The activities of data brokers are increasingly attracting the attention of both the Federal Trade Commission and federal lawmakers. The FTC hosted a seminar on Alternative Scoring Products, the second in its Spring Privacy Series, on March 19, 2014. A panel of industry representatives, independent researchers, and consumer privacy advocates discussed how data brokers use predictive analytics to offer companies scores that predict trends and the behavior of their customers.

These scores are used for a variety of purposes, ranging from identity verification and fraud prevention to marketing and advertising, and can influence the kinds of marketing offers a consumer receives. Consumers are largely unaware of these scores and have little to no access to the underlying data. The seminar focused on the privacy concerns raised by data brokers and predictive analytics.

Regulators and lawmakers are intensifying their scrutiny of data brokers, who compile profiles of consumers from alternative non-Fair Credit Reporting Act (FCRA) sources (such as social media or public databases) and market them to lenders and advertisers. The Senate Commerce Committee released a report on data brokers, and Senator Jay Rockefeller’s (D-WV) comments indicate the heightened level of concern lawmakers have regarding this industry: “[Data brokers] are gathering massive amounts of data about our personal lives and selling this information to marketers. . . . When government or law enforcement agencies collect information about us, they are restrained by our Constitution and our laws; and they are subject to the oversight of courts, Inspectors General, and Congress. But data brokers go about their business with little or no oversight. While there are laws on the books that protect the privacy of Americans’ health and financial information, they do not cover data brokers’ marketing activities.” In addition, Director Richard Cordray of the Consumer Financial Protection Bureau has stated that if this practice is harming consumers, the CFPB would be very concerned, and would contemplate whether there are any legal violations that the CFPB can address.

Representatives from the Consumer Data Industry Association and the Direct Marketing Association argued that companies aggregate data to manage risk, whether it is from fraud or credit risk associated with certain loan applications. By using data and predictive analytics to manage risk, companies are able to extend credit and offer products to customers who may not qualify under traditional models. As such, industry representatives argued that predictive analytics should be seen as “an opportunity for inclusion.”

The CFPB previously echoed a similar sentiment in its report on “Empowering low income and economically vulnerable consumers.” The CFPB suggested that consumer reporting agencies (CRAs) could help consumers, especially consumers with thin or no credit files, build or strengthen their credit profiles if they incorporated additional alternative data, such as regular telecom or rental payments.

The panelists also discussed the potential downsides to alternative scores and predictive analytics. An independent research and consultant to the FTC reasoned that alternative scores may not explicitly determine whether a consumer is approved for a product or not, but can affect the types of products, rates, or terms that a consumer is offered. Even if a consumer’s eligibility for a product is ultimately determined by a credit check, the types of products that the consumer is initially offered tends to guide them to certain products.

Under the Regulation Z loan originator compensation rule, the CFPB has indicated that it does not approve of “steering” consumers to certain (often more expensive) products, unless the transaction is in the consumer’s interest. Given the heightened scrutiny facing data brokers from the FTC and the Senate Commerce Committee, it may only be a matter of time before the CFPB will likely express an interest in investigating and regulating this area, despite the CFPB’s previous acknowledgement of the possible benefits of alternative scores.

The FTC is seeking written comments on issues related to this workshop until April 19, 2014, including comments on the following questions: 

  • What are the current types of predictive scores available to companies, and what scores can we expect data brokers to offer in the future?
  • How are companies utilizing these predictive scores?
  • How accurate are these scores and the underlying data used to create them?
  • How can consumers benefit from the availability and use of these scores?
  • What are the privacy concerns surrounding the use of predictive scoring?
  • What legal protections currently exist for consumers regarding the use of predictive scoring, both in the United States and internationally?
  • What consumer protections should be provided? For example, should consumers have access to these scores and the underlying data used to create them? Should some of these scores be considered eligibility determinations that should be scrutinized under the Fair Credit Reporting Act?

Instructions on how to submit comments can be found here. We expect that the FTC will issue a staff report sometime following the close of the comment period. Ballard Spahr will continue to follow this issue and other developments relating to the data brokers and alternative scoring products.

Our Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.


 

 

Copyright © 2014 by Ballard Spahr LLP.
www.ballardspahr.com
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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