United States: FTC Report Examines Legal And Policy Considerations For Big Data Analytics, Promises More Enforcement

The Federal Trade Commission's (FTC) recent report, Big Data: A Tool for Inclusion or Exclusion?, released on January 6, warns businesses engaged in big data analytics that the practice poses liability risks. While the FTC does not propose new law or policy, the report advises that existing laws—including the FTC Act, the Fair Credit Reporting Act (FCRA), and the Equal Credit Opportunity Act (ECOA)—already can reach certain uses of big data. 

The FTC's warning is not intended as a prohibition. Indeed, the Commission recognizes, and even encourages, the use of big data to innovate and improve the ability of businesses to serve underserved communities. Nevertheless, the FTC plans to monitor the use of big data under privacy, credit, and fair lending laws and bring enforcement actions where appropriate. Accordingly, businesses using or considering the use of big data analytics should review the FTC's report carefully and consider the risks those practices may present, especially in the privacy and fair lending areas.

Background

The FTC's report is the product of a public workshop held in September 2014, as well as a prior FTC seminar on alternative scoring products, and it aims to educate businesses on important legal compliance questions and broader big data research issues.1  

Before addressing specific legal and policy considerations, the report discusses the "life cycle" of big data and emphasizes the associated potential benefits and risks. The FTC distinguishes descriptive analytics—where the objective is to uncover or summarize patterns in data sets—from predictive analytics—where the use of statistical models generates new data. The FTC notes that predictive analytics are frequently used to draw inferences about consumers' likely choices. 2 The report highlights a number of benefits that may emerge as a result, including new methods to access credit as well as better health and educational outcomes. Echoing themes from the White House's 2014 Big Data report, the FTC's report also discusses potential risks, suggesting that analytics could be used to expose consumers' sensitive information, implement new forms of price discrimination, or weaken the effectiveness of consumer choice by drawing inferences about consumers who choose to opt out of data collection. 3

Applicable Consumer Protection and Equal Opportunity Laws

The FTC stresses that the report is not intended to identify gaps in the law, but rather to explain the Commission's view that various laws already apply to big data practices. 4 Accordingly, the FTC notes that a number of existing consumer protection laws, including the FCRA, federal equal opportunity laws, and the FTC Act, may already apply to big data practices.

  • Fair Credit Reporting Act: The FCRA applies to companies that compile, sell, or use consumer reports to make eligibility determinations for certain benefits or transactions. The FTC's report notes that companies are increasingly purchasing and using predictive big data analytics products for eligibility determinations. 5  

    The FTC cautions that while companies are generally free to use data derived from their own customer relationships for purposes of making decisions about their customers, this calculus changes when third-party data analytics providers are involved. If an unaffiliated third party evaluates a company's own data and provides that company with evaluations for covered eligibility determinations, the third party acts as a consumer reporting agency (CRA), and both companies can be considered users of consumer reports. 6 The FTC emphasizes once more that businesses can be considered a CRA under the FCRA even when they compile non-traditional information, such as data from social media platforms, for eligibility purposes. 7

    The report also reevaluates the FTC staff's position from its 2011 report 40 Years of Experience with the FCRA and now explains that the FTC may consider reports in which identifying information about a specific consumer has been stripped away to be consumer reports for purposes of the FCRA under certain circumstances. 8 Take, for example, a consumer who provides information about her social media habits on a credit application. If a company subsequently removes any identifying information, yet still uses the underlying data to generate an aggregated analysis and make a decision affecting that consumer, the analysis would likely be deemed a consumer report, according to the FTC report. The FTC encourages businesses to be mindful of any use of big data analytics to make an eligibility determination that could be covered under the FCRA.

  • Equal Opportunity Laws: The report devotes considerable attention to the applicability of federal equal opportunity laws, including ECOA, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Fair Housing Act, and the Genetic Information Nondiscrimination Act, to big data use. The report notes that to prove a violation of these laws, plaintiffs must show either "disparate treatment" or "disparate impact," based upon a protected characteristic such as race, gender, marital status, or receipt of public income. 9 The report places a particular emphasis on compliance with ECOA, over which the FTC shares enforcement authority with the Department of Justice and the Consumer Financial Protection Bureau. 10

    Disparate impact analysis is especially important in the context of big data analytics. 11 A disparate impact occurs when a company employs a facially neutral policy or practice that has a disproportionate effect on members of a protected class, absent a legitimate business need that cannot be achieved by less disparate means. For example, a business might avoid expressly screening job applications based on gender and instead use analytics to screen applicants in a way that nevertheless has a disparate impact on women. Similarly, making credit decisions based on zip codes could prove problematic if those determinations have an impact on a protected class and cannot be justified by a legitimate business necessity. Thus, in certain circumstances, facially neutral policies could run afoul of equal opportunity laws.

    The FTC's report cautions that advertising and marketing practices could implicate equal opportunity laws for creditors. 12 Even if credit offers are open to all who apply, marketing that affects a creditor's subsequent lending patterns or the terms and conditions of the credit received by borrowers could be cited as evidence of discrimination.

  • Section 5 of the FTC Act: The FTC reiterates that businesses should take care to ensure that their use of big data analytics is done in a way that is not unfair or deceptive to consumers. The FTC recommends that companies engaging in big data analytics consider whether they (1) are honoring promises made to consumers and providing consumers with material information about their data practices, (2) have put reasonable security measures in place, and (3) are undertaking reasonable measures to know the purposes for which customers are using their data. 13 At minimum, the FTC remains concerned that companies not sell or share analytics products if they know or have reason to know that the recipients could use those products for discriminatory or fraudulent purposes.

The report emphasizes that any FTC or regulatory inquiry under these laws is ultimately case- and fact-specific. The report provides a set of high-level questions focused on FCRA and ECOA requirements that companies using big data analytics should consider when navigating these laws. 14

Big Data Policy Considerations

Beyond legal compliance, the report also discusses several policy considerations raised by big data. The FTC appears worried that errors and biases in data may be incorporated throughout the entire big data life cycle. The Commission cautions that adding more data may not correct inaccuracies or remove these biases. 15 The FTC encourages businesses to consider the following questions when deploying big data analytics:

  1. How representative is your data set? Citing the Boston Street Bump application that was designed to detect potholes via a smartphone app, the FTC explains that once the app team realized that lower-income individuals were less likely to carry smartphones, they also realized their application data was not representative of road conditions across Boston. 16 According to the FTC, companies should be aware of how "digital divides" may produce under- or over-representative data sets before launching products or services that could produce skewed and unfair ramifications. 17 
  2. Does your data model account for biases? The report notes that even before the widespread use of big data, computer models used to identify good job applicants could reproduce existing biases by incorporating pre-existing discriminatory actions into new decision-making. The FTC recommends that companies think carefully about how both their data sets and algorithms have been generated. 18  
  3. How accurate are your predictions based on big data? The FTC cautions that while big data has improved the ability to detect correlations among data points, it does not always explain which correlations are meaningful. 19 The report highlights efforts by lenders to improve access to credit by using non-traditional indicators such as rental or utility bill payment history, but notes that there could be legitimate reasons for consumers to withhold paying or otherwise dispute a bill, which could throw off these innovative credit models. 20 The report stresses that when big data analytics affect consumers' ability to complete transactions, the potential effects from inaccuracies could be substantial.
  4. Does your reliance on big data raise ethical or fairness concerns? The notion that big data analytics raises larger ethical issues emerged in the White House's 2014 Big Data report and continues to be of concern to the FTC. The report suggests that companies consider assessing what factors go into an analytics model and balance any predictive value against fairness considerations. 21 The FTC, however, also highlights how big data can be used to expand opportunity. 22

What's Next?

As the report states, "[T]he Commission will continue to monitor areas where big data practices could violate existing laws, including the FTC Act, the FCRA, and ECOA, and will bring enforcement actions where appropriate. The Commission will also continue to examine and raise awareness about big data practices that could have a detrimental impact on low-income and underserved populations, and promote the use of big data that has a positive impact on such populations." 23

In a concurring statement, Commissioner Ohlhausen acknowledges some of the concerns around big data analytics as legitimate, but encourages policymakers to evaluate these concerns within "the larger context of the market and economic forces companies face." 24 She notes that big data analytics may combine with a competitive market to resolve rather than exacerbate industry's misunderstandings of low-income populations. For instance, lenders could collect and analyze predictive data to market credit offerings to traditionally underserved communities. In this way, big data could allow lenders to reach populations that are difficult to score using traditional credit models. 25 She recommends that the FTC test hypothetical harms with strong economic reasoning and empirical evidence as it addresses big data in the future. 

The overarching message of the FTC report encourages businesses to apply big data analytics in a way that provides benefits and opportunities to consumers, while also identifying the legal pitfalls that could violate consumer protection or equal opportunity laws. Use of big data as a proxy for protected class status or in a way that results in a disparate impact based on protected characteristics without a countervailing justification based on a business necessity carries risks. Where businesses carefully consider their objectives and pressure test their practices, they can reduce exposure to discrimination claims and expand access to credit consistent with the FTC's guidance. 

Footnotes

1. On January 10, 2016, two Consumer Financial Protection Bureau (CFPB) officials stated that no CFPB guidance is forthcoming on the proper use of big data analytics. However, Bryce Stephens, the CFPB's section chief for compliance analytics and policy, reported that the agency remains concerned about model-related questions surrounding the use of big data in marketing and lending determinations.  See Chris Bruce, Bloomberg BNA Banking Daily, "Don't Expect CFPB Fair Lending Guidance on Big Data" (Jan. 10, 2016), available here.

2. Fed. Trade Comm'n, Big Data: A Tool for Inclusion or Exclusion? 4–5 (Jan. 2016).

3. Id. at 9–11. See Executive Office of the President, Big Data: Seizing Opportunities, Preserving Values 48–54 (May 2014).

4. Id. at 12–13.

5. Id. at 15.

6. Id.

7. Id. at 14.

8. Id. at 16, fn. 85.

9. Id. at 18, 20.

10. Id. at 18, fn. 94.

11. Id. at 19.

12. Id. at 20–21.

13. Id. at 21–23.

14. Id. at 24.

15. Id. at 25.

16. Id. at 27.

17. Id.

18. Id. at 29.

19. Id.

20. Id. at 30.

21. Id. at 31.

22. Id. at 32.

23. Id. at v.

24. Id. at A-1.

25. See id. at A-2 and fn. 4–5; see also Executive Office of the President, Big Data: Seizing Opportunities, Preserving Values at 7, 45–47 (May 2014).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
David W. Ogden
Jonathan G. Cedarbaum
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.