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Part IV Department of the Treasury
Page created by Jared Ray
Friday, November 9, 2007 Part IV Department of the Treasury Office of the Comptroller of the Currency 12 CFR Part 41 Federal Reserve System 12 CFR Part 222 Federal Deposit Insurance Corporation 12 CFR Parts 334 and 364 Department of the Treasury Office of Thrift Supervision 12 CFR Part 571 National Credit Union Administration 12 CFR Part 717 Federal Trade Commission 16 CFR Part 681 Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003; Final Rule
63718 Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 41 [Docket ID OCC–2007–0017] RIN 1557–AC87 FEDERAL RESERVE SYSTEM 12 CFR Part 222 [Docket No.
R–1255] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 334 and 364 RIN 3064–AD00 DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 571 [Docket No. OTS–2007–0019] RIN 1550–AC04 NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 717 FEDERAL TRADE COMMISSION 16 CFR Part 681 RIN 3084–AA94 Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003 AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); National Credit Union Administration (NCUA); and Federal Trade Commission (FTC or Commission).
ACTION: Joint final rules and guidelines. SUMMARY: The OCC, Board, FDIC, OTS, NCUA and FTC (the Agencies) are jointly issuing final rules and guidelines implementing section 114 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) and final rules implementing section 315 of the FACT Act. The rules implementing section 114 require each financial institution or creditor to develop and implement a written Identity Theft Prevention Program (Program) to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. In addition, the Agencies are issuing guidelines to assist financial institutions and creditors in the formulation and maintenance of a Program that satisfies the requirements of the rules.
The rules implementing section 114 also require credit and debit card issuers to assess the validity of notifications of changes of address under certain circumstances. Additionally, the Agencies are issuing joint rules under section 315 that provide guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy. DATES: The joint final rules and guidelines are effective January 1, 2008. The mandatory compliance date for this rule is November 1, 2008.
FOR FURTHER INFORMATION CONTACT: OCC: Amy Friend, Assistant Chief Counsel, (202) 874–5200; Deborah Katz, Senior Counsel, or Andra Shuster, Special Counsel, Legislative and Regulatory Activities Division, (202) 874–5090; Paul Utterback, Compliance Specialist, Compliance Department, (202) 874–5461; or Aida Plaza Carter, Director, Bank Information Technology, (202) 874–4740, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. Board: David A. Stein or Ky TranTrong, Counsels, or Amy Burke, Attorney, Division of Consumer and Community Affairs, (202) 452–3667; Kara L.
Handzlik, Attorney, Legal Division, (202) 452–3852; or John Gibbons, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, (202) 452–6409, Board of Governors of the Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.
FDIC: Jeffrey M. Kopchik, Senior Policy Analyst, (202) 898–3872, or David P. Lafleur, Policy Analyst, (202) 898–6569, Division of Supervision and Consumer Protection; Richard M. Schwartz, Counsel, (202) 898–7424, or Richard B. Foley, Counsel, (202) 898– 3784, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. OTS: Ekita Mitchell, Consumer Regulations Analyst, Compliance and Consumer Protection, (202) 906–6451; Kathleen M. McNulty, Technology Program Manager, Information Technology Risk Management, (202) 906–6322; or Richard Bennett, Senior Compliance Counsel, Regulations and Legislation Division, (202) 906–7409, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
NCUA: Regina M. Metz, Staff Attorney, Office of General Counsel, (703) 518–6540, National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314–3428. FTC: Naomi B. Lefkovitz, Attorney, or Pavneet Singh, Attorney, Division of Privacy and Identity Protection, Bureau of Consumer Protection, (202) 326– 2252, Federal Trade Commission, 600 Pennsylvania Avenue, NW., Washington DC 20580.
SUPPLEMENTARY INFORMATION: I. Introduction The President signed the FACT Act into law on December 4, 2003.1 The FACT Act added several new provisions to the Fair Credit Reporting Act of 1970 (FCRA), 15 U.S.C. 1681 et seq. Section 114 of the FACT Act, 15 U.S.C. 1681m(e), amends section 615 of the FCRA, and directs the Agencies to issue joint regulations and guidelines regarding the detection, prevention, and mitigation of identity theft, including special regulations requiring debit and credit card issuers to validate notifications of changes of address under certain circumstances.2 Section 315 of the FACT Act, 15 U.S.C.
1681c(h), adds a new section 605(h)(2) to the FCRA requiring the Agencies to issue joint regulations that provide guidance regarding reasonable policies and procedures that a user of a consumer report should employ when the user receives a notice of address discrepancy.
On July 18, 2006, the Agencies published a joint notice of proposed rulemaking (NPRM) in the Federal Register (71 FR 40786) proposing rules and guidelines to implement section 114 and proposing rules to implement section 315 of the FACT Act. The public comment period closed on September 18, 2006. The Agencies collectively received a total of 129 comments in response to the NPRM, although many commenters sent copies of the same letter to each of the Agencies. The comments included 63 from financial institutions, 12 from financial institution holding companies, 23 from financial institution trade associations, 12 from individuals, nine from other trade associations, five from other business entities, three from consumer 1 Pub.
L. 108–159.
2 Section 111 of the FACT Act defines ‘‘identity theft’’ as ‘‘a fraud committed using the identifying information of another person, subject to such further definition as the [Federal Trade] Commission may prescribe, by regulation.’’ 15 U.S.C. 1681a(q)(3).
Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations 63719 groups,3 one from a member of Congress, and one from the United States Small Business Administration (SBA). II. Section 114 of the FACT Act A. Red Flag Regulations and Guidelines 1. Background Section 114 of the FACT Act requires the Agencies to jointly issue guidelines for financial institutions and creditors regarding identity theft with respect to their account holders and customers.
Section 114 also directs the Agencies to prescribe joint regulations requiring each financial institution and creditor to establish reasonable policies and procedures for implementing the guidelines, to identify possible risks to account holders or customers or to the safety and soundness of the institution or ‘‘customer.’’4 In developing the guidelines, the Agencies must identify patterns, practices, and specific forms of activity that indicate the possible existence of identity theft. The guidelines must be updated as often as necessary, and cannot be inconsistent with the policies and procedures issued under section 326 of the USA PATRIOT Act,5 31 U.S.C.
5318(l), that require verification of the identity of persons opening new accounts. The Agencies also must consider including reasonable guidelines that would apply when a transaction occurs in connection with a consumer’s credit or deposit account that has been inactive for two years. These guidelines would provide that in such circumstances, a financial institution or creditor ‘‘shall follow reasonable policies and procedures’’ for notifying the consumer, ‘‘in a manner reasonably designed to reduce the likelihood of identity theft.’’ 2. Overview of Proposal and Comments Received The Agencies proposed to implement section 114 through regulations requiring each financial institution and creditor to implement a written Program to detect, prevent and mitigate identity theft in connection with the opening of an account or any existing account.
The Agencies also proposed guidelines that identified 31 patterns, practices, and specific forms of activity that indicate a possible risk of identity theft. The proposed regulations required each financial institution and creditor to incorporate into its Program relevant 3 One of these letters represented the comments of five consumer groups.
4 Use of the term ‘‘customer,’’ here, appears to be a drafting error and likely should read ‘‘creditor.’’ 5 Pub. L. 107–56. indicators of a possible risk of identity theft (Red Flags), including indicators from among those listed in the guidelines. To promote flexibility and responsiveness to the changing nature of identity theft, the proposed rules also stated that covered entities would need to include in their Programs relevant Red Flags from applicable supervisory guidance, their own experiences, and methods that the entity had identified that reflect changes in identity theft risks.
The Agencies invited comment on all aspects of the proposed regulations and guidelines implementing section 114, and specifically requested comment on whether the elements described in section 114 had been properly allocated between the proposed regulations and the proposed guidelines.
Consumer groups maintained that the proposed regulations provided too much discretion to financial institutions and creditors to decide which accounts and Red Flags to include in their Programs and how to respond to those Red Flags. These commenters stated that the flexible and risk-based approach taken in the proposed rulemaking would permit ‘‘business as usual.’’ Some small financial institutions also expressed concern about the flexibility afforded by the proposal. These commenters stated that they preferred to have clearer, more structured guidance describing exactly how to develop and implement a Program and what they would need to do to achieve compliance.
Most commenters, however, including many financial institutions and creditors, asserted that the proposal was overly prescriptive, contained requirements beyond those mandated in the FACT Act, would be costly and burdensome to implement, and would complicate the existing efforts of financial institutions and creditors to detect and prevent identity theft. Some industry commenters asserted that the rulemaking was unnecessary because large businesses, such as banks and telecommunications companies, already are motivated to prevent identity theft and other forms of fraud in order to limit their own financial losses.
Financial institution commenters maintained that they are already doing most of what would be required by the proposal as a result of having to comply with the customer identification program (CIP) regulations implementing section 326 of the USA PATRIOT Act 6 and other existing requirements. These 6 See, e.g., 31 CFR 103.121 (applicable to banks, thrifts and credit unions and certain non-federally regulated banks).
commenters suggested that the regulations and guidelines take the form of broad objectives modeled on the objectives set forth in the ‘‘Interagency Guidelines Establishing Information Security Standards’’ (Information Security Standards).7 A few financial institution commenters asserted that the primary cause of identity theft is the lack of care on the part of the consumer. They stated that consumers should be held responsible for protecting their own identifying information. The Agencies have modified the proposed rules and guidelines in light of the comments received. An overview of the final rules, guidelines, and supplement, a discussion of the comments, and the specific manner in which the proposed rules and guidelines have been modified, follows.
3. Overview of final rules and guidelines The Agencies are issuing final rules and guidelines that provide both flexibility and more guidance to financial institutions and creditors. The final rules also require the Program to address accounts where identity theft is most likely to occur. The final rules describe which financial institutions and creditors are required to have a Program, the objectives of the Program, the elements that the Program must contain, and how the Program must be administered.
Under the final rules, only those financial institutions and creditors that offer or maintain ‘‘covered accounts’’ must develop and implement a written Program. A covered account is (1) an account primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, or (2) any other account for which there is a reasonably foreseeable risk to customers or the safety and soundness of the financial institution or creditor from identity theft. Each financial institution and creditor must periodically determine whether it offers or maintains a ‘‘covered account.’’ The final regulations provide that the Program must be designed to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account.
In addition, the Program must be tailored to the entity’s size, complexity and nature of its operations. 7 12 CFR part 30, app. B (national banks); 12 CFR part 208, app. D–2 and part 225, app. F (state member banks and holding companies); 12 CFR part 364, app. B (state non-member banks); 12 CFR part 570, app. B (savings associations); 12 CFR part 748, App. A (credit unions).
63720 Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations The final regulations list the four basic elements that must be included in the Program of a financial institution or creditor. The Program must contain ‘‘reasonable policies and procedures’’ to:
In order to provide financial institutions and creditors with more flexibility in developing a Program, the Agencies have moved certain detail formerly contained in the proposed regulations to the guidelines located in Appendix J. This detailed guidance should assist financial institutions and creditors in the formulation and maintenance of a Program that satisfies the requirements of the regulations to detect, prevent, and mitigate identity theft. Each financial institution or creditor that is required to implement a Program must consider the guidelines and include in its Program those guidelines that are appropriate.
The guidelines provide policies and procedures for use by institutions and creditors, where appropriate, to satisfy the requirements of the final rules, including the four elements listed above. While an institution or creditor may determine that particular guidelines are not appropriate to incorporate into its Program, the Program must nonetheless contain reasonable policies and procedures to meet the specific requirements of the final rules. The illustrative examples of Red Flags formerly in Appendix J are now listed in a supplement to the guidelines.
4. Section-by-Section Analysis 8 Sectionl.90(a) Purpose and Scope Proposed §l.90(a) described the statutory authority for the proposed regulations, namely, section 114 of the FACT Act. It also defined the scope of this section; each of the Agencies proposed tailoring this paragraph to describe those entities to which this section would apply. The Agencies received no comments on this section, and it is adopted as proposed. Sectionl.90(b) Definitions Proposed §l.90(b) contained definitions of various terms that applied to the proposed rules and guidelines. While §l.90(b) of the final rules continues to describe the definitions applicable to the final rules and guidelines, changes have been made to address the comments, as follows.
Sectionl.90(b)(1) Account. The Agencies proposed using the term ‘‘account’’ to describe the relationships covered by section 114 that an account holder or customer may have with a financial institution or creditor.9 The proposed definition of ‘‘account’’ was ‘‘a continuing relationship established to provide a financial product or service that a financial holding company could offer by engaging in an activity that is financial in nature or incidental to such a financial activity under section 4(k) of the Bank Holding Company Act, 12 U.S.C. 1843(k).’’ The definition also gave examples of types of ‘‘accounts.’’ Some commenters stated that the regulations do not need a definition of ‘‘account’’ to give effect to their terms.
Some commenters maintained that a new definition for ‘‘account’’ would be confusing as this term is already defined inconsistently in several regulations and in section 615(e) of the FCRA. These commenters recommended that the 8 The OCC, Board, FDIC, OTS and NCUA are placing the regulations and guidelines implementing section 114 in the part of their regulations that implement the FCRA—12 CFR parts 41, 222, 334, 571, and 717, respectively. In addition, the FDIC cross-references the regulations and guidelines in 12 CFR part 364. For ease of reference, the discussion in this preamble uses the shared numerical suffix of each of these agency’s regulations.
The FTC also is placing the final regulations and guidelines in the part of its regulations implementing the FCRA, specifically 16 CFR part 681. However, the FTC uses different numerical suffixes that equate to the numerical suffixes discussed in the preamble as follows: preamble suffix .82 = FTC suffix .1, preamble suffix .90 = FTC suffix .2, and preamble suffix .91 = FTC suffix .3. In addition, Appendix J referenced in the preamble is the FTC’s Appendix A. 9 The Agencies acknowledged that section 114 does not use the term ‘‘account’’ and, in other contexts, the FCRA defines the term ‘‘account’’ narrowly to describe certain consumer deposit or asset accounts.
See 15 U.S.C. 1681a(r)(4). Agencies use the term ‘‘continuing relationship’’ instead, and define this phrase in a manner consistent with the Agencies’’ privacy rules 10 implementing Title V of the GrammLeach-Bliley Act (GLBA), 15 U.S.C. 6801.11 These commenters urged that the definition of ‘‘account’’ not be expanded to include relationships that are not ‘‘continuing.’’ They stated that it would be very burdensome to gather and maintain information on noncustomers for one-time transactions. Other commenters suggested defining the term ‘‘account’’ in a manner consistent with the CIP rules.
Many commenters stated that defining ‘‘account’’ to cover both consumer and business accounts was too broad, exceeded the scope of the FACT Act, and would make the regulation too burdensome. These commenters recommended limiting the scope of the regulations and guidelines to cover only consumer financial services, specifically accounts established for personal, family and household purposes, because these types of accounts typically are targets of identity theft. They asserted that identity theft has not historically been common in connection with business or commercial accounts. Consumer groups maintained that the proposed definition of ‘‘account’’ was too narrow.
They explained that because the proposed definition was tied to financial products and services that can be offered under the Bank Holding Company Act, it inappropriately excluded certain transactions involving creditors that are not financial institutions that should be covered by the regulations. Some of these commenters recommended that the definition of ‘‘account’’ include any relationship with a financial institution or creditor in which funds could be intercepted or credit could be extended, as well as any other transaction which could obligate an individual or other covered entity, including transactions that do not result in a continuing relationship.
Others suggested that there should be no flexibility to exclude any account that is held by an individual or which generates information about individuals that reflects on their financial or credit reputations. The Agencies have modified the definition of ‘‘account’’ to address these comments. First, the final rules now apply to ‘‘covered accounts,’’ a term that the Agencies have added to the definition section to eliminate 10 See 12 CFR 40 (OCC); 12 CFR 216 (Board); 12 CFR 332 (FDIC); 12 CFR 573 (OTS); 12 CFR 716 (NCUA); and 16 CFR 313 (FTC).
11 Pub. L. 106–102.
Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations 63721 confusion between these rules and other rules that apply to an ‘‘account.’’ The Agencies have retained a definition of ‘‘account’’ simply to clarify and provide context for the definition of ‘‘covered account.’’ Section 114 provides broad discretion to the Agencies to prescribe regulations and guidelines to address identity theft. The terminology in section 114 is not confined to ‘‘consumer’’ accounts. While identity theft primarily has been directed at consumers, the Agencies are aware that small businesses also have been targets of identity theft.
Over time, identity theft could expand to affect other types of accounts. Thus, the definition of ‘‘account’’ in §l.90(b)(1) of the final rules continues to cover any relationship to obtain a product or service that an account holder or customer may have with a financial institution or creditor.12 Through examples, the definition makes clear that the purchase of property or services involving a deferred payment is considered to be an account. Although the definition of ‘‘account’’ includes business accounts, the riskbased nature of the final rules allows each financial institution or creditor flexibility to determine which business accounts will be covered by its Program through a risk evaluation process.
The Agencies also recognize that a person may establish a relationship with a creditor, such as an automobile dealer or a telecommunications provider, primarily to obtain a product or service that is not financial in nature. To make clear that an ‘‘account’’ includes relationships with creditors that are not financial institutions, the definition is no longer tied to the provision of ‘‘financial’’ products and services. Accordingly, the Agencies have deleted the reference to the Bank Holding Company Act.
The definition of ‘‘account’’ still includes the words ‘‘continuing relationship.’’ The Agencies have determined that, at this time, the burden that would be imposed upon financial institutions and creditors by a requirement to detect, prevent and mitigate identity theft in connection with single, non-continuing transactions by non-customers would outweigh the benefits of such a requirement. The Agencies recognize, however, that identity theft may occur at the time of account opening. Therefore, as detailed below, the obligations of the final rule apply not only to existing accounts, where a relationship already has been 12 Accordingly, the definition of ‘‘account’’ still applies to fiduciary, agency, custodial, brokerage and investment advisory activities.
established, but also to account openings, when a relationship has not yet been established.
Sectionl.90(b)(2) Board of Directors. The proposed regulations discussed the role of the board of directors of a financial institution or creditor. For financial institutions and creditors covered by the regulations that do not have boards of directors, the proposed regulations defined ‘‘board of directors’’ to include, in the case of a branch or agency of a foreign bank, the managing official in charge of the branch or agency. For other creditors that do not have boards of directors, the proposed regulations defined ‘‘board of directors’’ as a designated employee.
Consumer groups objected to the proposed definition as it applied to creditors that do not have boards of directors.
These commenters recommended that for these entities, ‘‘board of directors’’ should be defined as a designated employee at the level of senior management. They asserted that otherwise, institutions that do not have a board of directors would be given an unfair advantage for purposes of the substantive provisions of the rules, because they would be permitted to assign any employee to fulfill the role of the ‘‘board of directors.’’ The Agencies agree this important role should be performed by an employee at the level of senior management, rather than any designated employee. Accordingly, the definition of ‘‘board of directors’’ has been revised in § l.90(b)(2) of the final rules so that, in the case of a creditor that does not have a board of directors, the term ‘‘board of directors’’ means ‘‘a designated employee at the level of senior management.’’ Section l.90(b)(3) Covered Account.
As mentioned previously, the Agencies have added a new definition of ‘‘covered account’’ in § l.90(b)(3) to describe the type of ‘‘account’’ covered by the final rules. The proposed rules would have provided a financial institution or creditor with broad flexibility to apply its Program to those accounts that it determined were vulnerable to the risk of identity theft, and did not mandate coverage of any particular type of account. Consumer group commenters urged the Agencies to limit the discretion afforded to financial institutions and creditors by requiring them to cover consumer accounts in their Programs.
While seeking to preserve their discretion, many industry commenters requested that the Agencies limit the final rules to consumer accounts, where identity theft is most likely to occur. The Agencies recognize that consumer accounts are presently the most common target of identity theft and acknowledge that Congress expected the final regulation to address risks of identity theft to consumers.13 For this reason, the final rules require each Program to cover accounts established primarily for personal, family or household purposes, that involve or are designed to permit multiple payments or transactions, i.e., consumer accounts.
As discussed above in connection with the definition of ‘‘account,’’ the final rules also require the Programs of financial institutions and creditors to cover any other type of account that the institution or creditor offers or maintains for which there is a reasonably foreseeable risk from identity theft.
Accordingly, the definition of ‘‘covered account’’ is divided into two parts. The first part refers to ‘‘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.’’ The definition provides examples to illustrate that these types of consumer accounts include, ‘‘a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account, or savings account.’’14 The second part of the definition refers to ‘‘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.’’ This part of the definition reflects the Agencies’ belief that other types of accounts, such as small business accounts or sole proprietorship accounts, may be vulnerable to identity theft, and, therefore, should be considered for coverage by the Program of a financial institution or creditor.
In response to the proposed definition of ‘‘account,’’ a trade association representing credit unions suggested that the term ‘‘customer’’ in the definition be revised to refer to 13 See S. Rep. No. 108–166 at 13 (Oct. 17, 2003) (accompanying S. 1753). 14 These examples reflect the fact that the rules are applicable to a variety of financial institutions and creditors. They are not intended to confer any additional powers on covered entities. Nonetheless, some of the Agencies have chosen to limit the examples in their rule texts to those products covered entities subject to their jurisdiction are legally permitted to offer.
63722 Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations ‘‘member’’ to better reflect the ownership structure of some financial institutions or to ‘‘consumer’’ to include all individuals doing business at all types of financial institutions. The definition of ‘‘account’’ in the final rules no longer makes reference to the term ‘‘customer’’; however, the definition of ‘‘covered account’’ continues to employ this term, to be consistent with section 114 of the FACT Act, which uses the term ‘‘customer.’’ Of course, in the case of credit unions, the final rules and guidelines will apply to the accounts of members that are maintained primarily for personal, family, or household purposes, and those that are otherwise subject to a reasonably foreseeable risk of identity theft.
Sections l.90(b)(4) and (b)(5) Credit and Creditor. The proposed rules defined these terms by cross-reference to the relevant sections of the FCRA. There were no comments on the definition of ‘‘credit’’ and § l.90(b)(4) of the final rules adopts the definition as proposed. Some commenters asked the Agencies to clarify that the term ‘‘creditor’’ does not cover third-party debt collectors who regularly arrange for the extension, renewal, or continuation of credit. Section 114 applies to financial institutions and creditors. Under the FCRA, the term ‘‘creditor’’ has the same meaning as in section 702 of the Equal Credit Opportunity Act (ECOA), 15 U.S.C.
1691a.15 ECOA defines ‘‘creditor’’ to include a person who arranges for the extension, renewal, or continuation of credit, which in some cases could include third-party debt collectors. 15 U.S.C. 1691a(e). Therefore, the Agencies are not excluding third-party debt collectors from the scope of the final rules, and § l.90(b)(5) of the final rules adopts the definition of ‘‘creditor’’ as proposed. Section l.90(b)(6) Customer. Section 114 of the FACT Act refers to ‘‘account holders’’ and ‘‘customers’’ of financial institutions and creditors without defining either of these terms. For ease of reference, the Agencies proposed to use the term ‘‘customer’’ to encompass both ‘‘customers’’ and ‘‘account holders ‘ ‘ Customer’’ was defined as a person that has an account with a financial institution or creditor.
The proposed definition of ‘‘customer’’ applied to any ‘‘person,’’ defined by the FCRA as any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity.16 The proposal explained 15 See 15 U.S.C. 1681a(r)(5). 16 See 15 U.S.C. 1681a(b). that the Agencies chose this broad definition because, in addition to individuals, various types of entities (e.g., small businesses) can be victims of identity theft. Under the proposed definition, however, a financial institution or creditor would have had the discretion to determine which type of customer accounts would be covered under its Program, since the proposed regulations were risk-based.17 As noted above, most industry commenters maintained that including all persons, not just consumers, within the definition of ‘‘customer’’ would impose a substantial financial burden on financial institutions and creditors, and make compliance with the regulations more burdensome.
These commenters stated that business identity theft is rare, and maintained that financial institutions and creditors should be allowed to direct their fraud prevention resources to the areas of highest risk. They also noted that businesses are more sophisticated than consumers, and are in a better position to protect themselves against fraud than consumers, both in terms of prevention and in enforcing their legal rights. Some financial institution commenters were concerned that the broad definition of ‘‘customer’’ would create opportunities for commercial customers to shift responsibility from themselves to the financial institution for not discovering Red Flags and alerting business customers about embezzlement or other fraudulent transactions by the commercial customer’s own employees.
These commenters suggested narrowing the definition to cover natural persons and to exclude business customers. Some of these commenters suggested that the definition of ‘‘customer’’ should be consistent with the definition of this term in the Information Security Standards and the Agencies’ privacy rules.
Consumer groups commented that the proposed definition of ‘‘customer’’ was too narrow. They recommended that the definition be amended, so that the regulations would not only protect persons who are already customers of a financial institution or creditor, but also persons whose identities are used by an imposter to open an account. Section l.90(b)(6) of the final rule defines ‘‘customer’’ to mean a person that has a ‘‘covered account’’ with a financial institution or creditor. Under the definition of ‘‘covered account,’’ an 17 Proposed § l.90(d)(1) required this determination to be substantiated by a risk evaluation that takes into consideration which customer accounts of the financial institution or creditor are subject to a risk of identity theft.
individual who has a consumer account will always be a ‘‘customer.’’ A ‘‘customer’’ may also be a person that has another type of account for which a financial institution or creditor determines there is a reasonably foreseeable risk to its customers or to its own safety and soundness from identity theft.
The Agencies note that the Information Security Standards and the privacy rules implemented various sections of Title V of the GLBA, 15 U.S.C. 6801, which specifically apply only to customers who are consumers. By contrast, section 114 does not define the term ‘‘customer.’’ Because the Agencies continue to believe that a business customer can be a target of identity theft, the final rules contain a risk-based process designed to ensure that these types of customers will be covered by the Program of a financial institution or creditor, when the risk of identity theft is reasonably foreseeable.
The definition of ‘‘customer’’ in the final rules continues to cover only customers that already have accounts. The Agencies note, however, that the substantive provisions of the final rules, described later, require the Program of a financial institution or creditor to detect, prevent, and mitigate identity theft in connection with the opening of a covered account as well as any existing covered account. The final rules address persons whose identities are used by an imposter to open an account in these substantive provisions, rather than through the definition of ‘‘customer.’’ Section l.90(b)(7) Financial Institution.
The Agencies received no comments on the proposed definition of ‘‘financial institution.’’ It is adopted in § l.90(b)(7), as proposed, with a crossreference to the relevant definition in the FCRA.
Section l.90(b)(8) Identity Theft. The proposal defined ‘‘identity theft’’ by cross-referencing the FTC’s rule that defines ‘‘identity theft’’ for purposes of the FCRA.18 Most industry commenters objected to the breadth of the proposed definition of ‘‘identity theft.’’ They recommended that the definition include only actual fraud committed using identifying information of a consumer, and exclude attempted fraud, identity theft committed against businesses, and any identity fraud involving the creation of a fictitious identity using fictitious data combined with real information from 18 69 FR 63922 (Nov.
3, 2004) (codified at 16 CFR 603.2(a)). Section 111 of the FACT Act added several new definitions to the FCRA, including ‘‘identity theft,’’ and authorized the FTC to further define this term. See 15 U.S.C. 1681a.
Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations 63723 multiple individuals. By contrast, consumer groups supported a broad interpretation of ‘‘identity theft,’’ including the incorporation of ‘‘attempted fraud’’ in the definition. Section l.90(b)(8) of the final rules adopts the definition of ‘‘identity theft’’ as proposed. The Agencies believe that it is important to ensure that all provisions of the FACT Act that address identity theft are interpreted in a consistent manner. Therefore, the final rule continues to define identity theft with reference to the FTC’s regulation, which as currently drafted provides that the term ‘‘identity theft’’ means ‘‘a fraud committed or attempted using the identifying information of another person without authority.’’ 19 The FTC defines the term ‘‘identifying information’’ to mean ‘‘any name or number that may be used, alone or in conjunction with any other information, to identify a specific person, including any— (1) Name, social security number, date of birth, official State or government issued driver’s license or identification number, alien registration number, government passport number, employer or taxpayer identification number; (2) Unique biometric data, such as fingerprint, voice print, retina or iris image, or other unique physical representation; (3) Unique electronic identification number, address, or routing code; or (4) Telecommunication identifying information or access device (as defined in 18 U.S.C.
1029(e)).
Thus, under the FTC’s regulation, the creation of a fictitious identity using any single piece of information belonging to a real person falls within the definition of ‘‘identity theft’’ because such a fraud involves ‘‘using the identifying information of another person without authority.’’ 20 Section l.90(b)(9) Red Flag. The proposed regulations defined ‘‘Red Flag’’ as a pattern, practice, or specific activity that indicates the possible risk of identity theft. The preamble to the proposed rules explained that indicators of a ‘‘possible risk’’ of identity theft would include precursors to identity theft such as phishing,21 and security breaches involving the theft of personal information, which often are a means to acquire the information of another person for use in committing identity theft.
The preamble explained that the Agencies included such precursors to 19 See 16 CFR 603.2(a).
20 See 16 CFR 603.2(b). 21 Electronic messages to customers of financial institutions and creditors directing them to provide personal information in response to a fraudulent e-mail. identity theft as ‘‘Red Flags’’ to better position financial institutions and creditors to stop identity theft at its inception. Most industry commenters objected to the broad scope of the definition of ‘‘Red Flag,’’ particularly the phrase ‘‘possible risk of identity theft.’’ These commenters believed that this definition would require financial institutions and creditors to identify all risks and develop procedures to prevent or mitigate them, without regard to the significance of the risk.
They asserted that the statute does not support the use of ‘‘possible risk’’ and suggested defining a ‘‘Red Flag’’ as an indicator of significant, substantial, or the probable risk of identity theft. These commenters stated that this would allow a financial institution or creditor to focus compliance in areas where it is most needed.
Most industry commenters also stated that the inclusion of precursors to identity theft in the definition of ‘‘Red Flag’’ would make the regulations even broader and more burdensome. They stated that financial institutions and creditors do not have the ability to detect and respond to precursors, such as phishing, in the same manner as other Red Flags that are more indicative of actual ongoing identity theft. By contrast, consumer groups supported the inclusion of the phrase ‘‘possible risk of identity theft’’ and the reference to precursors in the proposed definition of ‘‘Red Flag.’’ These commenters stated that placing emphasis on detecting precursors to identity theft, instead of waiting for proven cases, is the right approach.
The Agencies have concluded that the phrase ‘‘possible risk’’ in the proposed definition of ‘‘Red Flag’’ is confusing and could unduly burden entities with limited resources. Therefore, the final rules define ‘‘Red Flag’’ in § l.90(b)(9) using language derived directly from section 114, namely, ‘‘a pattern, practice, or specific activity that indicates the possible existence of identity theft.’’ 22 The Agencies continue to believe, however, that financial institutions and creditors should consider precursors to identity theft in order to stop identity theft before it occurs. Therefore, as described below, the Agencies have chosen to address precursors directly, through a substantive provision in section IV of the guidelines titled ‘‘Prevention and Mitigation,’’ rather than through the definition of ‘‘Red Flag.’’ This provision states that a financial institution or creditor should 22 15 U.S.C.
1681m(c)(2)(A). consider aggravating factors that may heighten the risk of identity theft in determining an appropriate response to the Red Flags it detects.
Section l.90(b)(10) Service Provider. The proposed regulations defined ‘‘service provider’’ as a person that provides a service directly to the financial institution or creditor. This definition was based upon the definition of ‘‘service provider’’ in the Information Security Standards.23 One commenter agreed with this definition. However, two other commenters stated that the definition was too broad. They suggested narrowing the definition of ‘‘service provider’’ to persons or entities that have access to customer information. Section l.90(b)(10) of the final rules adopts the definition as proposed.
The Agencies have concluded that defining ‘‘service provider’’ to include only persons that have access to customer information would inappropriately narrow the coverage of the final rules. The Agencies have interpreted section 114 broadly to require each financial institution and creditor to detect, prevent, and mitigate identity theft not only in connection with any existing covered account, but also in connection with the opening of an account. A financial institution or creditor is ultimately responsible for complying with the final rules and guidelines even if it outsources an activity to a thirdparty service provider.
Thus, a financial institution or creditor that uses a service provider to open accounts will need to provide for the detection, prevention, and mitigation of identity theft in connection with this activity, even when the service provider has access to the information of a person who is not yet, and may not become, a ‘‘customer.’’ Section l.90(c) Periodic Identification of Covered Accounts To simplify compliance with the final rules, the Agencies added a new provision in § l.90(c) that requires each financial institution and creditor to periodically determine whether it offers or maintains any covered accounts.
As a part of this determination, a financial institution or creditor must conduct a risk assessment to determine whether it 23 The Information Security Standards define ‘‘service provider’’ to mean any person or entity that maintains, processes, or otherwise is permitted access to customer information or consumer information through the provision of services directly to the financial institution. 12 CFR part 30, app. B (national banks); 12 CFR part 208, app. D– 2 and part 225, app. F (state member banks and holding companies); 12 CFR part 364, app. B (state non-member banks); 12 CFR part 570, app.
B (savings associations); 12 CFR part 748, App. A (credit unions).
63724 Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 / Rules and Regulations offers or maintains covered accounts described in § l.90(b)(3)(ii) (accounts other than consumer accounts), taking into consideration:
Its previous experiences with identity theft. Thus, a financial institution or creditor should consider whether, for example, a reasonably foreseeable risk of identity theft may exist in connection with business accounts it offers or maintains that may be opened or accessed remotely, through methods that do not require face-to-face contact, such as through the internet or telephone. In addition, those institutions and creditors that offer or maintain business accounts that have been the target of identity theft should factor those experiences with identity theft into their determination. This provision is modeled on various process-oriented and risk-based regulations issued by the Agencies, such as the Information Security Standards. Compliance with this type of regulation is based upon a regulated entity’s own preliminary risk assessment. The risk assessment required here directs a financial institution or creditor to determine, as a threshold matter, whether it will need to have a Program.24 If a financial institution or creditor determines that it does need a Program, then this risk assessment will enable the financial institution or creditor to identify those accounts the Program must address. This provision also requires a financial institution or creditor that initially determines that it does not need to have a Program to reassess periodically whether it must develop and implement a Program in light of changes in the accounts that it offers or maintains and the various other factors set forth in the provision. Section l.90(d)(1) Identity Theft Prevention Program Requirement Proposed § l.90(c) described the primary objectives of a Program. It stated that each financial institution or creditor must implement a written Program that includes reasonable policies and procedures to address the risk of identity theft to its customers and to the safety and soundness of the financial institution or creditor, in the manner described in proposed 24 The Agencies anticipate that some financial institutions and creditors, such as various creditors regualted by the FTC that solely engage in businessto-business transactions, will be able to determine that they do not need to develop and implement a Program.
l.90(d), which described the development and implementation of a Program. It also stated that the Program must address financial, operational, compliance, reputation, and litigation risks and be appropriate to the size and complexity of the financial institution or creditor and the nature and scope of its activities. Some commenters believed that the proposed regulations exceeded the scope of section 114 by covering deposit accounts and by requiring a response to the risk of identity theft, not just the identification of the risk of identity theft. One commenter expressed concern about the application of the Program to existing accounts.
The SBA commented that requiring all small businesses covered by the regulations to create a written Program would be overly burdensome. Several financial institution commenters objected to what they perceived as a proposed requirement that financial institutions and creditors have a written Program solely to address identity theft. They recommended that the final regulations allow a covered entity to simply maintain or expand its existing fraud prevention and information security programs as long as they included the detection, prevention, and mitigation of identity theft. Some of these commenters stated that requiring a written program would merely focus examiner attention on documentation and cause financial institutions to produce needless paperwork.
While commenters generally agreed that the Program should be appropriate to the size and complexity of the financial institution or creditor, and the nature and scope of its activities, many industry commenters objected to the prescriptive nature of this section. They urged the Agencies to provide greater flexibility to financial institutions and creditors by allowing them to implement their own procedures as opposed to those provided in the proposed regulations. Several other commenters suggested permitting financial institutions and creditors to take into account the cost and effectiveness of policies and procedures and the institution’s history of fraud when designing its Program.
Several financial institution commenters maintained that the Program required by the proposed rules was not sufficiently flexible. They maintained that a true risk-based approach would permit institutions to prioritize the importance of various controls, address the most important risks first, and accept the good faith judgments of institutions in differentiating among their options for conducting safe, sound, and compliant operations. Some of these commenters urged the Agencies to revise the final rules and guidelines and adopt an approach similar to the Information Security Standards which they characterized as providing institutions with an outline of issues to consider without requiring specific approaches.
Although a few commenters believed that the proposed requirement to update the Program was burdensome and should be eliminated, most commenters agreed that the Program should be designed to address changing risks over time. A number of these commenters, however, objected to the requirement that the Program must be designed to address changing identity theft risks ‘‘as they arise,’’ as too burdensome a standard. Instead, they recommended that the final regulations require a financial institution or creditor to reassess periodically whether to adjust the types of accounts covered or Red Flags to be detected based upon any changes in the types and methods of identity theft that an institution or creditor has experienced.
Section l.90(d) of the final rules requires each financial institution or creditor that offers or maintains one or more covered accounts to develop and implement a written Program that is designed to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account. To signal that the final rules are flexible, and allow smaller financial institutions and creditors to tailor their Programs to their operations, the final rules state that the Program must be appropriate to the size and complexity of the financial institution or creditor and the nature and scope of its activities.
The guidelines are appended to the final rules to assist financial institutions and creditors in the formulation and maintenance of a Program that satisfies the requirements of the regulation. Section I of the guidelines, titled ‘‘The Program,’’ makes clear that a covered entity may incorporate into its Program, as appropriate, its existing processes that control reasonably foreseeable risks to customers or to the safety and soundness of the financial institution or creditor from identity theft, such as those already developed in connection with the entity’s fraud prevention program. This will avoid duplication and allow covered entities to benefit from existing policies and procedures.
The Agencies do not agree with those commenters who asserted that the scope of the proposed regulations (and hence the final rules that adopt the identical approach with respect to these issues)