FACTA update: new study shows imminent FACTA regulations could have disruptive effects for new credit business.(selected topic)(Fair and Accurate Credit Transaction Act)

While the final compliance dates for Section 15 of the FACTA legislation are looming, a recent data study by identity fraud protection company ID Insight, Inc., reveals that manual review rates and operational costs associated with originating new credit accounts may potentially triple when the FACTA guidelines take effect. What's more, the study also revealed that the new compliance burden could cause the percentage of new account applications declined for non-credit reasons to jump from approximately 4% to 7%. The expense incurred from the additional manual reviews along with lost revenue from the diminished number of approved applicants will undoubtedly affect the bottom lines of the country's banks and creditors.

ID Insight revealed these findings through an in-depth study involving multiple top-10 banks and credit card issuers. New account acquisition strategies in California and Illinois were examined--the two states that have enacted legislation similar to the proposed Section 315 of the nationwide FACT Act. The study results provide a glimpse into how these new legislative requirements will impact banks and other credit issuers when FACTA is implemented, and how compliance can be achieved while minimizing the resulting costs.

Exactly what is the FACT Act? In December 2003, President Bush signed FACTA into law, which will impact all financial institutions and other companies that are regulated by the OCC, FRB, FDIC, OTS, NCUA and the FTC. Referred to as the "Red Flag Guidelines," Section 114 and Section 315 of this legislation contain language that require all financial institutions and creditors by law to adopt procedures to reduce the risk of identity theft.

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The common factor in both Sections 114 and 315 is that address changes on both new and existing accounts must be resolved by financial institutions and creditors. Under the proposed rulemaking released on July 18, 2006, these provisions extend to any "account" defined by "an extension of credit for personal, family, household or business purposes such as a credit card account, margin account or retail sales installment contract."

Final guidelines for FACTA Sections 114 and 315 are expected to be announced yet in 2007, although the final timeline is uncertain at this point. The commentary period on the regulations has now closed and the submitted comments are currently being evaluated by the regulators.

Aimed at deterring identity theft, Section 315 of FACTA will require banks or any business extending credit to form a belief of true identity when observing a discrepancy in the address seen on a new credit account application and the subsequent address reported by the Credit Reporting Agency. This new regulatory language promises to substantially increase the operational burden on creditors when acquiring new customers.