Could FACT Regulations Help Drive New Income?

Credit Union Journal | Wednesday, November 21, 2007

NORTHFIELD, Minn. -

Credit unions should see the adoption of "Red Flag" and Address Discrepancy rules of the Fair and Accurate Credit Transactions Act (FACTA) by NCUA and other federal regulators as more than just additional compliance burden-it could also mean substantial new income.

The law, which requires financial institutions to adopt a risk-based program to detect and prevent identity theft could represent "a potentially massive amount of unrealized income-as they scramble to develop a compliance strategy," according to Adam Elliott, president of Minnesota-based fraud-prevention company ID Insight. The company, which says it has been monitoring and analyzing the cost implications of the new FACT Act compliance requirements since it was signed into law in 2003, said its analysis of the financial implications of address mismatches, which are incurred by the combination of fraud losses, costs associated with reviews and other controls during the approval process, shows one-fifth of credit apps have problems.

Under FACTA Sections 114 and 315, financial institutions and creditors are required by law to adopt procedures to reduce the risk of identity theft by examining consumer address changes on both new and existing accounts.

"Roughly 20% of new consumer credit applications feature a different address from the corresponding credit bureau file, so the workload that financial institutions can now expect is not at all trivial," Elliott said. "And if they use conventional methods of third-party name-to-address verification, they could be losing out on millions of dollars of unrealized revenue by rejecting legitimate applications with an unverified address change."

In addition to a potential hit in account approval rates, financial institutions are facing a huge jump in the manual review workload, Elliott said. The study by ID Insight closely examined new account acquisition strategies in California, a state that has enacted legislation similar to Section 315 of the nationwide FACT Act. According to Elliott, the FACTA-like compliance requirements in California result in 11% of all new applications reviewed for address mismatch reasons. This is nearly triple the current national average of approximately 4%.