By Elizabeth McGinn, Antonio Reynolds and Jessica ShannonElizabeth McGinn is a partner in the Washington, D.C., and New York offices of Buckley Sandler LLP, Antonio Reynolds is a counsel in the Washington, D.C. office of the firm, and Jessica Shannon is an associate in the Washington, D.C. office. They advise clients on consumer financial services, privacy, and data security issues.
With many people underserved by traditional lending institutions, including the close to 45 million adults in the U.S. who the Consumer Financial Protection Bureau estimates are “credit invisible” or have had past credit challenges, emerging FinTech lenders and online lending platforms (FinTech firms) have established themselves as valuable lending resources for both investors and consumers. FinTech firms generally use non-traditional lending and underwriting models to assess the creditworthiness of loan applicants, including, in some instances, online data that cannot be gleaned from a consumer’s credit report or employment history.
Undoubtedly, the digital footprints (both active and passive) left by consumers online offer valuable insights about those consumers’ preferences and behaviors, which can be useful to FinTech firms in assessing whether to extend credit. But the use of the Internet, which provides unprecedented access to an extraordinary amount of consumer information (some of which might be obtained without a consumer’s consent or knowledge), has raised significant privacy questions that FinTech firms might have to confront in order to overcome inevitable regulatory scrutiny.
On February 16, 2017, the Consumer Financial Protection Bureau (CFPB) held a field hearing in Charleston, West Virginia, to examine how “alternative data,” can be used to “paint a broader and more accurate picture of [a consumer’s] creditworthiness.” As CFPB Director Richard Cordray noted in his opening remarks at the field hearing:
For [consumers with little or no credit history, or who lack a credit score], the use of unconventional sources of information, called “alternative data,” may allow them to build a credit history and gain access to credit. Alternative data may draw from sources such as rent or utility payments. These obligations may not qualify under more traditional definitions of “credit” and as a result would not be factored into the credit decisioning process. Alternative data may also draw from electronic transactions such as deposits, withdrawals, or transfers from a checking account. And it can encompass the kinds of information that relationship lenders typically know as a matter of course, such as the consumer’s occupation, educational attainment, and various other personal accomplishments. New forms of alternative data may come from sources that never existed before, such as the way we use our mobile phones or the Internet. By filling in more details of a consumer’s financial life, this information may paint a broader and more accurate picture of their creditworthiness. Adding this kind of alternative data into the mix thus holds out the promise of opening up credit for millions of additional consumers.
Additionally, as noted last year by the U.S. Department of the Treasury (Treasury), the value of lending facilitated by or through FinTech firms can be found in the ability to provide consumers with lower credit costs, easier access to products, and faster decision-making. In the context of marketplace lending, for example, which can include peer-to-peer lending as well as funding through institutional investors, hedge funds, and other financial institutions, market analysts estimate significant growth in loan origination volumes as well as an expansion in the types of products being offered. The California Department of Business Oversight conducted a survey of marketplace lenders and found that marketplace lenders provided over $13 billion in financing to consumers in 2014, having only provided less than $2 billion in 2010. This form of lending allows investors and consumers to connect outside the traditional lending and underwriting models. On its face, it appears to be a win-win for all involved.
But even with these significant expressions of optimism about the opportunities that may be available through the use of alternative data, such as Director Cordray’s remarks that alternative data “are most closely correlated with future performance,” FinTech firms should be aware of potential risks about the types of alternative data they collect and the means through which they obtain that data. As the National Consumer Law Center has warned, “the devil is in the details” as the use of alternative data can potentially raise a number of significant legal issues, most notably fair lending and privacy concerns.
From a privacy standpoint (as we save fair lending considerations for other articles), the sharing and use of alternative data in assessing a consumer’s credit risk can be wrought with pitfalls. Gathering information from social networking systems, in particular, can provide significant information about a consumer’s interests and preferences, as well as the consumer’s location and travel history. While Internet users can furnish actively some of this information through entry of data into a system, a significant amount of information also can be gathered passively through cookies and the tracking of user IP addresses. The sources and means through which FinTech firms (and their vendors) gather information matter in examining whether those lenders have complied with current federal and state privacy laws.
Both Congress and various federal agencies have publicly expressed uncertainty about how best to regulate the use of alternative data by FinTech firms.
With the regulatory uncertainty surrounding the use of alternative data (caveating that regulatory priorities may shift under the current administration of President Trump), FinTech firms should consider carefully assessing what data they are collecting and maintaining to ensure that they are complying with current consumer privacy regulations. As demonstrated by the questions posed in the CFPB’s RFI, there is a desire by regulators to obtain information and understand the potential privacy risks of collecting and using alternative data. As FinTech firms begin grappling with these questions, below are a few questions to consider.
If the FinTech firm obtained the data from the consumer:
If the FinTech firm obtained the data from a credit reporting agency:
If the FinTech firm obtained the data from any other third-party (besides a credit reporting agency):
At bottom, FinTech firms can reduce their litigation and enforcement risks by establishing and maintaining policies and procedures to ensure that they (and their sources of information) are lawfully collecting and maintaining consumer information, advising consumers of the information that is being collected, and providing adequate privacy notices and opt-outs to consumers, as applicable. Since “alternative data” can include so many kinds of information, the specific legal requirements are contingent on the specific relevant facts and circumstances, all of which can be examined by experienced privacy counsel.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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