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Good news. The federal financial regulatory agencies charged with enforcing the Fair Credit Reporting Act are seeking comments on some new proposed rules designed to add more protections for consumers from identity thieves.  These rules are a very good start, because they force institutions to prevent identity theft from occurring instead of leaving the task of recovering in the hands of the victims, after the theft occurs. One proposed rule requires financial institutions and creditors to develop and implement red flag, or early warning and prevention programs to help identify and detect patterns associated with identity theft. A red flag is defined as “a pattern, practice, or specific activity that indicates the possible risk of identity theft.” In other words, financial institutions will be required to figure out what type of things might occur, are likely to occur, and the level of risk associated with that incident.  The idea is (1) identify the possible existence of identity theft even if there is no actual identity theft occurring, and (2) identify it before it occurs.  It is a forward thinking approach.  Whereas now victims have to struggle to undo the damage caused by a thief, lending institutions will be required to identify activities that pose a ‘possible risk’ of identity theft and have a procedure in place to nip it in the bud before the damage is done. Under the proposed rules, the programs must include policies and procedures designed to: Identify red flags that might help an institution detect a possible risk of identity theft. For example a lending institution would be responsible to develop a plan to respond to a phishing attack where an e-mail is sent out directing the institution’s customers to go to a fraudulent web-site and provide personally identifiable information; Verify the identity of the person opening a new account, or making changes to existing accounts; Detect any red flags that the institution identifies as relevant in connection with the opening of a new account, or activities in existing accounts, such as an address change on a new order of checks; Mitigate the risk of identity theft commensurate with the level of risk associated with the red flag.  That is, if a creditor identifies a potential risk and determines it is a high risk, which poses a grave risk to the consumer or the institution itself, the fix must be appropriate to the level of risk; Requires the board of the institution to approve the program, (e.g., the board of directors will take responsibility for the program); and Requires a member of the board, or high level executive to oversee the program. The proposed rules are a very good start. Whereas victims of identity theft were left on their own to untangle the damage, the FTC and other regulatory agencies are placing some of the burden on the financial institutions.  Good stuff. Comments must be submitted by September 18, 2006.  I expect financial institutions and creditors to object to taking on the responsibility to alleviate identity theft. Until now the burden and expense has been on the victim.  Are you in favor of making institutions, creditors and other users of credit information share some of the responsibility to prevent identity theft? What would you say to the FTC?  Read the proposed rules.

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