Identity Theft: Some Problems & Some Solutions

Meeting for the third time this year, the Fed's Consumer Advisory Council made identity theft its leading topic. The CAC outlined the three basic approaches to the problem: limiting the use, purchase and display of consumer identity information, strengthening deterrents, and providing victims of identity theft with effective tools to correct their records.

Victim tools include facilitating a consumer's access to his or her own credit report, requiring creditors and credit bureaus to fully investigate and respond to consumer complaints, and setting time for corrections.

The CAC discussed additional steps that could provide consumers with the ability to prevent identity theft and to minimize its consequences. Other remedies include requiring a credit bureau to notify a consumer whenever the consumer's report is accessed without the consumer's direction or permission. This notification would enable consumers to quickly identify situations that may be the result of identity theft. Early detection could also help consumers limit the damage that can be done by the identity thief.

The Problem
Identity theft is a widespread problem. The CAC found that at least three of its members had suffered identity theft directly or to a close family member. Those affected by identity theft commented on how difficult it had been to resolve the problems. Council members noted that correcting the problems took enormous time and effort even with the knowledge and skills of credit specialists available.

Identity Theft Fraud
Not only is there such a thing as identity theft; there is also identity theft fraud. This presents serious complications to the momentum for additional remedies to identity theft. Identity theft fraud is undertaken - perhaps as a less honest alternative to declaring bankruptcy - by individuals who are attempting to avoid responsibility for their legitimate credit obligations.

Close to a third of those consumers who allege identity theft are actually using the allegations to evade debts that they have incurred themselves. Providing additional protections from and remedies for identity theft also opens the way for those who use the protections for fraudulent purposes of personal benefit.

Remedies
Solutions are not easy. In fact, several CAC members observed that almost every idea for a remedy has a dark side that would produce another sort of consumer hardship.

The CAC generally agreed that any remedies should draw a balance between customer protection and customer convenience. One reason that identities are stolen is the ease with which consumers are able to obtain credit. Imposing strict protections would also result in making credit less readily available. The goal is to find the right balance.

Other members noted that corrective measures can have the opposite effect. For example, shortening time periods and imposing stricter standards for investigating and correcting credit bureau information could also make false allegations easier because creditors would have less time to investigate and develop proof or disproof.

Several members noted that law enforcement fails to give attention to identity theft allegations when police reports are filed. This lack of attention lowers any consumer interest in using law enforcement as a remedy and increases pressures on the credit market participants.

Customer Identification
Several members of the council noted that an important control for identity theft is a high level of care taken in verifying the identity of credit applicants. Identity theft occurs when credit is made readily available without taking careful steps to confirm that the borrower is in fact a valid person. The effort to get credit cards into the market without including steps to verify the credit recipient's identity makes identity theft relatively easy.

In this respect, preventative techniques for identity theft are fully compatible with the Customer Identification Program of the USA PATRIOT Act. Careful steps to verify customer identities serve both goals.

Ultimately, consumer financial education is the most effective and most powerful tool for preventing identity theft and for implementing corrections to stolen identities. The more consumers know about managing their credit accounts, the fewer opportunities identity thieves will have.

ACTION STEPS

Visit the Federal Trade Commission's website at www.ftc.gov and download their information for consumers on identity theft. Use this in your lobby and in statements to arm customers with knowledge.
Review your credit-granting procedures with an eye to identity theft. Consider the steps taken or not taken to verify the identity of the customer. Give special attention to credit applications through mail or Internet.
Make your CIP have multiple purposes. When you work on your CIP, include considerations of identity theft.