Privacy for loan applicants versus predictive power for loan providers: Is it possible to bridge the gap?

Abstract

Loan providers manage risk by assessing applicants' ability and willingness to re-pay. The loan application is the most visible aspect of credit scoring. To prevent gaming of the process, loan providers do not reveal why they ask for certain information. This lack of transparency leads applicants to perceive some questions as invasive. We investigated this phenomenon in three studies. The first survey revealed that applicants were least comfortable with providing their work phone number, value of other assets, and total number of investments. Ten interviews with loan applicants indicated that loan application forms do not allow them to adequately describe their financial situation. In the second survey 12 % of participants reported they had not applied for credit because of the information requested. Results suggest that loan providers should explain why information is requested and how it will be used. Applicants’ satisfaction with credit scoring can be improved by: (1) letting applicants specify how/when they want to be contacted; (2) obtaining informed consent for data sharing with third parties; and (3) making some data items optional.