globally, but a recent study shows that the use of digital footprints may even out the playing field. A person’s digital footprint can be used for nefarious reasons, including identity theft and fraud, but it is not all bad, University of Auckland Researcher Dr Dulani Jayasuriya said.
She and two co-authors found that the use of digital footprints, which are a record of online activity, may help to reduce discrimination in the US mortgage market.
“Borrowers from a certain race, gender, income range or geographic location can be marginalised because of preconceived biases, and in our study, we found that a borrower’s digital footprint can aid in correcting such biases,” she said.
Dr Jayasuriya said that the research can improve the screening process for good quality borrowers and help to ensure lenders are not inhibited by biases.
The researchers’ analysis of 50 banks, many of which collect customers’ digital footprints, found that the use of such information can benefit both the company and the customer by significantly reducing the lender’s overall risk as well as discriminatory traits.
Informational advantage
Dr Jayasuriya said that she and her fellow researchers found that the informational advantage associated with using a borrower’s digital footprint far outweighs that of existing lending methods.
“Just because you are a certain race or a woman, or you live in a not-so-nice neighbourhood, you might be considered a risky borrower by traditional lenders, but those banks who utilise digital footprints have more granular information and can identify the true creditworthiness of a borrower and disregard biases. We also found that banks who use this digital information reduce the overall riskiness of their portfolios by lending to these borrowers,” she said.
At a time when interest rates are rising and putting considerable pressure on mortgage borrowers and home buyers, the findings have unique implications not only in the US but globally, Dr Jayasuriya said.
“The research is applicable here – many banks in Aotearoa New Zealand and Australia are collecting their customers’ digital information. We explored the substantial rise of digital footprint users in the US residential mortgage market, the kind of data collected, and subsequent lending outcomes,” she said.
Implications of Study
The researchers studied 50 US banks and lenders including JP Morgan Chase, Wells Fargo and the Bank of America and published their findings in a paper titled, ‘The use of digital footprints in the US mortgage market.’ Their findings have significant implications on data privacy, usage, efficient markets and decision-making processes for both borrowers and lenders.
“Although this is one example of how our online activity can be used for good, it also raises many questions about big data, data privacy and consumer behaviour as a result of data collection. For example, if borrowers know that banks collect their digital data and use it to identify their creditworthiness, they can change their behaviours,” she said.
The research highlights the need for regulation and oversight and calls for transparent discussions on data privacy and collection.
According to Dr Jayasuriya, long-winded, very detailed privacy agreements used by many banks and other organisations must be constructed in a way that people can, and will, digest.
“There are positives when it comes to collecting a user’s digital footprint, as we have shown, but there can be negatives too, so there has to be monitoring, transparency and laws regarding data privacy, collection and usage. When we click ‘yes’ to these very in-depth data privacy agreements, many of us fail to read or understand the statement in its entirety.
“Instead, customers could be made aware of what they are signing if the key points were summarised detailing what data is collected, and for what scenarios it may be used, including whether it can be sold to third parties,” Dr Jayasuriya said.
She said that another alternative could see providers incorporate short explainer videos to make customers aware of how their digital information will be used.
“This may result in a more transparent and open process where users and companies both benefit from such data collection and usage,” Dr Jayasuriya said.
