|March 30, 2000
Mr. Donald S. Clark
Dear Sir or Madam and Messrs. Feldman and Clark:
Statement of Interest
This letter is filed on behalf of Advanta Corp. ("Advanta") in response to the Joint Notice of Rulemaking filed by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") (65 Federal Register 8770, February 22, 2000) and the Notice of Proposed Rulemaking filed by the Federal Trade Commission ("FTC") seeking comments on proposed rules published pursuant to Title V, section 504, of the Gramm-Leach-Bliley Act ("the Act") (65 Federal Register 11174, March 1, 2000).
Advanta Corp. is a highly focused financial services company with over 2,600 employees, servicing approximately $24 billion of assets, including $12 billion in managed assets and approximately $12 billion in assets serviced for third parties. Advanta provides consumers and small businesses with targeted financial products and services, including non-conforming mortgages, business credit cards, equipment leases, insurance and deposit products. The company is also one of the largest servicers of non-conforming mortgages for third parties in the country.
Advanta is the parent company of Advanta National Bank, a national banking association with its headquarters in Wilmington, Delaware and regulated by the OCC, and Advanta Bank Corp., an industrial loan corporation organized under the laws of the state of Utah with its principle executive offices located in Salt Lake City and insured by the FDIC. A number of Advanta's other operating units, third-party processors and vendors are subject to the regulatory oversight of the FTC. Other operating subsidiaries of Advanta may file comments at the appropriate time with the relevant state insurance commissioners.
General Policy Comments
While Advanta recognizes that the Act gives the regulatory agencies, in many areas, limited discretion in crafting rules promulgated under the Act, we urge agencies to recognize that the use of customer data has spurred the Democratization of credit availability and has enhanced financial institutions' ability to use consumer information-based analytics to ensure that safety and soundness standards and risk management parameters are met.
We also note that many of the well-publicized concerns about "privacy" actually deal with data security concerns (especially on the Internet), identity theft (already illegal) and overarching discomfiture with telephone direct marketing (already Federally regulated). None of these are addressed by the Act. We sincerely hope that a genuine balance can be established between actual consumer concerns and the consumer benefits that flow from modern information-based marketing practices. Our Company supported passage of the Act because we believed that rationalizing the nation's financial services structure would allow us to better serve our customers by offering a wider range of products.
Specific Recommendations and Comments
Definition of "Personal" and "Nonpublic Personal Information"
Advanta believes that the proposed definition of "personal information" is inconsistent with plain meaning of the Act which, in Section 509(4)(A), defines the term to mean "personally identifiable financial information". In fact, the proposal recognizes that the proposed definition is so broad as to "...result in certain information being covered by the rules that may not be considered intrinsically financial...". We believe that information that is "nonfinancial" is not within the scope of the Act and should not be covered by the new rules.
The legislative history clearly confirms that Congress intended to limit this definition to financial information. In a colloquy between Senate Banking Committee Chairman Gramm (R-TX) and Senator Allard (R-CO), the Chairman stated:
This was echoed by Senator Hagel (R-NE) who, in a statement supporting the Act, noted that the privacy provisions "protect the privacy of customers' financial information" (145 Cong. Rec. S13876).
Further, the Act's definition of "nonpublic personal information" does not indicate that Congress intended for all information provided by a consumer to a financial institution, or resulting from any transaction with the consumer, or otherwise obtained by a financial institution, to be financial in nature.
The agencies offer two alternatives concerning the treatment of "nonpublic personal information." The OCC recommends Alternative A in which information is considered "public" only if it has actually been obtained from public sources. The Federal Reserve Board recommends Alternative B which treats as "public" any information that could be derived from public sources (e.g. a telephone directory) even if the information was obtained from a proprietary data base.
If limited to these two alternatives, Advanta recommends that the agencies adopt Alternative B. We do, however, suggest that neither alternative recognizes that much of the information in question is widely available from many sources. We do not believe that any readily available public information should be deemed "nonpublic."
Should "Nonpublic Personal Information" Include Data Without Personal Identifiers?
The agencies specifically invite comment on whether either definition of "nonpublic personal information" should cover "information about a consumer that contains no identifiers of a consumer's identity." Advanta urges the agencies to find that such unidentified data is, on its face, public. There can be no public policy argument suggesting that data, which cannot be tied to an individual, give an individual an expectation of privacy.
Further, the Joint Notice of Rulemaking cites a realistic use of such data; i.e. the preparation of a marketing study. Another example is the development of analytical data for pricing which anticipates future risks based on performance analytics.
In practical terms, any out-sourced model development or analysis requires the ability to analyze performance data which is transmitted to third parties without identifying information. This is, in fact, standard industry practice. Credit scoring models and, in particular, customized credit scores, could not be developed without this practice.
Definition of "consumer" versus "customer"
Advanta suggests that the definition of "consumer" should reflect the fact that the Act applies only to consumers who actually obtain a financial product or service and does not apply to individuals who apply but do not actually obtain a financial product or service -- especially since the statutory language treats "consumers and customers" interchangeably.
We believe that Congress clearly intended that the Act apply only to individuals with whom financial institutions have developed a "customer relationship" and not apply to isolated transactions outside of a customer relationship. We urge the agencies to eliminate the distinctions between "consumers" and "customers" and to apply the rule only to the disclosure of nonpublic personal information that a financial institution obtains in the course of a customer relationship.
We also recommend that the definition of "customer relationship" should reflect a financial institution's own practices and policies with respect to whether it is in an active and genuine "customer relationship" with an individual. The agencies should provide clarification and examples of the appropriate timing as to when this relationship begins.
For example, many consumer credit transactions are originated and purchased from other sources, such as mortgage brokers. Indirect lending is common in finance transactions and a growing number of loans are arranged by aggregators of financial services, who deal with many lenders.
Delivery of Initial Notices
Advanta is pleased that the agencies recognize that, in today's information-based society, initial notices may be given electronically. We recommend that, rather than requiring the sending of individual email notices to our customers, we meet the requirement by posting our policies and practices on our institution's websites.
We further note that the proposal states that "oral notices alone are insufficient". We urge the agencies to modify this stance and allow the oral delivery of our policies and practices where the conversation with the customer is taped and a record is retained. This would readily meet the burden of proof in showing that the required notice had indeed been given to the customer.
This is particularly critical in instances where the bulk of the transaction is consummated over the telephone. We note that the proposed rule discusses that if we orally agree to enter into a contract for a financial product or service over the telephone, we may provide the customer with the option of receiving the initial notice after providing the product or service, so as not to delay the transaction. We believe that the customer would be well served to receive the initial notice orally at this time.
Depending on the ultimate treatment of consumer versus customer discussed above, the inability to provide oral notices, during the mortgage origination process, would make the process slower and more cumbersome. This would run counter to what is happening in the consumer credit market today. Our customers want a speedy turnaround on credit decisions - and, like most creditors, we strive to achieve "instant decisioning" in, many cases. Advanta believes the inability to deliver oral notices will hamper lenders ability to streamline the process.
Advanta is pleased that the agencies would allow "reasonable time" to provide the initial notice when a loan is purchased from another source or on the secondary market. This is particularly important in mortgage lending and we hope that this provision is retained in the final rule.
Exceptions to "Opt-out" Requirements for Service Providers and Joint Marketing
Many consumer credit transactions and, in particular, real estate lending, require the sharing of information with third party, non-affiliates and service providers. The growing trend of outsourcing different parts of the credit-granting process requires that a third party have access to customer data in order to provide its function. We believe that the initial privacy disclosures, coupled with our own contractual enforcement of confidentiality agreements and compliance review of our vendors, vitiate the need for additional regulations in this area. Advanta believes it is always in our interest to demand and enforce confidential treatment of customer data.
The growing number of new services, particularly on the Internet, which arrange for credit, or bundle or aggregate lending services, present what is, at best, a moving target. We hope that creative new enterprises are not stifled.
One of the specific questions posed by the agencies invites comments as to whether or not these provisions would prohibit a vendor from "using consumers' information without indicators of personal identity to help improve its scoring levels."
We certainly hope that the final regulation would in no way prohibit such an activity. At a time when credit scoring models are under attack and have been the subject of inquiries by the FTC, nothing should be done, either implicitly or explicitly, to discourage the continued refinement of these models. It is important to us to meet safety and soundness standards and to more adequately meet our internal risk assessment standards.
There is no joint marketing with the providers of credit scoring and models and we again fail to see how information, that has no indicators of personal identity, gives rise to either an expectation of privacy or a perceived violation of personal privacy rights.
Timing of Notices to Customers
Advanta is concerned that while the Act states that customer disclosures are to be made "at the time of establishing a customer relationship", the rule requires that notices be given "prior to the time that a customer relationship is established." This advances the timing of the notice as required by the Act and we believe the Congressionally mandated time frames, under the Act, should be adopted.
Financial institutions should be given the flexibility to select the timing of their notices to best suit their operational capacity and product lines. Furthermore, specific examples, which would allow financial institutions to append their notice to existing disclosures and fulfillment materials, should be included. For example, under the Truth in Lending Act, consumers who apply for open-end credit must receive their disclosures in a form that the consumer can keep prior to the first transaction under the credit arrangement. Financial institutions should be allowed to include their privacy notice in these disclosures in order to minimize operational impact and confusion to the customer.
Delivery of Notices
Request for Delayed Implementation
Advanta urges the agencies to exercise their discretionary authority to delay implementation of the rules until May 13, 2001, with optional compliance as of November 13, 2000. The new rules represent a significant compliance burden to entities that hithertofore had never been deemed to be financial institutions, coming on the heels of Y2K compliance efforts and accompanying "lockdowns." Similarly, contractual representations and warranties with joint venture partners, third-party processors, third party marketing companies and other entities involved in financial services will need to be brought in compliance. Additionally the need for employee training, with emphasis on customer services functions, will require time and resources to answer anticipated customer questions and address their concerns.
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The foregoing comments deal with select key provisions and we urge the agencies to carefully consider the comment letters filed on behalf of the trade associations which represent our interests, namely the American Financial Services Association, the Consumer Bankers Association, the Delaware Bankers Association and the Direct Marketing Association.
Thank you for the opportunity to participate in this vital rulemaking.
Frank M. Salinger