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November 1, 2008, is the compliance date for the Red Flag Rules under the Fair and Accurate Credit Transaction Act ("FACTA"). The rules apply to any "creditor." The term "creditor" means "any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." ¹ Although the Red Flag Rules are receiving the most attention because of the impending compliance date, the FACTA rules are broader and focus on three areas: identity theft detection (Red Flag Rules); use of consumer credit reports; and disposal of sensitive information. This article will address the first area only.

Identity Theft Prevention ("Red Flag Rules").
If a creditor maintains "covered accounts," then the creditor must institute an identity theft detection and prevention program. "Covered account" means: (i) An account that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, such as a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account, or savings account; and

Any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks.²

Generally, anyone who extends credit to consumers must comply with the Red Flag Rules.

The identity theft prevention program must be approved by the company board of directors or an appropriate committee of the board.³ A member of senior management must be charged with overseeing the program, including training of staff and continuing compliance.⁴ If the company uses service providers who have access to covered accounts, then the company must ensure that the service provider complies with the identity theft prevention program.⁵ The company must review and update the program.⁶

The heart of the identity theft prevention program is the use of "red flags" to identify suspicious activity. The program must establish red flags, detect red flags, and respond to red flags.⁷ Examples of red flags, suggested by the Federal Trade Commission, are

• A fraud or active duty alert is included with a consumer report.
• A consumer reporting agency provides a notice of credit freeze in response to a request for a consumer report.
• A consumer reporting agency provides a notice of address discrepancy, as defined in §334.82(b) of the interagency guidelines.
• A consumer report indicates a pattern of activity that is inconsistent with the history and usual pattern of activity of an applicant or customer, such as:
  • A recent and significant increase in the volume of inquiries;
  • An unusual number of recently established credit relationships;
  • A material change in the use of credit, especially with respect to recently established credit relationships.
• An account that was closed for cause or identified for abuse of account privileges by a financial institution or creditor.
• Documents provided for identification appear to have been altered or forged.
• The photograph or physical description on the identification is not consistent with the appearance of the applicant or customer presenting the identification.
• Other information on the identification is not consistent with information provided by the person opening a new covered account or customer presenting the identification.
• Other information on the identification is not consistent with readily accessible information that is on file with the financial institution or creditor, such as a signature card or recent check.
• Personal identifying information is inconsistent when compared with external information sources:
  • An application appears to have been altered or forged, or gives the appearance of having been destroyed and reassembled.
  • The address does not match any address in the consumer report; or
• The Social Security Number (SSN) has not been issued, or is listed on the Social Security Administration's Death Master File.
• Personal identifying information provided by the customer is not consistent with other personal identifying information provided by the customer. For example, there is a lack of correlation between the SSN range and the date of birth.
• Personal identifying information is associated with known fraudulent activity:
  • The address on an application is the same as the address provided on a fraudulent application; or
  • The phone number on an application is the same as the number provided on a fraudulent application.
  • The address on an application is fictitious, a mail drop, or prison; or
  • The phone number is invalid, or is associated with a pager or answering service.
• The SSN provided is the same as that submitted by other persons opening an account or other customers.
• The address or telephone number provided is the same as or similar to the account number or telephone number submitted by an unusually large number of other persons opening accounts or other customers.
• The person opening the covered account or the customer fails to provide all required personal identifying information on an application or in response to notification that the application is incomplete.
• Personal identifying information provided is not consistent with personal identifying information that is on file with the financial institution or creditor.
• Where creditors use challenge questions, the person opening the covered account or the customer cannot provide authenticating information beyond that which generally would be available from a wallet or consumer report.
• Shortly following the notice of a change of address for a covered account, the creditor receives a request for new, additional, or replacement cards or a cell phone, or for the addition of authorized users on the account.
• A new revolving account is used in a manner associated with patterns of fraudulent activity:
  • The majority of available credit is used for cash advances or merchandise that is easily convertible to cash (e.g., electronics equipment or jewelry); or
  • The customer fails to make the first payment or makes an initial payment but no subsequent payments.
• A covered account is used in a manner that is not consistent with established patterns of activity on the account:
  • Nonpayment when there is no history of late or missed payments.
  • A material increase in the use of available credit.
  • A material change in purchasing or spending patterns.
  • A material change in electronic fund transfer patterns in connection with a deposit account.
  • A material change in telephone call patterns in connection with a cellular phone account.
• A covered account that has been inactive for a lengthy period of time is used (taking into consideration the type of account, the expected pattern of usage and other relevant factors).
• Mail sent to the customer is returned repeatedly as undeliverable although transactions continue to be conducted in connection with the customer's covered account.
• The financial institution or creditor is notified that the customer is not receiving paper account statements.
• The financial institution or creditor is notified of unauthorized charges or transactions in connection with a customer's covered account.
• The financial institution or creditor is notified by a customer, a victim of identity theft, a law enforcement authority, or any other person that it has opened a fraudulent account for a person engaged in identity theft.⁸:

Not all of the suggested red flags are appropriate for all creditors. In addition, there may be other red flags that are not specifically suggested that should be considered in particular applications. As noted above, the most pressing issue is to determine whether a company needs to comply with the Red Flag regulations by November 1, 2008.

Footnotes:

1. 15 U.S.C. §1691a(e).
2. 16 C.F.R. §681.2(b)(3).
3. 16 C.F.R. §681.2(e)(1).
4. 16 C.F.R. §681.2(e)(1)&(2).
5. 16 C.F.R. §681.2(e)(4).
6. 16 C.F.R. §681.2(d)(2)(iv).
7. 16 C.F.R. §681.2(d)(2).
8. 72 Fed. Reg. 63718, 63759 (11/9/07).