Term Paper on "Banking Law FACTA"

Term Paper 10 pages (3340 words) Sources: 3

[EXCERPT] . . . .

Banking Law - Fair and Accurate Credit Transactions Act (FACTA)

Memorandum of Law

Bank's Responsibilities under the Fair and Accurate Credit Transactions Act (FACTA)

The purpose of this memorandum is to provide the bank's chief compliance officer with the background and an overview of the FACTA and its implications for the bank for compliance purposes. The Federal Deposit Insurance Corporation (FDIC) and other federal financial institution regulatory agencies and the Federal Trade Commission (FTC) have jointed published rules related to compliance with the Fair and Accurate Credit Transactions Act (FACTA). This memorandum of law provides a definition of what FACTA (hereinafter alternatively "the Act" or "FACTA") is and to whom the law applies and describes what commercial banks must do to comply with FACTA and any regulations promulgated thereunder. To this end, a description of the general provisions of the Act is followed by a discussion of FACTA as it applies to banks in general and to state-chartered banks doing business in Tennessee in particular. A summary of the research related to FACTA and salient conclusions follow.

General Provisions of the Fair and Accurate Credit Transactions Act.

In response to the growing threat of identity theft, the federal government has made sweeping changes and additions to the Fair Credit Reporting Act (FCRA). Signed into law Dececember 14, 2003, the new Fair and Accurate Credit Transactions Act of 2003 (FACTA) has added provisions to enhance the accuracy of credit reports, gives consumers more access to their credit information, and puts systems in place that will combat identity theft; however, FACTA does not replace the FRCA but supplements its provisions (Royal, 2004). For the purposes of compliance with the FACTA, "identity theft report" has been defined by the FTC to include any report a consumer filed with federal, state, or local law enforcement, including the U.S. Postal Service and the FTC if filing a false report subjects them to criminal penalties; however, institutions may request additional information to verify the validity of the claim (Feddis, 2005). In sum, beginning December 1, 2004, American consumers are able to request one free credit report per year, an initiative intended to allow consumers to maintain oversight of their credit rating without having to pay a fee to a consumer reporting agency (Royal, 2004). As a result of the Act, consumers will also be able to place fraud alerts on their credit files if they believe they have been the victims of identity theft. Once the alert is there, creditors will not be permitted to open new accounts in a consumer's name without first contacting the consumer (Royal, 2004). Prior to the passage of the FACTA, American consumers were forced to contact the three major credit bureaus (i.e., Equifax, Experian, and TransUnion) to alert them that incidents of fraud may have taken place; while these administrative processes were taking their course, an identity thief have additional opportunities to obtain even more credit in the consumer's name. In this regard, Sovern (2004) reports that, "Consumers complain that even after they place fraud alerts in their credit files, identity thieves are still able to borrow in their names. Identity thieves have obtained loans despite applications containing obvious errors. Victims report that consumer reporting agencies -- known colloquially as credit bureaus -- have automated telephone answering systems that make it impossible for victims to reach a human being for aid" (p. 233). The FACTA also contains provisions that allow consumers that become active duty military to place a special notice on their credit file to prevent becoming victims of fraud while they are assigned abroad (Royal, 2004).

According to a recent Interagency Advance Notice of Proposed Rulemaking: Procedures to Enhance the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies" (2006), Section 312 of the amended the FCRA to enhance the ability of consumers to combat identity theft, increase the accuracy of consumer reports, restrict the use of medical information in credit eligibility determinations, and allow consumers to exercise greater control regarding the type and amount of solicitations they receive. Section 312 of the FACT Act amends section 623 of the FCRA and generally requires the Agencies to issue guidelines for use by furnishers regarding the accuracy and integrity of the information that they furnish to consumer reporting agencies and prescribe regulations requiring furnishers to establish reasonable policies and procedures for implementing the guidelines. Section 312 also requires the Agencies to issue regulations identifying the circumstances under which a furnisher must reinvestigate disputes about the accuracy of information contained in consumer reports based on a direct request from a consumer (Interagency advance notice, 2006).

The Act established uniform national standards in key areas of regulation concerning consumer report information. For example, Section 217 of the Act requires that if any financial institution (1) extends credit and regularly and in the ordinary course of business furnishes information to a nationwide consumer reporting agency, and (2) furnishes negative information to such an agency regarding credit extended to a customer, the institution must provide a clear and conspicuous notice about furnishing negative information, in writing, to the customer. Section 217 defines the term "negative information" to mean information concerning a customer's delinquencies, late payments, insolvency, or any form of default.

The term "credit" is defined under the FACT Act to have the same meaning as in section 702 of the Equal Credit Opportunity Act, which defines "credit" to mean "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." 15 U.S.C. 1691a. The provisions in Section 217 became effective December 1, 2004 (69 FR 6526, February 11, 2004) (DeLargy, 2004). Section 217 specifies that an institution must provide the required notice to the customer prior to, or no later than 30 days after, furnishing the negative information to a nationwide consumer reporting agency. After providing the notice, the institution may submit additional negative information to a nationwide consumer reporting agency with respect to the same transaction, extension of credit, account, or customer without providing additional notice to the customer. If a financial institution has provided a customer with a notice prior to the furnishing of negative information, the institution is not required to furnish negative information about the customer to a nationwide consumer reporting agency. A financial institution generally 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, so long as the notice is clear and conspicuous. Section 217 specifically provides, however, that the notice may not be included in the initial disclosures provided under section 127(a) of the Truth in Lending Act (15 U.S.C. 1637(a)) (DeLargy, 2004). A complete copy of the Act is available for your review at http://www.federalreserve.gov/boarddocs/caletters/2004/0412/CA04-12Attach3.pdf

While the foregoing provisions of the Act are straightforward enough for compliance purposes, the legal waters become somewhat muddier thereafter. According to Feddis (2005), "Consumer creditors around the country have been looking over and working with the act since its passage late last year. Passed with some urgency, with the January 2004 sunset of certain federal preemption provisions looming, there was little time for refinement, let alone consistency. The result makes compliance with the statute a challenge" (p. 57). Compliance with the Act has been further exacerbated by the convoluted rulemaking procedures used. According to Feddis, the majority of the statutes with which banks are familiar, a single regulator, usually the Federal Reserve Board, implements a single regulation covering the entire statute; however, the FACTA involves numerous agencies which must promulgate regulations but only concerning specific provisions of the Act. This author reports that, "In some instances, the regulations are promulgated by a single agency for all institutions; at other times, various agencies promulgate regulations either "jointly," "in consultation with," or "in coordination with'" (Feddis, 2005, p. 57). Not surprisingly, these terms have introduced some problems in interpolation in real-world applications and the resulting delays have caused the banking industry to speculate about how and when to comply with some of the provisions of the Act (Feddis, 2005).

Specific Provisions of the Act as they Apply to the Bank.

To help clarify the primary responsibilities of the bank pursuant to the Act, Table 1 below provides an overview of some of the salient issues and responsibilities that affect state-chartered banks across the country today by virtue of the Act.

Table 1.

Overview of Salient FACTA Issues and Responsibilities Affecting State-Chartered Banks.

Issue

Discussion/Implications

Effective dates

Certain provisions which are not subject to specific rulemaking, went into effect before or on December 1, 2004, including the provisions related to:

Credit score disclosures

Fraud and "active duty" alerts

Blocking reporting of information claimed to be the result of identity theft

Prevention of re-reporting information that a consumer reporting agency has, found to be inaccurate, incomplete, or unverifiable

Consumer notification of reports of negative information

Other provisions subject to specific rulemaking, however, will not… READ MORE

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