Federal Identity Theft Prevention Requirements

New federal regulations, known as “red flag rules”, require financial institutions and creditors to develop and implement written identity-theft-prevention programs. Because of the definition of “creditor”, many municipalities may be affected by these regulations.

A municipality that provides a service to customers and collects payment later must comply with the red flag rules. The red flag rules are part of the federal Fair and Accurate Credit Transactions (FACT) Act of 2003. Under these regulations, financial institutions and creditors with covered accounts must have identity-theft-prevention programs in place by November 1, 2008 to identify, detect and respond to patterns, practices, or specific activities that could indicate identity theft.

New federal regulations, known as “red flag rules”, require financial institutions and creditors to develop and implement written identity-theft-prevention programs. Because of the definition of “creditor”, many municipalities may be affected by these regulations.

A municipality that provides a service to customers and collects payment later must comply with the red flag rules. The red flag rules are part of the federal Fair and Accurate Credit Transactions (FACT) Act of 2003. Under these regulations, financial institutions and creditors with covered accounts must have identity-theft-prevention programs in place by November 1, 2008 to identify, detect and respond to patterns, practices, or specific activities that could indicate identity theft.

WHO MUST COMPLY WITH THE RED FLAG RULES?

The red flag rules apply to “financial institutions” and “creditors” that have “covered accounts”. To determine whether a municipality must comply with the red flag rules, the key definitions to look to are “creditor” and “covered account”.

The term “creditor” includes municipalities that provide services to customers and, subsequently, bill for those services. Federal statute defines the term “creditor” as “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.” The term “person” means “a natural person, a corporation, government or governmental subdivision or agency, trust, estate, partnership, cooperative, or association.” According to the Federal Trade Commission, “where non-profit and government entities defer payment for goods or services, they...are to be considered creditors.”


A “covered account” is an account used mostly for personal, family or household purposes, and that involves multiple payments or transactions. Covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts and savings accounts. A covered account is also an account for which there is a foreseeable risk of identity theft — for example, small business or sole proprietorship accounts.

WHAT DO THE RULES REQUIRE?

The regulations require a written program that includes reasonable policies and procedures that are designed to detect, prevent and mitigate identity theft in
connection both with existing accounts and with the opening of a new account. The program must identify and detect the relevant warning signs (or “red flags”) of identify theft. The program must include four basic elements;

•    The identification of relevant red flags for covered accounts;
•    The establishment of a process to detect those red flags;
•    Appropriate responses to detected events; and
•    Periodic updates to policies and procedures to reflect changes in risk exposure.

The federal rules include guidelines. The guidelines are intended to assist in the formulation and maintenance of the required identity-theft-prevention program. Each entity that is required to implement a program must consider the guidelines and include those that are appropriate. The guidelines are contained in appendix J to Part 41 of the Code of Federal Regulations.

1. The identification of relevant red flags for covered accounts: The guidelines set forth five categories of red flags. The program should include relevant red flags from the following categories as appropriate:
•    Alerts, notifications, or warnings from a consumer reporting agency;
•    Suspicious documents;
•    Suspicious personally identifying information, such as a suspicious address;
•    Unusual use of— or suspicious activity relating to — a covered account; and
•    Notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts.
A supplement to the guidelines identifies 26 possible red flags. These red flags are not a checklist, but rather, are examples that entities may want to consider as a starting point.

2.    Detecting relevant red flag: Items to consider in detecting red flags include:
•    Obtaining identifying information and verifying the identity of those wanting to open a new account;
•    Authenticating transactions for existing customers to include photo ID plus possible additional verification methods such as biometrics, tokens, security ID cards, fingerprint readers and GPS technology using cell phones. For online transactions these methods plus a user ID and passwords create a two-factor authentication process. The regulations do not specify the use of technology; they only stress the need to be “effective”.

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Identity Theft Prevention Program

Purpose:  To establish an Identity Theft Prevention Program designed to detect, prevent and mitigate identity theft in connection with the opening of a covered account or an existing covered account and to provide for continued administration of the Program in compliance with Part 681 of Title 16 of the Code of Federal Regulations implementing Sections 114 and 315 of the Fair and Accurate Credit Transactions Act (FACTA) of 2003.

Definitions: Identify theft means fraud committed or attempted using the identifying information of another person without authority.

A covered account means:

• 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. Covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts and savings accounts.
• 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.

A red flag means a pattern, practice or specific activity that indicates the possible existence of identity theft.

The Program: ___________________________ (name of utility) establishes an Identity Theft Prevention Program to detect, prevent and mitigate identity theft.

The Program shall include reasonable policies and procedures to:

1. Identify relevant red flags for covered accounts it offers or maintains and incorporate those red flags into the program
2. Detect red flags that have been incorporated into the Program
3. Respond appropriately to any red flags that are detected to prevent and mitigate identity theft
4. Ensure the Program is updated periodically to reflect changes in risks to customers and to the safety and soundness of the creditor from identity theft.

The program shall, as appropriate, incorporate existing policies and procedures that control reasonably foreseeable risks.

Administration of Program:

1. ______________________________ (the utility’s governing body, an appropriate committee of the governing body or a designated employee at the level of senior management) shall be responsible for the development, implementation, oversight and continued administration of the Program.
2. The Program shall train staff, as necessary, to effectively implement the Program
3. The Program shall exercise appropriate and effective oversight of service provider arrangements.

Identification of Relevant Red Flags:

1.) The Program shall include relevant red flags from the following categories as appropriate:

• Alerts, notifications, or other warnings received from consumer reporting agencies or service providers, such as fraud detection services;

• The presentation of suspicious documents;
• The presentation of suspicious personal identifying information;
• The unusual use of, or other suspicious activity related to, a covered account;
• Notice from customers, victims of identity theft, law enforcement authorities, or other persons regarding possible identity theft in connection with covered accounts.

• The types of covered accounts offered or maintained;
• The methods provided to open covered accounts;
• The methods provided to access covered accounts;
• Its previous experience with identity theft.

3.) The Program shall incorporate relevant red flags from sources such as:

• Incidents of identity theft previously experienced;
• Methods of identity theft that reflect changes in risk;
• Applicable supervisory guidance.

Detection of Red Flags

The Program shall address the detection of red flags in connection with the opening of covered accounts and existing covered accounts, such as by:

• Obtaining identifying information about, and verifying the identity of, a person opening a covered account;
• Authenticating customers, monitoring transactions, and verifying the validity of change of address requests in the case of existing covered accounts.

Response

The Program shall provide for appropriate responses to detected red flags to prevent and mitigate identity theft. The response shall be commensurate with the degree of risk posed.

Appropriate responses may include:

• Monitor a covered account for evidence of identity theft;
• Contact the customer;
• Change any passwords, security codes or other security devices that permit access to a covered account;
• Reopen a covered account with a new account number;
• Not open a new covered account;
• Close an existing covered account;
• Notify law enforcement; or
• Determine no response is warranted under the particular circumstances.

Updating the Program

The Program shall be updated periodically to reflect changes in risks to customers or to the safety and soundness of the organization from identity theft based on factors such as:

• The experiences of the organization with identity theft;
• Changes in methods of identity theft;
• Changes in methods to detect, prevent and mitigate identity theft;
• Changes in the types of accounts that the organization offers or maintains;
• Changes in the business arrangements of the organization, including mergers, acquisitions, alliances, joint ventures and service provider arrangements.

Oversight of the Program

1.) Oversight of the Program shall include:

• Assignment of specific responsibility for implementation of the Program;
• Review of reports prepared by staff regarding compliance;
• Approval of material changes to the Program as necessary to address changing risks of identity theft.

2.) Reports shall be prepared as follows:

• Staff responsible for development, implementation and administration of the Program shall report to ____________________________ (the utility’s governing body, an appropriate committee of the governing body or a designated employee at the level of senior management) at least annually on compliance by the organization with the Program.
• The report shall address material matters related to the Program and evaluate issues such as:
  
  1. The effectiveness of the policies and procedures in addressing the risk of identity theft in connection with the opening of covered accounts and with respect to existing covered accounts;
  2. Service provider agreements;
  3. Significant incidents involving identity theft and management’s response;
  4. Recommendations for material changes to the Program.

Oversight of Service Provider Arrangements

The organization (utility) shall take steps to ensure that the activity of a service provider is conducted in accordance with reasonable policies and procedures designed to detect, prevent and mitigate the risk of identity theft whenever the organization engages a service provider to perform an activity in connection with one or more covered accounts.

Duties Regarding Address Discrepancies

The organization (utility) shall develop policies and procedures designed to enable the organization to form a reasonable belief that a credit report relates to the consumer for whom it was requested if the organization receives a notice of address discrepancy from a nationwide consumer reporting agency indicating the address given by the consumer differs from the address contained in the consumer report.

The organization (utility) may reasonably confirm that an address is accurate by any of the following means:

• Verification of the address with the consumer;
• Review of the utility’s records;
• Verification of the address through third-party sources;
• Other reasonable means.

If an accurate address is confirmed, the organization (utility) shall furnish the consumer’s address to the nationwide consumer reporting agency from which it received the notice of address discrepancy if:

• The organization establishes a continuing relationship with the consumer;
• The organization, regularly and in the ordinary course of business, furnishes information to the consumer reporting agency.