As part of its 2014 Spring Privacy Series, the Federal Trade Commission in March held a seminar to examine alternative scoring products and the possible benefits and risks of their growing use. During the seminar, FTC attorneys Katherine Armstrong and Andrea Arias of the Division of Privacy and Identity Protection moderated a panel discussion between various stakeholders that included public interest groups, the data industry, and academics.
Alternative scoring products are ways of classifying consumers that aim to predict how those consumers will behave in a variety of contexts, and have become an increasingly popular tool used by companies to decide what offers and services to provide to consumers. When consumer information is collected and provided to third parties to make employment, credit, insurance, housing, or other decisions in the context of a consumer transaction, it is regulated by the Fair Credit Reporting Act (FCRA). In many instances, however, entities collecting and providing this data are not regulated. Though some in attendance called for increased regulation of alternative scoring products that are not regulated by FCRA, industry representatives cautioned against increased regulation in this area, stating that further regulation could lead to decreased accuracy of the scoring models, instead encouraging industry self-regulation.
Panelists representing the data analytics community noted that the use of alternative scoring products benefits consumers, providing them with increased competition, more relevant advertisements, and more effective fraud protection. Panelists highlighted the benefits of transparency, both to clarify the methods used to create alternative scoring products and to protect against their use in ways that may limit opportunities for some consumers. While use of discriminatory factors is not allowed under FCRA, some panelists expressed growing concerns that consumer information will be used in ways that exploit certain demographics or groups. Panelists representing public interest groups argued that these products should be used to expand, rather than limit, opportunity.
At the center of the debate over the proliferation of alternative scoring products is the access that individuals have to data about themselves. In some instances, where information from alternative scoring products is used to make decisions about a consumer, FCRA will apply with its attendant obligations on regulated consumer reporting agencies. Yet unlike the big three credit agencies, which consumers can contact to contest information held about them, the FTC noted that so many entities are now collecting information to develop alternative scoring products that it can be difficult for consumers to reach all those who may be engaged in these activities, potentially leaving some with no access or recourse.
During the seminar, the FTC did not announce any specific action on alternative scoring, although it indicated that it plans to study the “potential privacy concerns that these products may raise.” While this take-away is unremarkable, the FTC’s continued focus on FCRA compliance counsels that entities that create or utilize alternative scoring products should review whether their products are regulated by and in compliance with the existing regulatory framework. Companies considering using alternative scoring products should consider how new uses of data would change their regulatory liability, and should keep an eye out for future FTC guidance or action in this rapidly growing field.
Special thanks to Madeline Gitomer, an Associate in our Washington, D.C. office, for her assistance in the preparation of this entry.