Identity safeguards help
New credit rules require closer look when application raises red flags
Victims of identity theft know the difficulty of trying to repair a damaged financial reputation. In an effort to prevent that damage from occurring in the first place, the federal government has begun requiring banks to take extra steps to ensure they can detect and prevent fraud-related identity theft.
Noncompliance will result in fines, regulatory penalties and lawsuits, and apparently the requirement will be extended soon to other companies.
These “red flag rules” were announced a year ago and are derived from the Fair and Accurate Credit Transactions Act of 2003, which set forth examples of transactions that should trigger heightened scrutiny from creditors issuing credit. The changes are welcome.
Chris Hoofnagle, an expert in information privacy law and director of the Berkeley Center for Law & Technology’s information privacy programs, said individuals have had to present very little information in order to obtain credit accounts — and that it has been possible even to present fake information and obtain credit.
A typical identity theft involves an impostor using a victim’s Social Security number and date of birth, but a different address. The new red flag rules would require creditors to intervene in these situations. If the applicant’s address does not appear in the named person’s credit file, the bank must use heightened screening measures to verify the activity. Other situations can also trigger closer scrutiny.
As Hoofnagle said, it remains to be seen what level of scrutiny will be applied. Authentication is based on a “reasonableness” standard, meaning creditors may use databases to verify identity. Those databases may be polluted with inaccurate information, especially for former victims of identity theft. The new rules help, but the heightened standards should be required in all cases where credit is granted.
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