United States: Fair Credit Reporting Act Amendments: Affiliate Sharing
Consumer Financial Services Law Report

The Fair and Accurate Credit Transactions Act of 2003 adds a new Section 624 to the Fair Credit Reporting Act which limits the ability of affiliated companies to use shared consumer data for marketing purposes.

By way of background, the FCRA as originally enacted permitted any company to share with any third party information relating solely to that company's firsthand experience with the consumer. By providing that such information did not constitute a "consumer report," a company could share its transaction or experience information with third parties without the risk of being treated as a "consumer reporting agency" under the FCRA by virtue of such sharing.

Since the "consumer report" exception was limited to transaction or experience information, affiliated companies continued to be subject to the risk of being treated as "consumer reporting agencies" if they shared other consumer data with each other that fell within the FCRA's definition of a "consumer report." In addition, because the transaction or experience exception was only available where the company sharing the information had dealt directly with the consumer, affiliated companies could not develop a joint database which could collect such information from all affiliates within a corporate family and share it with any other affiliate.

After a protracted battle led by the financial services industry, the FCRA was finally amended in 1996 to permit the sharing of transaction or experience information among affiliated companies without regard to which affiliate had the firsthand experience with the consumer and, even more significantly, to permit the sharing among affiliates of non-transaction or non-experience information that fell within the FCRA's "consumer report" definition. More specifically, the FCRA was amended in 1996 to also exclude from the definition of "consumer report " both transaction or experience information communicated among companies related by common ownership or control and non-transactional or non-experience information communicated among such companies (collectively, "consumer information") if the consumer is given notice and an opportunity to opt out of such sharing.

These 1996 amendments left an affiliate receiving any consumer information from another affiliate free to use such information to send marketing solicitations to such consumer provided the consumer had not elected to opt out of such affiliate sharing.

FACTA Opt-Out Notice

New Section 624 added by the FACTA limits an affiliate's ability to use any consumer information it has received from another affiliate by imposing an opt-out notice requirement. This new provision provides that prior to using consumer information obtained from an affiliate for marketing purposes, a company must clearly and conspicuously disclose to the consumer that consumer information received from an affiliate may be used for marketing purposes and give the consumer an opportunity and a simple method to opt out of such solicitations. If a consumer elects to opt out of such solicitations, the opt-out is effective for at least five years beginning on the date on which the consumer's election is received, unless the consumer subsequently revokes the opt-out. Upon expiration of the five-year period, use of a consumer's consumer information for marketing purposes among affiliates continues to be prohibited unless the consumer receives a new notice and opportunity to opt out for an additional period of at least five years.

The FACTA permits the new opt-out notice to be combined with other legally required disclosures, most notably the privacy disclosures required by the federal Gramm-Leach-Bliley Act. While the notice must allow the consumer to opt out of all marketing solicitations based on consumer information, the notice can also allow the consumer to choose among more limited opt-out options. For example, a consumer may be given the option of opting out of solicitations from particular affiliates or delivered only by certain methods.

The challenge to affiliated companies revising their existing FCRA opt-out notices to comply with the FACTA will be to provide consumers with a new opt-out notice that does not limit the affiliated companies' ability to continue to take advantage of their pre-FACTA rights to share consumer information while giving consumers the right to prevent use of such information for marketing solicitations.

New Section 624 contains a number of exceptions to the opt-out notice requirement. Most notably, there is an exception that permits a company to use consumer information received from an affiliate to send marketing solicitations to a consumer if the company already has a preexisting business relationship with the consumer.

Section 624 defines a preexisting business relationship to mean a relationship between a consumer and a company based on: 1) an existing financial contract between the consumer and the company; 2) the consumer's purchase, rental or lease of goods or services from the company or a financial transaction (which includes holding an active account or policy in force or having another continuing relationship) between the consumer and the company during the 18-month period immediately proceeding the date on which the consumer is sent a solicitation; 3) the consumer's making an inquiry or application regarding a product or service provided by the company during the three-month period immediately proceeding the date on which the consumer is sent a solicitation; or 4) any other preexisting business relationship as defined by regulations implementing Section 624.

Other exceptions from the opt-out notice requirement include a company using consumer information received from an affiliate to a) perform services on behalf of an affiliate unless the affiliate could not send the solicitation itself because of an opt-out; and b) to respond to a communication initiated by the consumer or to make solicitations which the consumer has authorized or requested.

It is important to note that the limitations on sharing consumer information among affiliates in Section 624 is purely prospective in nature. In other words, if prior to the effective date of the regulations implementing Section 624, a company has received consumer information either directly from an affiliate or from a joint database maintained by an affiliate, the affiliate may continue to market using that information without providing a consumer the right to opt out of the marketing solicitation.

The FACTA provides that any state law relating to the exchange and use of information from an affiliate to make a solicitation for marketing purposes is preempted. Section 624 directs the federal banking agencies, the National Credit Union Administration, the Federal Trade Commission and the Securities and Exchange Commission to coordinate with each other to issue regulations to implement the requirements of Section 624.

Section 624 provides that regulations implementing the new affiliate sharing limitations must be issued in final form not later than nine months after the date of the enactment of the FACTA, which is Sept. 4, 2004. It further provides that such regulations will become effective no later than six months after they are issued in final form.

This article is presented for informational purposes only and is not intended to constitute legal advice.