Add "V" to Your Regulatory Alphabet - Mary Beth Guard

Add "V" to Your Regulatory Alphabet
by Mary Beth Guard
Guru BIOS

The Federal Reserve Board has adopted a new Regulation V to implement certain provisions of a new federal law known as the "FACT Act" or "FACTA". The full name of the law is the Fair and Accurate Credit Transactions Act of 2003. It's an important piece of legislation and you'll be reading a lot about it. Because many of its provisions are dependent upon regulations to effectuate them and the effective dates are staggered out over a period of time, keeping it all straight and knowing what you must, and when, will be a challenge.

A Quick Overview
One of the major goals of the FACT Act is to equip consumers with better tools and greater rights for combating identity theft and dealing with its aftermath, as well as protective measures to prevent victimization. The law formalizes procedures for three types of fraud alerts to be placed in an individual's file with the credit reporting agencies, and gives consumers more effective methods for dealing with incorrect/fraudulent information in credit reports.

Under FACTA, consumers will also have greater control over the type and amount of marketing solicitations they receive. Plus, there are new restrictions on the use and disclosure of sensitive financial information, and new requirements for disposal of consumer information.

Financial institutions will need to observe "red flag guidelines" for spotting possible fraud and identity theft and must take precautions when a consumer report they obtain shows a fraud alert.

Customers must be given notices regarding your reporting of negative information to credit reporting agencies, as well as notices triggered when a customer's credit report results in the customer receiving less favorable pricing.

There will be a "one call" system that will propagate fraud alerts from one credit reporting agency to another, and customers will have rights to obtain free copies of their credit reports under several circumstances.

Account numbers are required to be truncated on printed receipts and social security numbers are to truncated in consumer reports.

The standard for accuracy of information reported to consumer reporting agencies is being altered.

There are new limitations on the use of medical information by creditors.

Actually, it does even more than that, such as requiring the Federal Trade Commission to engage in some proactive consumer education about ID theft remedies, creating a new Financial Literacy and Education Commission.

Accounts are actually fraudulent in nature (such as ones that result from identity theft) cannot be sold or transferred.

What You Need to Know NOW

Different provisions have different effective dates;
Some provisions are dependent upon regulations promulgated by the FTC and/or the bank regulatory agencies in order for them to become effective and in order for affected parties to have an appropriate level of guidance;
Other provisions go into effective without the need for rulemaking action;
Some provisions affect only consumer reporting agencies;
Some provisions affect only furnishers of information to consumer reporting agencies;
Other provisions affect users of consumer reports.

It isn't necessary to digest the entire Act. Since most of the provisions are phased-in over time, concentrate, one at a time, on what is required as the rules are rolled out.

Furnishing Negative Information
The Federal Reserve has issued a final rule, effective July 16, 2004, under Regulation V to implement the provision in Section 217 of the FACT Act relating to the furnishing of negative information. While the rule becomes effective in July, the Section 217 requirement to actually provide the negative information notice does not take effect until December 1, 2004.

Section 217 specifies that if a financial institution:

extends credit regularly and in the ordinary course of business furnishes information to a nationwide consumer reporting agency; and
furnishes negative information to a reporting agency regarding credit extended to a customer, the institution must provide a notice to the customer about furnishing negative information. The notice must be clear and conspicuous.

What Constitutes "Credit"
The term "credit" for purposes of this part of the FACT Act rules is specifically deemed to have the same meaning the term has under Section 702 of the Equal Credit Opportunity Act. "Credit" means "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment or to purchase property or services and defer payment therefor."

What Constitutes "Negative Information"
The term "negative information" means information concerning a customer's delinquencies, late payments, insolvency, or any form of default.

Model Notices
A model notice has been adopted for this purpose. The use of the model form is not required, but can help shield an institution from liability if they do use it. There are actually two different versions of the model notice. If you decide to make alterations to either one, keep in mind that the regulators say your changes may not be so extensive as to affect the substance, clarity, or meaningful sequence of the language in the model notices. In fact, the examples they give of "acceptable changes" are extremely minor. Most financial institutions would be well-advised to just stick to one of the model notices as written.

Model Notice B-1 is designed to be used in the event the institution elects to provide the notice PRIOR to furnishing negative information to the reporting agency. It reads as follows:
We may report information about your account to credit bureaus Late payments, missed payments, or other defaults on your account may be reflected in your credit report.

If you instead will be furnishing notice to the customer after you have furnished negative information to the consumer reporting agency, the appropriate form to use is Model Notice B-2, which reads:

We have told a credit bureau about a late payment, missed payment or other default on your account. This information may be reflected in your credit report.

So, the questions are:

Who is entitled to the notice?
Under what circumstances must the notice be sent?
What is the timing for providing the notice?

Since this requirement comes from the FACT Act, which amends the FCRA, which is a consumer protection law, it is consumer customers that are potential recipients. In other words, the information you are providing must be information about a consumer.

In terms of understanding the circumstances under which the notice must be given, two definitions are crucial: "credit" and "negative information".

The "after the fact" notice is obviously triggered by a customer's late payment, missed payment or other default. It will be given in circumstances where there has actually been a negative experience with the customer's credit.

The notice language in Model Notice B-1, however, is what I would view as being more in the nature of a "warning". It is designed to be sent in advance and it alerts the customer to the fact that late payments, missed payments or other defaults on the customer's account may be reported to the credit bureaus and may be reflected on the customer's credit report.

The law says that the notice must be provided to the customer either prior to, or no later than 30 days after, furnishing the negative information to a nationwide consumer reporting agency. Clearly, Model Notice B-2 will be given within that 30 day window after information is furnished.

The law gives the alternative of providing the notice "prior to" furnishing information to the reporting agency, and it doesn't set any restrictions on how far in advance it may be provided. Not only that, but the dissemination of the notice does not have to be restricted only to those customers on whom you have negative information and about whom you are going to report. That is clear from the fact that the laws says if a financial institution has provided a customer with an advance negative information notice, the institution is not required to furnish negative information about the consumer to a consumer reporting agency.

Two things can be read into this prior notice language. First, if you have a delinquent customer and you furnish this notice to them, it does not make you duty-bound to subsequently follow through and report them to a consumer reporting agency. Second, since you are not required to furnish negative information to a consumer reporting agency about every customer to whom you furnished this "warning" notice, you can give the warning notices in blanket fashion to your consumer borrowers.

In terms of options, that would mean that to the extent the borrowers are also deposit account owners, you could include the prior notice in statement stuffers with periodic accounts, so long as you had a way to identify non-depositor borrowers, so that you could provide the notice to them separately. Another option it to send the notice at the same time you send your privacy notice. In that event, it would hit a broader range of customers than you need to (including those who have not obtained "credit" from you), but there is no regulatory prohibition against this.

If you elect instead to only provide the notice to those customers about whom you are actually furnishing negative information to reporting agencies, you could examine your process and determine when such reporting takes place. If it takes place before, or contemporaneous with, the sending of a delinquency notice or collection notice, you could include the negative information with those notices, as appropriate. The law provides that you may provide the notice about furnishing negative information on or with:

any notice of default;
any billing statement; or
any other materials provided to the customer.

Both approaches have advantages and disadvantages. Giving the warning-type notice places all customers on notice of the potential consequences of missing payments, making late payments, and otherwise getting into default. On the other hand, giving the notice in advance might not be particularly meaningful to the customer. It's just one more piece of paper. Furnishing the notice only to customers who truly are having negative information reported would be a more strategic and targeted approach, but is also fraught with the most potential for compliance flubs, because it's one more ad hoc type notice that someone has to remember to give within a particular timeframe to a subset of customers.

One of the single biggest issues relates to how the requirement is to be applied to consumer customers who obtain credit prior to the December 1, 2004 effective date for Section 217 of FACTA. The regulators did not address that issue in Regulation V because, while they were given authority to draft model notices for Section 217, they were not given other general rulemaking authority in connection with that provision. The safest route is, undoubtedly, to treat those customers as covered and provide either the prior "warning" notice or the after-the-fact notice, just as you would on customers whose credit was obtained on or after December 1, 2004.

Notice May NOT Be Included in TILA Disclosures
One thing the statute prohibits is including the notice in the initial disclosures under the Truth in Lending Act. Whenever and however you do provide the notice, you must do it in a way that is clear and conspicuous, but not, in any event, with the TILA initial disclosures.

Free Copies of Consumer Reports
FACTA amends the Fair Credit Reporting Act to require consumer reporting agencies to provide free copies of consumer reports in several different instances. The Federal Trade Commission has issued a Final Rule to implement this part of FACTA. It becomes effective December 1, 2004. While the burden is on the reporting agencies to furnish the free reports (and not on financial institutions), financial institutions will want to be familiar with the requirements in order to provide helpful information to customers who seek to protect themselves from identity theft by monitoring their credit reports for fraudulent activity, as well as those who have placed fraud alerts in their consumer report files.

A consumer is entitled to obtain a free copy of his or her credit report once every 12 months from each of the nationwide consumer reporting agencies. In addition, consumers who have placed either an initial fraud alert or extended fraud alert in their credit file are entitled to copies as a result of placing those alerts.

In connection with the request for the free annual copy, the FTC's rule contains a standardized form to be used. You may wish to keep a copy available for your customers. A copy of the form appears here. Please note that some parts of the form are designed to be customized to include information relating to each particular consumer reporting agency. In addition, however, the nationwide consumer reporting agencies are required to jointly design, fund, implement, maintain, and operate a centralized source to enable consumers to request the annual file disclosures by either going to a single, dedicated Internet Web site, calling a single, dedicated toll-free telephone number, or mailing directly to a single address.

One of the big concerns is that, if not handled properly, this free credit report process could actually contribute to identity theft, rather than help combat it, by allowing a clever con artist to pose as someone else and obtain their consumer report.

The original version appeared in the Febuary/March 2004 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 8/23/04