Federal Register, Volume 72 Issue 217 (Friday, November 9, 2007)

[Federal Register Volume 72, Number 217 (Friday, November 9, 2007)]
[Rules and Regulations]
[Pages 63718-63775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-5453]

[[Page 63717]]

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Part IV

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Part 41

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Federal Reserve System

12 CFR Part 222

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Federal Deposit Insurance Corporation

12 CFR Parts 334 and 364

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Department of the Treasury

Office of Thrift Supervision

12 CFR Part 571

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National Credit Union Administration

12 CFR Part 717

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Federal Trade Commission

16 CFR Part 681

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Identity Theft Red Flags and Address Discrepancies Under the Fair and
Accurate Credit Transactions Act of 2003; Final Rule

Federal Register / Vol. 72, No. 217 / Friday, November 9, 2007 /
Rules and Regulations

[[Page 63718]]

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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.

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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 Tran-Trong, 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.
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\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).
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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

[[Page 63719]]

groups,\3\ one from a member of Congress, and one from the United
States Small Business Administration (SBA).
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\3\ One of these letters represented the comments of five
consumer groups.
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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\
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\4\ Use of the term ``customer,'' here, appears to be a drafting
error and likely should read ``creditor.''
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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.''
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\5\ Pub. L. 107-56.
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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
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 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.
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\6\ See, e.g., 31 CFR 103.121 (applicable to banks, thrifts and
credit unions and certain non-federally regulated banks).
\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).
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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.

[[Page 63720]]

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:
Identify relevant Red Flags for covered accounts and
incorporate those Red Flags into the Program;
Detect Red Flags that have been incorporated into the
Program;
Respond appropriately to any Red Flags that are detected
to prevent and mitigate identity theft; and
Ensure the Program is updated periodically, to reflect
changes in risks to customers or to the safety and soundness of the
financial institution or creditor from identity theft.
The regulations also enumerate certain steps that financial
institutions and creditors must take to administer the Program. These
steps include obtaining approval of the initial written Program by the
board of directors or a committee of the board, ensuring oversight of
the development, implementation and administration of the Program,
training staff, and overseeing service provider arrangements.
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\
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\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.
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Section --.90(a) Purpose and Scope

Proposed Sec. --.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.

Section --.90(b) Definitions

Proposed Sec. --.90(b) contained definitions of various terms that
applied to the proposed rules and guidelines. While Sec. --.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.
Section --.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.''
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\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).
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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 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 Gramm-Leach-
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 non-customers for one-time
transactions. Other commenters suggested defining the term ``account''
in a manner consistent with the CIP rules.
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\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.
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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

[[Page 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 Sec. --.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.
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\12\ Accordingly, the definition of ``account'' still applies to
fiduciary, agency, custodial, brokerage and investment advisory
activities.
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Although the definition of ``account'' includes business accounts,
the risk-based 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 established, but also to account openings, when a
relationship has not yet been established.
Section --.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 Sec. --.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 --.90(b)(3) Covered Account. As mentioned previously, the
Agencies have added a new definition of ``covered account'' in Sec.
--.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.
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\13\ See S. Rep. No. 108-166 at 13 (Oct. 17, 2003) (accompanying
S. 1753).
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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\
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\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.
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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

[[Page 63722]]

``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 --.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
Sec. --.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 Sec. --.90(b)(5) of the final
rules adopts the definition of ``creditor'' as proposed.
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\15\ See 15 U.S.C. 1681a(r)(5).
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Section --.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 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\
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\16\ See 15 U.S.C. 1681a(b).
\17\ Proposed Sec. --.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.
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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 --.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 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 --.90(b)(7) Financial Institution. The Agencies received no
comments on the proposed definition of ``financial institution.'' It is
adopted in Sec. --.90(b)(7), as proposed, with a cross-reference to
the relevant definition in the FCRA.
Section --.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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 63723]]

multiple individuals. By contrast, consumer groups supported a broad
interpretation of ``identity theft,'' including the incorporation of
``attempted fraud'' in the definition.
Section --.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--
---------------------------------------------------------------------------

\19\ See 16 CFR 603.2(a).
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

\20\ See 16 CFR 603.2(b).
---------------------------------------------------------------------------

Section --.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 identity theft
as ``Red Flags'' to better position financial institutions and
creditors to stop identity theft at its inception.
---------------------------------------------------------------------------

\21\ Electronic messages to customers of financial institutions
and creditors directing them to provide personal information in
response to a fraudulent e-mail.
---------------------------------------------------------------------------

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 Sec. --.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\
---------------------------------------------------------------------------

\22\ 15 U.S.C. 1681m(c)(2)(A).
---------------------------------------------------------------------------

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 consider aggravating factors that may
heighten the risk of identity theft in determining an appropriate
response to the Red Flags it detects.
Section --.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\
---------------------------------------------------------------------------

\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).
---------------------------------------------------------------------------

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 --.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 third-party 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 --.90(c) Periodic Identification of Covered Accounts

To simplify compliance with the final rules, the Agencies added a
new provision in Sec. --.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

[[Page 63724]]

offers or maintains covered accounts described in Sec. --.90(b)(3)(ii)
(accounts other than consumer accounts), taking into consideration:
The methods it provides to open its accounts;
The methods it provides to access its accounts; and
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.
---------------------------------------------------------------------------

\24\ The Agencies anticipate that some financial institutions
and creditors, such as various creditors regualted by the FTC that
solely engage in business-to-business transactions, will be able to
determine that they do not need to develop and implement a Program.
---------------------------------------------------------------------------

Section --.90(d)(1) Identity Theft Prevention Program Requirement

Proposed Sec. --.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 Sec. --.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 --.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)

[[Page 63725]]

exceed the Agencies'' statutory mandate. First, section 114 clearly
permits the Agencies to issue regulations and guidelines that address
more than the mere identification of the risk of identity theft.
Section 114 contains a broad mandate directing the Agencies to issue
guidelines ``regarding identity theft'' and to prescribe regulations
requiring covered entities to establish reasonable policies and
procedures for implementing the guidelines. Second, two provisions in
section 114 indicate that Congress expected the Agencies to issue final
regulations and guidelines requiring financial institutions and
creditors to detect, prevent, and mitigate identity theft.
The first relevant provision is codified in section 615(e)(1)(C) of
the FCRA, where Congress addressed a particular scenario involving card
issuers. In that provision, Congress directed the Agencies to prescribe
regulations requiring a card issuer to take specific steps to assess
the validity of a change of address request when it receives such a
request and, within a short period of time, also receives a request for
an additional or replacement card. The regulations must prohibit a card
issuer from issuing an additional or replacement card under such
circumstances, unless it notifies the cardholder or ``uses other means
of assessing the validity of the change of address in accordance with
reasonable policies and procedures established by the card issuer in
accordance with the regulations prescribed [by the Agencies] * * *.''
This provision makes clear that Congress contemplated that the
Agencies' regulations would require a financial institution or creditor
to have policies and procedures not only to identify Red Flags, but
also, to prevent and mitigate identity theft.
The second relevant provision is codified in section 615(e)(2)(B)
of the FCRA, and directs the Agencies to consider addressing in the
identity theft guidelines transactions that occur with respect to
credit or deposit accounts that have been inactive for more than two
years. The Agencies must consider whether a creditor or financial
institution detecting such activity should ``follow reasonable policies
that provide for notice to be given to the consumer in a manner
reasonably designed to reduce the likelihood of identity theft with
respect to such account.'' This provision signals that the Agencies are
authorized to prescribe regulations and guidelines that comprehensively
address identity theft--in a manner that goes beyond the mere
identification of possible risks.
The Agencies' interpretation of section 114 is also supported by
the legislative history that indicates Congress expected the Agencies
to issue regulations and guidelines for the purposes of ``identifying
and preventing identity theft.'' \25\
---------------------------------------------------------------------------

\25\ See S. Rep. No. 108-166 at 13 (Oct. 17, 2003) (accompanying
S. 1753).
---------------------------------------------------------------------------

Finally, the Agencies' interpretation of section 114 is broad,
based on a public policy perspective that regulations and guidelines
addressing the identification of the risk of identity theft, without
addressing the prevention and mitigation of identity theft, would not
be particularly meaningful or effective.
The Agencies also have concluded that the scope of section 114 does
not only apply to credit transactions, but also applies, for example,
to deposit accounts. Section 114 refers to the risk of identity theft,
generally, and not strictly in connection with credit. Because identity
theft can and does occur in connection with various types of accounts,
including deposit accounts, the final rules address identity theft in a
comprehensive manner.
Furthermore, nothing in section 114 indicates that the regulations
must only apply to identity theft in connection with account openings.
The FTC has defined ``identity theft'' as ``a fraud committed or
attempted using the identifying information of another person without
authority.'' \26\ Such fraud may occur in connection with account
openings and with existing accounts. Section 615(e)(3) states that the
guidelines that the Agencies prescribe ``shall not be inconsistent''
with the policies and procedures required under 31 U.S.C. 5318(l), a
reference to the CIP rules which require certain financial institutions
to verify the identity of customers opening new accounts. However, the
Agencies do not read this phrase to prevent them from prescribing rules
directed at existing accounts. To interpret the provision in this
manner would solely authorize the Agencies to prescribe regulations and
guidelines identical to and duplicative of those already issued--making
the Agencies' regulatory authority in this area superfluous and
meaningless.\27\
---------------------------------------------------------------------------

\26\ 16 CFR 603.2(a).
\27\ The Agencies' conclusion is also supported by case law
interpreting similar terminology, albeit in a different context,
finding that ``inconsistent'' means it is impossible to comply with
two laws simultaneously, or one law frustrates the purposes and
objectives of another. See, e.g., Davenport v. Farmers Ins. Group,
378 F.3d 839 (8th Cir. 2004); Retail Credit Co. v. Dade County,
Florida, 393 F. Supp. 577 (S.D. Fla. 1975); Alexiou v. Brad Benson
Mitsubishi, 127 F. Supp.2d 557 (D.N.J. 2000).
---------------------------------------------------------------------------

The Agencies recognize that requiring a written Program will impose
some burden. However, the Agencies believe the benefit of being able to
assess a covered entity's compliance with the final rules by evaluating
the adequacy and implementation of its written Program outweighs the
burdens imposed by this requirement.
Moreover, although the final rules continue to require a written
Program, as detailed below, the Agencies have substantially revised the
proposal to focus the final rules and guidelines on reasonably
foreseeable risks, make the final rules less prescriptive, and provide
financial institutions and creditors with more discretion to develop
policies and procedures to detect, prevent, and mitigate identity
theft.
Proposed Sec. --.90(c) also provided that the Program must address
changing identity theft risks as they arise based upon the experience
of the financial institution or creditor with identity theft and
changes in: Methods of identity theft; methods to detect, prevent, and
mitigate identity theft; the types of accounts the financial
institution or creditor offers; and its business arrangements, such as
mergers and acquisitions, alliances and joint ventures, and service
provider arrangements.
The Agencies continue to believe that, to ensure a Program's
continuing effectiveness, it must be updated, at least periodically.
However, in order to simplify the final rules, the Agencies moved this
requirement into the next section, where it is one of the required
elements of the Program, as discussed below.
Development and Implementation of Identity Theft Prevention Program
The remaining provisions of the proposed rules were set forth under
the above-referenced section heading. Many commenters asserted that the
Agencies should simply articulate certain objectives and provide
financial institutions and creditors the flexibility and discretion to
design policies and procedures to fulfill the objectives of the Program
without the level of detail required under this section.
As described earlier, to ensure that financial institutions and
creditors are able to design Programs that effectively address identity
theft in a manner tailored to their own operations, the Agencies have
made significant changes in the proposal by deleting whole provisions
or moving them into the guidelines in Appendix J. More specifically,
the Agencies abbreviated the proposed requirements formerly located in
the provisions titled

[[Page 63726]]

``Identification and Evaluation of Red Flags'' and ``Identity Theft
Prevention and Mitigation'' and have placed them under a section of the
final rules titled ``Elements of a Program.'' The proposed requirements
on ``Staff Training,'' ``Oversight of Service Provider Arrangements,''
and ``Involvement of Board of Directors and Senior Management'' are now
in a section of the final rules titled ``Administration of the
Program.'' The guidelines in Appendix J elaborate on these
requirements. A discussion of the comments received on these sections
of the proposed rules, and the corresponding sections of the final
rules and guidelines follows.

Section --.90(d)(2)(i) Element I of the Program: Identification of Red
Flags

Proposed Sec. --.90(d)(1)(i) required a Program to include
policies and procedures to identify which Red Flags, singly or in
combination, are relevant to detecting the possible risk of identity
theft to customers or to the safety and soundness of the financial
institution or creditor, using the risk evaluation described in Sec.
--.90(d)(1)(ii). It also required the Red Flags identified to reflect
changing identity theft risks to customers and to the financial
institution or creditor as they arise.
Proposed Sec. --.90(d)(1)(i) provided that each financial
institution and creditor must incorporate into its Program relevant Red
Flags from Appendix J. The preamble to the proposed rules acknowledged
that some Red Flags that are relevant today may become obsolete as time
passes. The preamble stated that the Agencies expected to update
Appendix J periodically,\28\ but that it may be difficult to do so
quickly enough to keep pace with rapidly evolving patterns of identity
theft or as quickly as financial institutions and creditors experience
new types of identity theft. Therefore, proposed Sec. --.90(d)(1)(i)
also provided that each financial institution and creditor must
incorporate into its Program relevant Red Flags from applicable
supervisory guidance, incidents of identity theft that the financial
institution or creditor has experienced, and methods of identity theft
that the financial institution or creditor has identified that reflect
changes in identity theft risks.
---------------------------------------------------------------------------

\28\ Section 114 directs the Agencies to update the guidelines
as often as necessary. See 15 U.S.C. 1681m(e)(1)(a).
---------------------------------------------------------------------------

Some commenters objected to the proposed requirement that the
Program contain policies and procedures to identify which Red Flags,
singly or in combination, are relevant to detecting the possible risk
of identity theft to customers or to the safety and soundness of the
financial institution or creditor. They criticized the phrase
``possible risk'' as too broad and stated that it was unrealistic to
impose upon covered entities a continuing obligation to incorporate
into their Programs Red Flags to address virtually any new identity
theft incident or trend and potential fraud prevention measure. These
commenters stated that this would be a burdensome compliance exercise
that would limit flexibility and add costs, which in turn, would take
away limited resources from the ultimate objective of combating
identity theft.
Many commenters objected to the proposed requirement that the Red
Flags identified by a financial institution or creditor reflect
changing identity theft risks to customers and to the financial
institution or creditor ``as they arise.'' These commenters requested
that the final rules permit financial institutions and creditors a
reasonable amount of time to adjust the Red Flags included in their
Programs.
Some commenters agreed that the enumerated sources of Red Flags
were appropriate. A few commenters stated that financial institutions
and creditors should not be required to include in their Programs any
Red Flags except for those set forth in Appendix J or in supervisory
guidance, or that they had experienced. However, most commenters
objected to the requirement that, at a minimum, the Program incorporate
any relevant Red Flags from Appendix J.
Some financial institution commenters urged deletion of the
proposed requirement to include a list of relevant Red Flags in their
Program. They stated that a financial institution should be able to
assess which Red Flags are appropriate without having to justify to an
examiner why it failed to include a specific Red Flag on a list. Other
commenters recommended that the list of Red Flags in Appendix J be
illustrative only. These commenters recommended that a financial
institution or creditor be permitted to include any Red Flags on its
list that it concludes are appropriate. They suggested that the
Agencies encourage institutions to review the list of Red Flags, and
use their own experience and expertise to identify other Red Flags that
become apparent as fraudsters adapt and develop new techniques. They
maintained that in this manner, institutions and creditors would be
able to identify the appropriate Red Flags and not waste limited
resources and effort addressing those Red Flags in Appendix J that were
obsolete or not appropriate for their activities.
By contrast, consumer groups criticized the flexibility and
discretion afforded to financial institutions and creditors in this
section of the proposed rules. These commenters urged the Agencies to
make certain Red Flags from Appendix J mandatory, such as a fraud alert
on a consumer report.
Proposed Sec. --.90(d)(1)(ii) provided that in order to identify
which Red Flags are relevant to detecting a possible risk of identity
theft to its customers or to its own safety and soundness, the
financial institution or creditor must consider:
A. Which of its accounts are subject to a risk of identity theft;
B. The methods it provides to open these accounts;
C. The methods it provides to access these accounts; and
D. Its size, location, and customer base.
While some industry commenters thought the enumerated factors were
appropriate, other commenters stated that the factors on the list were
not necessarily the ones used by financial institutions to identify
risk and were irrelevant to any determination of identity theft or
actual fraud. These commenters maintained that this proposed
requirement would require financial institutions to develop entirely
new programs that may not be as effective or efficient as those
designed by anti-fraud experts. Therefore, they recommended that the
final rules provide financial institutions and creditors with wide
latitude to determine what factors they should consider and how they
categorize them. These commenters urged the Agencies to refrain from
providing a list of factors that financial institutions and creditors
would have to consider because a finite list could limit their ability
to adapt to new forms of identity theft.
Some commenters suggested that the risk evaluation include an
assessment of other factors such as the likelihood of harm, the cost
and operational burden of using a particular Red Flag and the
effectiveness of a particular Red Flag for that institution or
creditor. Some commenters suggested that the factors refer to the
likely risk of identity theft, while others suggested that the factors
be modified to refer to the possible risk of identity theft to which
each type of account offered by the financial institution or creditor
is subject. Other commenters, including a trade association
representing small financial institutions, asked the Agencies to
provide guidelines on how to conduct a risk assessment.

[[Page 63727]]

The final rules continue to address the identification of relevant
Red Flags, but simply state that the first element of a Program must be
reasonable policies and procedures to identify relevant Red Flags for
the covered accounts that the financial institution or creditor offers
or maintains. The final rules also state that a financial institution
or creditor must incorporate these Red Flags into its Program.
The final rules do not require policies and procedures for
identifying which Red Flags are relevant to detecting a ``possible
risk'' of identity theft. Moreover, as described below, a covered
entity's obligation to update its Red Flags is now a separate element
of the Program. The section of the proposed rules describing the
various factors that a financial institution or creditor must consider
to identify relevant Red Flags, and the sources from which a financial
institution or creditor must derive its Red Flags, are now in section
II of the guidelines titled `` Identifying Relevant Red Flags.''
The Agencies acknowledge that establishing a finite list of factors
that a financial institution or creditor must consider when identifying
relevant Red Flags for covered accounts could limit the ability of a
financial institution or creditor to respond to new forms of identity
theft. Therefore, section II of the guidelines contains a list of
factors that a financial institution or creditor ``should consider * *
* as appropriate'' in identifying relevant Red Flags.
The Agencies also modified the list in order to provide more
appropriate examples of factors for consideration by a financial
institution or creditor determining which Red Flags may be relevant.
These factors are:
The types of covered accounts it offers or maintains;
The methods it provides to open its covered accounts;
The methods it provides to access its covered accounts;
and
Its previous experiences with identity theft.
Thus, for example, Red Flags relevant to deposit accounts may
differ from those relevant to credit accounts, and those applicable to
consumer accounts may differ from those applicable to business
accounts. Red Flags appropriate for accounts that may be opened or
accessed remotely may differ from those that require face-to-face
contact. In addition, a financial institution or creditor should
consider identifying as relevant those Red Flags that directly relate
to its previous experiences with identity theft.
Section II of the guidelines also gives examples of sources from
which financial institutions and creditors should derive relevant Red
Flags, rather than requiring that the Program incorporate relevant Red
Flags strictly from the four sources listed in the proposed rules.
Section II states that a financial institution or creditor should
incorporate into its Program relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution or
creditor has experienced; (2) methods of identity theft that the
financial institution or creditor has identified that reflect changes
in identity theft risks; and (3) applicable supervisory guidance.
The Agencies have deleted the reference to the Red Flags in
Appendix J as a source. Instead, a separate provision in section II of
the guidelines, titled ``Categories of Red Flags,'' states that the
Program of a financial institution or creditor ``should include''
relevant Red Flags from five particular categories ``as appropriate.''
The Agencies have included these categories, which summarize the
various types of Red Flags that were previously enumerated in Appendix
J, in order to provide additional non-prescriptive guidance regarding
the identification of relevant Red Flags.
Section II of the guidelines also notes that ``examples'' of
individual Red Flags from each of the five categories are appended as
Supplement A to Appendix J. The examples in Supplement A are a list of
Red Flags similar to those found in the proposed rules. The Agencies
did not intend for these examples to be a comprehensive list of all
types of identity theft that a financial institution or creditor may
experience. When identifying Red Flags, financial institutions and
creditors must consider the nature of their business and the type of
identity theft to which they may be subject. For instance, creditors in
the health care field may be at risk of medical identity theft (i.e.,
identity theft for the purpose of obtaining medical services) and,
therefore, must identify Red Flags that reflect this risk.
The Agencies also have decided not to single out any specific Red
Flags as mandatory for all financial institutions and creditors.
Rather, the final rule continues to follow the risk-based, non-
prescriptive approach regarding the identification of Red Flags that
was set forth in the proposal. The Agencies recognize that the final
rules and guidelines cover a wide variety of financial institutions and
creditors that offer and maintain many different products and services,
and require the flexibility to be able to adapt to rapidly changing
risks of identity theft.

Sections --.90(d)(2)(ii) and (iii) Elements II and III of the Program:
Detection of and Response to Red Flags

Proposed Sec. --.90(d)(2) stated that the Program must include
reasonable policies and procedures designed to prevent and mitigate
identity theft in connection with the opening of an account or any
existing account. This section then described the policies and
procedures that the Program must include, some of which related solely
to account openings while others related to existing accounts.
Some financial institution commenters acknowledged that reference
to prevention and mitigation of identity theft was generally a good
objective, but they urged that the final rules refrain from prescribing
how financial institutions must achieve it. Others noted that the CIP
rules and the Information Security Standards already required many of
the steps in the proposal. They recommended that the final rules
recognize this and clarify that compliance with parallel requirements
would be sufficient for compliance under these rules.
Section --.90(d)(1) of the final rules requires financial
institutions and creditors to develop and implement a written Program
to detect, prevent, and mitigate identity theft in connection with the
opening of a covered account or any existing covered account.
Therefore, the Agencies concluded that it was not necessary to
reiterate this requirement in Sec. --.90(d)(2). The Agencies have
deleted the prefatory language from proposed Sec. --.90(d)(2) on
prevention and mitigation in order to streamline the final rules. The
various provisions addressing prevention and mitigation formerly in
this section, namely, verification of identity, detection of Red Flags,
assessment of the risk of Red Flags, and responses to the risk of
identity theft, have been incorporated into the final rules as
``Elements of the Program'' and into the guidelines elaborating on
these provisions. Comments received regarding these provisions and the
manner in which they have been integrated into the final rules and
guidelines follows.
Detecting Red Flags
Proposed Sec. --.90(d)(2)(i) stated that the Program must include
reasonable policies and procedures to obtain identifying information
about, and verify the identity of, a person opening an account. This
provision was designed to address the risk of identity

[[Page 63728]]

theft to a financial institution or creditor that occurs in connection
with the opening of new accounts.
The proposed rules stated that any financial institution or
creditor would be able to satisfy the proposed requirement in Sec.
--.90(d)(2)(i) by using the policies and procedures for identity
verification set forth in the CIP rules. The preamble to the proposed
rules explained that although the CIP rules exclude a variety of
entities from the definition of ``customer'' and exclude a number of
products and relationships from the definition of ``account,'' \29\ the
Agencies were not proposing any exclusions from either of these terms
given the risk-based nature of the regulations.
---------------------------------------------------------------------------

\29\ See, e.g., 31 CFR 103.121(a).
---------------------------------------------------------------------------

Most commenters supported this provision. Many of these commenters
urged the Agencies to include in the final rules a clear statement
acknowledging that financial institutions and creditors complying with
the CIP rules would be deemed to be in compliance with this provision's
requirements. Some of these commenters encouraged the Agencies to place
the exemptions from the CIP rules in these final rules for consistency
in implementing both regulatory mandates.
Some commenters, however, believed the requirement to verify the
identity of a person opening an account duplicated the requirements in
the CIP rules and urged elimination of this redundancy. Other entities
not already subject to the CIP rules stated that complying with those
rules would be very costly and burdensome. These commenters asked that
the Agencies provide them with additional guidance regarding the CIP
rules.
Consumer groups were concerned that use of the CIP rules would not
adequately address identity theft. They stated that the CIP rules allow
accounts to be opened before identity is verified, which is not the
proper standard to prevent identity theft.
As described below, the Agencies have moved verification of the
identity of persons opening an account into section III of the
guidelines where it is described as one of the policies and procedures
that a financial institution or creditor should have to detect Red
Flags in connection with the opening of a covered account.
Proposed Sec. --.90(d)(2)(ii) stated that the Program must include
reasonable policies and procedures to detect the Red Flags identified
pursuant to paragraph Sec. --.90(d)(1). The Agencies did not receive
any specific comments on this provision.
In the final rules, the detection of Red Flags is the second
element of the Program. The final rules provide that a Program must
contain reasonable policies and procedures to detect the Red Flags that
a financial institution or creditor has incorporated into its Program.
Section III of the guidelines provides examples of various means to
detect Red Flags. It states that the Program's policies and procedures
should address the detection of Red Flags in connection with the
opening of covered accounts, such as by obtaining identifying
information about, and verifying the identity of, a person opening a
covered account, for example, using the policies and procedures
regarding identification and verification set forth in the CIP rules.
Section III also states that the Program's policies and procedures
should address the detection of Red Flags in connection with existing
covered accounts, such as by authenticating customers, monitoring
transactions, and verifying the validity of change of address requests,
in the case of existing covered accounts.
Covered entities subject to the CIP rules, the Federal Financial
Institution's Examination Council's guidance on authentication,\30\ the
Information Security Standards, and Bank Secrecy Act (BSA) rules \31\
may already be engaged in detecting Red Flags. These entities may wish
to integrate the policies and procedures already developed for purposes
of complying with these issuances into their Programs. However, such
policies and procedures may need to be supplemented. For example, the
CIP rules were written to implement section 326 \32\ of the USA PATRIOT
Act,\33\ an Act directed toward facilitating the prevention, detection,
and prosecution of international money laundering and the financing of
terrorism. Certain types of ``accounts,'' ``customers,'' and products
are exempted or treated specially in the CIP rules because they pose a
lower risk of money laundering or terrorist financing. Such special
treatment may not be appropriate to accomplish the broader objective of
detecting, preventing, and mitigating identity theft. Accordingly, the
Agencies expect all financial institutions and creditors to evaluate
the adequacy of existing policies and procedures and to develop and
implement risk-based policies and procedures that detect Red Flags in
an effective and comprehensive manner.
---------------------------------------------------------------------------

\30\ ``Authentication in an Internet Banking Environment''
(October 12, 2005) available at http://www.ffiec.gov/press/pr101205.htm.
\31\ See, e.g. 12 CFR 21.21 (national banks); 12 CFR 208.63
(state member banks); 12 CFR 326.8 (state non-member banks); 12 CFR
563.177 (savings associations); and 12 CFR 748.2 (credit unions).
\32\ 31 U.S.C. 5318(l).
\33\ Pub. L. 107-56.
---------------------------------------------------------------------------

Responding to Red Flags
Proposed Sec. --.90(d)(2)(iii) stated that to prevent and mitigate
identity theft, the Program must include policies and procedures to
assess whether the Red Flags the financial institution or creditor
detected pursuant to proposed Sec. --.90(d)(2)(ii) evidence a risk of
identity theft. It also stated that a financial institution or creditor
must have a reasonable basis for concluding that a Red Flag (detected)
does not evidence a risk of identity theft.
Financial institution commenters expressed concern that this
standard would force an institution to justify to examiners why it did
not take measures to respond to a particular Red Flag. Some consumer
groups believed it was appropriate to require a financial institution
or creditor to have a reasonable basis for concluding that a particular
Red Flag detected does not evidence a risk of identity theft. Other
consumer groups believed that this was too weak a standard and that
mandating the detection of certain Red Flags would be more effective
and preventive.
Some commenters mistakenly read the proposed provision as requiring
a financial institution or creditor to have a reasonable basis for
excluding a Red Flag listed in Appendix J from its Program requiring
the mandatory review and analysis of each and every Red Flag. These
commenters urged the Agencies to delete this provision.
Proposed Sec. --.90(d)(2)(iv) stated that to prevent and mitigate
identity theft, the Program must include policies and procedures that
address the risk of identity theft to the customer, the financial
institution, or creditor, commensurate with the degree of risk posed.
The proposed regulations also provided an illustrative list of measures
that a financial institution or creditor could take, including:
Monitoring an account for evidence of identity theft;
Contacting the customer;
Changing any passwords, security codes, or other security
devices that permit access to a customer's account;
Reopening an account with a new account number;
Not opening a new account;
Closing an existing account;
Notifying law enforcement and, for those that are subject
to 31 U.S.C. 5318(g), filing a Suspicious Activity Report in accordance
with applicable law and regulation;

[[Page 63729]]

Implementing any requirements regarding limitations on
credit extensions under 15 U.S.C. 1681c-1(h), such as declining to
issue an additional credit card when the financial institution or
creditor detects a fraud or active duty alert associated with the
opening of an account, or an existing account; or
Implementing any requirements for furnishers of
information to consumer reporting agencies under 15 U.S.C. 1681s-2, to
correct or update inaccurate or incomplete information.
Some commenters agreed that financial institutions and creditors
should be able to use their own judgment to determine which measures to
take depending upon the degree of risk that is present. However,
consumer groups believed that the final rules should require
notification of consumers in every case where a Red Flag that requires
a response has been detected.
Other commenters objected to some of the examples given as measures
that financial institutions and creditors could take to address the
risk of identity theft. For example, one commenter objected to the
inclusion, as an example, of the requirements regarding limitations on
credit extensions under 15 U.S.C. 1681c-1(h). The commenter stated that
this statutory provision is confusing, useless, and should not be
referenced in the final rules. Other commenters suggested that the
Agencies clarify that the inclusion of this statutory provision in the
proposed rules as an example of how to address the risk of identity
theft did not make this provision discretionary.
The final rules merge the concepts previously in proposed Sec.
--.90(d)(2)(iii) and Sec. --.90(d)(2)(iv) into the third element of
the Program: reasonable policies and procedures to respond
appropriately to any Red Flags that are detected pursuant to paragraph
(d)(2)(ii) of this section to prevent and mitigate identity theft.
In order to ``respond appropriately,'' it is implicit that a
financial institution or creditor must assess whether the Red Flags
detected evidence a risk of identity theft, and must have a reasonable
basis for concluding that a Red Flag does not evidence a risk of
identity theft. Therefore, the Agencies concluded that it is not
necessary to specify any such separate assessment, and, accordingly,
deleted the language from the proposal regarding assessing Red Flags
and addressing the risk of identity theft.
Most of the examples of measures for preventing and mitigating
identity theft previously listed in proposed Sec. --.90(d)(2)(iv) are
now located in section IV of the guidelines, titled ``Prevention and
Mitigation of Identity Theft.'' Section IV states that the Program's
policies and procedures should provide for appropriate responses to the
Red Flags the financial institution or creditor has detected that are
commensurate with the degree of risk posed. In addition, as described
earlier, the final rules do not define Red Flags to include indicators
of a ``possible risk'' of identity theft (including ``precursors'' to
identity theft). Instead, section IV states that in determining an
appropriate response, a financial institution or creditor should
consider aggravating factors that may heighten the risk of identity
theft, and provides examples of such factors.
The Agencies also modified the examples of appropriate responses as
follows. First, the Agencies added ``not attempting to collect on a
covered account or not selling a covered account to a debt collector''
as a possible response to Red Flags detected. Second, the Agencies
added ``determining that no response is warranted under the particular
circumstances'' to make clear that an appropriate response may be no
response, especially, for example, when a financial institution or
creditor has a reasonable basis for concluding that the Red Flags
detected do not evidence a risk of identity theft.
In addition, the Agencies moved the proposed examples, that
referenced responses mandated by statute, to section VII of the
guidelines titled ``Other Applicable Legal Requirements'' to highlight
that certain responses are legally required.
The section of the proposal listing examples of measures to address
the risk of identity theft included a footnote that discussed the
relationship between a consumer's placement of a fraud or active duty
alert on his or her consumer report and ECOA, 15 U.S.C. 1691, et seq. A
few commenters objected to this footnote. Some commenters believed that
creditors had a right to deny credit automatically whenever a fraud or
active duty alert appears on the consumer report of an applicant. Other
commenters believed that the footnote raised complex issues under the
ECOA and FCRA that required more thorough consideration, and questioned
the need and appropriateness of addressing ECOA in the context of this
rulemaking.
Under ECOA, it is unlawful for a creditor to discriminate against
any applicant for credit because the applicant has in good faith
exercised any right under the Consumer Credit Protection Act (CCPA), 15
U.S.C. 1691(a). A consumer who requests the inclusion of a fraud alert
or active duty alert in his or her credit file is exercising a right
under the FCRA, which is a part of the CCPA, 15 U.S.C. 1601, et seq.
When a credit file contains a fraud or active duty alert, section 605A
of the FCRA, 15 U.S.C. 1681c-1(h), requires a creditor to take certain
steps before extending credit, increasing a credit limit, or issuing an
additional card on an existing credit account. For an initial or active
duty alert, these steps include utilizing reasonable policies and
procedures to form a reasonable belief that the creditor knows the
identity of the consumer and, where a consumer has specified a
telephone number for identity verification purposes, contacting the
consumer at that telephone number or taking reasonable steps to verify
the consumer's identity and confirm that the application is not the
result of identity theft, 15 U.S.C. 1681c-1(h)(1)(B).
The purpose of the footnote was to remind financial institutions
and creditors of their legal responsibilities in circumstances where a
consumer has placed a fraud or active duty alert on his or her consumer
report. In particular, the Agencies have concerns that in some cases,
creditors have adopted policies of automatically denying credit to
consumers whenever an initial fraud alert or an active duty alert
appears on an applicant's consumer report. The Agencies agree that this
rulemaking is not the appropriate vehicle for addressing issues under
ECOA. However, the Agencies will continue to evaluate compliance with
ECOA through their routine examination or enforcement processes,
including issues related to fraud and active duty alerts.

Section --.90(d)(2)(iv) Element IV of the Program: Updating the Program

To ensure that the Program of a financial institution or creditor
remains effective over time, the final rules provide a fourth element
of the Program: policies and procedures to ensure the Program
(including the Red Flags determined to be relevant) is updated
periodically to reflect changes in risks to customers and to the safety
and soundness of the financial institution or creditor from identity
theft. As described earlier, this element replaces the requirements
formerly in proposed Sec. --.90(c)(2) which stated that the Program
must be designed to address changing identity theft risks as they
arise, and proposed Sec. --.90(d)(1)(i) which stated that the Red
Flags included in a covered entity's Program must reflect changing
identity theft risks to customers and to the financial institution or
creditor as they arise.

[[Page 63730]]

Unlike the proposed provisions, however, this element only requires
``periodic'' updating. The Agencies concluded that requiring financial
institutions and creditors to immediately and continuously update their
Programs would be overly burdensome.
Section V of the guidelines elaborates on the obligation to ensure
that the Program is periodically updated. It reiterates the factors
previously in proposed Sec. --.90(c)(2) that should cause a financial
institution or creditor to update its Program, such as its own
experiences with identity theft, changes in methods of identity theft,
changes in methods to detect, prevent and mitigate identity theft,
changes in accounts that it offers or maintains, and changes in its
business arrangements.

Section --.90(e) Administration of the Program

The final rules group the remaining provisions of the proposed
rules under the heading ``Administration of the Program,'' albeit in a
different order than proposed. This section of the final rules
describes the steps that financial institutions and creditors must take
to administer the Program, including: Obtaining approval of the initial
written Program; ensuring oversight of the development, implementation
and administration of the Program; training staff; and overseeing
service provider arrangements.
A number of commenters criticized each of the proposed provisions
regarding administration of the Program, arguing they were not
specifically required by section 114. The Agencies believe the mandate
in section 114 is broad, and provides the Agencies with an ample basis
to issue rules and guidelines containing these provisions because they
are critical to ensuring the effectiveness of a Program. Therefore, the
Agencies have retained these elements in the final rules and guidelines
with some modifications, as follows.

Sections --.90(e)(1) and (2) Involvement of the Board of Directors and
Senior Management

Proposed Sec. --.90(d)(5) highlighted the responsibility of the
board of directors and senior management to develop, implement, and
oversee the Program. Proposed Sec. --.90(d)(5)(i) specifically
required the board of directors or an appropriate committee of the
board to approve the written Program. Proposed Sec. --.90(d)(5)(ii)
required that the board, an appropriate committee of the board, or
senior management be charged with overseeing the development,
implementation, and maintenance of the Program, including assigning
specific responsibility for its implementation. The proposal also
provided that persons charged with overseeing the Program must review
reports prepared at least annually by staff regarding compliance by the
financial institution or creditor with the regulations.
Proposed Sec. --.90(d)(5)(iii) stated that reports must discuss
material matters related to the Program and evaluate issues such as:
The effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of accounts and with respect to existing
accounts; service provider arrangements; significant incidents
involving identity theft and management's response; and recommendations
for changes in the Program.
Some commenters agreed that identity theft is an important issue,
and the board, therefore, should be involved in the overall
development, approval, and oversight of the Program. These commenters
suggested that the final rules make clear that the board need not be
responsible for the day-to-day operations of the Program.
Most industry commenters opposed the proposed requirement that the
board or board committee approve the Program and receive annual reports
about compliance with the Program. These commenters asserted that the
statute does not mandate such requirements, and that compliance with
these rules did not warrant more board attention than other
regulations. They asserted that such requirements would impede the
ability of a financial institution or creditor to keep up with the
fast-paced changes and developments inherent with instances of fraud
and identity theft. They stated that boards of directors should not be
required to consider the minutiae of the fraud prevention efforts of a
financial institution or creditor and suggested the task be delegated
to senior management with expertise in this area. Some commenters
suggested the final rules provide a covered entity with the discretion
to assign oversight responsibilities in a manner consistent with the
institution's own risk evaluation.
One commenter suggested that the final rules permit the board of
directors of a holding company to approve and oversee the Program for
the entire organization. The commenter explained that this approach
would eliminate the need for redundant actions by a multiplicity of
boards, and help to insure uniformity of policy throughout large
organizations.
Some commenters stated that the preparation of reports for board
review would be costly and burdensome. The SBA suggested that the FTC
consider a one-page certification option for small low-risk entities to
minimize the burden of reports. One commenter opined that it would be
sufficient if the Agencies mandated that covered entities continuously
review and evaluate the policies and procedures they adopted pursuant
to the regulations and modify them as necessary. Consumer groups
suggested that the final rules specifically require financial
institutions and creditors to adjust their Programs to address
deficiencies raised by their annual reports.
Commenters generally took the position that reports to the board, a
board committee, or senior management regarding compliance with the
final rules should be prepared at most on a yearly basis, or when
significant changes have occurred that alter the institution's risk.
One commenter recommended a clarification that any reporting to the
board of material information relating to the Program could be combined
with reporting obligations required under the Information Security
Standards.
Section --.90(e)(1) of the final rules continues to require
approval of the written Program by the board of directors or an
appropriate committee of the board. However, to ensure that this
requirement does not hamper the ability of a financial institution or
creditor to update its Program in a timely manner, the final rules
provide that the board or an appropriate committee must approve only
the initial written Program. Thereafter, at the discretion of the
covered entity, the board, a committee, or senior management may update
the Program.
Bank holding companies and their bank and non-bank subsidiaries
will be governed by the principles articulated in connection with the
banking agencies'' Information Security Standards:

The Agencies agree that subsidiaries within a holding company
can use the security program developed at the holding company level.
However, if subsidiary institutions choose to use a security program
developed at the holding company level, the board of directors or an
appropriate committee at each subsidiary institution must conduct an
independent review to ensure that the program is suitable and
complies with the requirements prescribed by the subsidiary's
primary regulator * * * .

66 FR 8620 (Feb. 1, 2001) (Preamble to final Information Security
Standards.)

[[Page 63731]]

The Agencies recognize that boards of directors have many
responsibilities and it generally is not feasible for a board to
involve itself in the detailed oversight, development, implementation,
and administration of the Program. Accordingly, Sec. --.90(e)(2) of
the final rules provides discretion to a financial institution or
creditor to determine who will be responsible for these aspects of the
Program. It states that a financial institution or creditor must
involve the board of directors, an appropriate committee thereof, or a
designated employee at the level of senior management in the oversight,
development, implementation, and administration of the Program.
Section VI of the guidelines elaborates on this provision of the
final rules. The guidelines note that such oversight should include
assigning specific responsibility for the Program's implementation and
reviewing reports prepared by staff on compliance by the financial
institution or creditor with this section. As suggested by commenters,
the guidelines also state that oversight should include approving
material changes to the Program as necessary to address changing
identity theft risks. Section VI also provides that reports should be
prepared at least annually and describes the contents of a report as
proposed in Sec. --.90(d)(5)(iii)(B).
These steps are modeled on sections of the Information Security
Standards.\34\ As noted previously, financial institutions and
creditors subject to these Standards may combine elements required
under the final rules and guidelines, including reports, with those
required by the Standards, as they see fit.
---------------------------------------------------------------------------

\34\ A board approval requirement is also found in the BSA rules
of the Federal banking agencies and the NCUA. See 12 CFR 21.21;
(OCC); 12 CFR 208.63 (Board); 12 CFR 326.8 (FDIC); 12 CFR 563.177
(OTS); and 12 CFR 748.2 (NCUA). Thus, contrary to the assertion of
some commenters, this rule is being treated in a manner similar to
other rules.
---------------------------------------------------------------------------

Section --.90(e)(3) Staff Training

Proposed Sec. --.90(d)(3) required each financial institution or
creditor to train staff to implement its Program.
Consumer groups believed that this provision should be more
detailed and specifically require monitoring, oversight, and auditing
of a covered entity's training efforts. By contrast, a number of
industry commenters recommended that the Agencies withdraw this
provision because they believed it was burdensome. Some of these
commenters asserted that the Agencies had not taken into account the
limited personnel and resources available to smaller institutions to
provide training.
Some financial institution commenters stated that it was not clear
why staff training would be specifically required under the final
rules, absent a specific statutory requirement. They maintained that
financial institutions have sufficient incentives to ensure that
appropriate staff is trained. Other commenters suggested that the
Agencies clarify that this provision would only require training for
relevant staff and would permit training on identity theft that is
integrated into overall staff training on similar or overlapping
matters such as fraud prevention.
One commenter objected to an example in the preamble to the
proposed rules which stated that staff should be trained to detect
``anomalous wire transfers in connection with a customer's deposit
account.'' The commenter stated that this example potentially exposed
financial institutions to significant and unintended liability,
predicting that customers and law enforcement would use the rules to
support claims that financial institutions are responsible for
authorizing transactions by fraudsters. The commenter asserted that
financial institutions do not have systems that can detect these
transactions because they fall outside the usual fraud filter
parameters.
Section --.90(e)(3) of the final rules provides that a covered
entity must train staff, as necessary, to effectively implement the
Program. There is no corresponding section of the guidelines.
The Agencies continue to believe proper training will enable staff
to address the risk of identity theft. However, this provision requires
training of only relevant staff. In addition, staff that has already
been trained, for example, as a part of the anti-fraud prevention
efforts of the financial institution or creditor, do not need to be re-
trained except ``as necessary.''
The Agencies recognize that some of the examples, such as detecting
``anomalous wire transfers in connection with a customer's deposit
account'' may fall outside the usual fraud filter parameters. However,
the Agencies expect that compliance with the final rules will improve
the ability of financial institutions and creditors to detect, prevent,
and mitigate identity theft.

Section --.90(e)(4) Oversight of Service Provider Arrangements

Proposed Sec. --.90(d)(4) stated that, whenever a financial
institution or creditor engaged a service provider to perform an
activity on its behalf and the requirements of the Program applied to
that activity, the financial institution or creditor would be required
to take steps designed to ensure the activity is conducted in
compliance with a Program that satisfies the regulations. The preamble
to the proposed rules explained that this provision would allow a
service provider serving multiple financial institutions and creditors
to conduct activities on behalf of these entities in accordance with
its own program to prevent identity theft, as long as the program meets
the requirements of the regulations. The service provider would not
need to apply the particular Program of each individual financial
institution or creditor to whom it is providing services.
Several commenters asserted it would be costly and burdensome for
financial institutions and creditors to ensure third party compliance
with the final rules and therefore, this provision should be
eliminated. They urged that financial institutions and creditors be
given maximum flexibility to manage service provider relationships.
Some financial institution commenters also suggested that the
Agencies withdraw this provision. They stated that the FACT Act does
not address this issue and asserted that there already is no doubt that
if a financial institution delegates any of its operations to a third
party, the institution will remain responsible for related regulatory
compliance.
Other commenters stated that it should remain a contractual matter
between the parties whether the service provider may implement a
program that is different from its financial institution client.
Consumer groups asked the Agencies to ensure that the decision of a
financial institution or creditor to outsource would not lead to lower
Red Flag standards. These commenters suggested the final rules state
that the Program must also meet the requirements that would apply if
the activity were performed without the use of a service provider. They
also suggested the final rules clarify that, in addition to any
responsibility on the service provider imposed by law, regulation, or
contract, the financial institution or creditor would be responsible
for a failure to comply with the Program.
Most commenters, however, agreed with the proposal and stated that
a service provider must have the flexibility to meet the objectives of
the rules without having to tailor its services to the Program
requirements of each company for which it provides

[[Page 63732]]

service. These commenters noted that this proposed approach was the
same as that used in the Information Security Standards.
The Agencies believe it is important to retain a provision in the
final rules addressing service providers to remind financial
institutions and creditors that they continue to remain responsible for
compliance with the final rules, even if they outsource operations to a
third party. However, the Agencies have simplified the service provider
provision in the final rules and moved the remaining parts of proposed
Sec. --.90(d)(4) to the guidelines.
Section --.90(e)(4) of the final rules provides that a covered
entity must exercise appropriate and effective oversight of service
provider arrangements, without further elaboration. This provision
provides maximum flexibility to financial institutions and creditors in
managing their service provider arrangements, while making clear that a
covered entity cannot escape its obligations to comply with the final
rules and to include in its Program those guidelines that are
appropriate by simply outsourcing an activity.
Section VI(c) of the guidelines provides that, whenever a financial
institution or creditor engages a service provider to perform an
activity in connection with one or more covered accounts, the financial
institution or creditor should take steps to ensure that the activity
of the service provider is conducted in accordance with reasonable
policies and procedures designed to detect, prevent, and mitigate the
risk of identity theft. Thus, the guidelines make clear that a service
provider that provides services to multiple financial institutions and
creditors may do so in accordance with its own program to prevent
identity theft, as long as the program meets the requirements of the
regulations. The guidelines also provide an example of how a covered
entity may comply with this provision. The guidelines state that a
financial institution or creditor could require the service provider,
by contract, to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities and either report the Red Flags to the financial institution
or creditor or take appropriate steps to prevent or mitigate identity
theft.

Section --.90(f) Consideration of Guidelines in Appendix J

The Agencies have added a provision to the final rules that
explains the relationship of the rules to the guidelines. Section
--.90(f) states that each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix J and include in its Program those guidelines that are
appropriate.
Each of the guidelines corresponds to a provision of the final
rules. As mentioned earlier, the guidelines were issued to assist
financial institutions and creditors in the development and
implementation of a Program that satisfies the requirements of the
final rules. The guidelines provide policies and procedures that
financial institutions and creditors should use, where appropriate, to
satisfy the regulatory requirements of the final rules. While an
institution or a creditor may determine that a particular guideline is
not appropriate for its circumstances, it nonetheless must ensure its
Program contains reasonable policies and procedures to fulfill the
requirements of the final rules. This approach provides financial
institutions and creditors with the flexibility to determine ``how best
to develop and implement the required policies and procedures.'' \35\
---------------------------------------------------------------------------

\35\ See H.R. Rep. No. 108-263 at 43 (Sept. 4, 2003)
(accompanying H.R. 2622); S. Rep. No. 108-166 at 13 (Oct. 17, 2003)
(accompanying S. 1753).
---------------------------------------------------------------------------

Supplement A to Appendix J: Examples of Red Flags
Section 114 of the FACT Act states that, in developing the
guidelines, the Agencies must identify patterns, practices, and
specific forms of activity, that indicate the possible existence of
identity theft. The Agencies proposed implementing this provision by
requiring the Program of a financial institution or creditor to include
policies and procedures for the identification and detection of Red
Flags in connection with an account opening or an existing account,
including from among those listed in Appendix J.
The Agencies compiled the Red Flags enumerated in Appendix J from a
variety of sources, such as literature on the topic, information from
credit bureaus, financial institutions, creditors, designers of fraud
detection software, and the Agencies' own experiences. The preamble to
the proposed rules stated that some of the Red Flags, by themselves,
may be reliable indicators of identity theft, while others are more
reliable when detected in combination with other Red Flags.
The preamble to the proposed rules explained that the Agencies
recognized that a wide range of financial institutions and creditors,
and a broad variety of accounts would be covered by the regulations.
Therefore, the Agencies proposed to afford each financial institution
and creditor flexibility to determine which Red Flags were relevant for
their purposes to detect identity theft, including from among those
listed in Appendix J.
As mentioned previously, consumer groups criticized the discretion
in the proposal that permitted financial institutions and creditors to
choose Red Flags relevant to detecting the risk of identity theft based
upon the list of enumerated factors. These groups urged the Agencies to
make certain Red Flags in Appendix J mandatory. In addition, consumer
groups suggested a number of additional Red Flags for inclusion in
Appendix J.
Some commenters agreed that the list of examples of Red Flags was
appropriate because, in their view, it was designed to be flexible.
Some industry commenters, including a number of small financial
institutions, stated that the Red Flags set forth in Appendix J would
assist them in developing and improving their identity theft prevention
programs. Other commenters suggested deleting the list of Red Flags or
modifying the list in a manner appropriate to the nature of their own
operations.
The Agencies have retained the list of examples of Red Flags
because section 114 states that the Agencies ``shall identify patterns,
practices, and specific forms of activity that indicate the possible
existence of identity theft.'' The Agencies also retained the list
because some commenters indicated that having examples of Red Flags
would be helpful to them. However, the examples of Red Flags are now
set forth in a separate supplement to the guidelines. The list of
examples is similar to that which the Agencies proposed, however, the
Red Flags that the Agencies identified as precursors to identity theft
have been deleted and are now addressed in section IV of the
guidelines. Moreover, in response to a Congressional commenter, the
Agencies added, as an example of a Red Flag, an application that gives
the appearance of having been destroyed and reassembled.
The introductory language to the supplement clarifies that the
enumerated Red Flags are examples. Thus, a financial institution or
creditor may tailor the Red Flags it chooses for its Program to its own
operations. A financial institution or creditor will not need to
justify to an Agency its failure to include in the Program a specific
Red Flag from the list of examples. However, a covered entity will have
to account for the overall effectiveness of a Program that is
appropriate to its size and

[[Page 63733]]

complexity and the nature and scope of its activities.
Inactive Accounts
Section 114 also directs the Agencies to consider whether to
include reasonable guidelines for notifying the consumer when a
transaction occurs in connection with a consumer's credit or deposit
account that has been inactive for two years, in order to reduce the
likelihood of identity theft. The preamble to the proposed rules noted
that the Agencies believed that the two-year limit was not always an
accurate indicator of identity theft given the wide variety of credit
and deposit accounts that would be covered by the provision. Therefore,
in place of guidelines on inactive accounts, the Agencies proposed
incorporating a Red Flag on inactive accounts into Appendix J that was
flexible and was designed to take into consideration the type of
account, the expected pattern of usage of the account, and any other
relevant factors.
Some consumer groups suggested that a new section be added to the
guidelines requiring notice to the consumer when a transaction occurs
in connection with a consumer's credit or deposit account that has been
inactive for two years unless this pattern would be expected for a
particular type of account. Other commenters agreed with the Agencies'
proposal to simply make activity on an inactive account a Red Flag.
They also agreed that the Agencies should not use two years of
inactivity as a hard and fast rule, and allow financial institutions
and creditors to use their own standards to determine when an account
is inactive.
In the final rules, the Agencies continue to list activity on an
inactive account as a Red Flag. Given the variety of covered accounts
to which the final rules and guidelines will apply, the Agencies
concluded that the two-year period suggested in section 114 would not
necessarily be a useful indicator of identity theft. Therefore, the
Agencies have not included a provision in the guidelines regarding
notification when a transaction occurs in connection with a consumer's
credit or deposit account that has been inactive for two years.

B. Special Rules for Card Issuers

1. Background
Section 114 also requires the Agencies to prescribe joint
regulations generally requiring credit and debit card issuers to assess
the validity of change of address notifications. In particular, these
regulations must ensure that if the card issuer receives a notice of
change of address for an existing account and, within a short period of
time (during at least the first 30 days), receives a request for an
additional or replacement card for the same account, the issuer must
follow reasonable policies and procedures to assess the validity of the
change of address through one of three methods. The card issuer may not
issue the card unless it: (1) Notifies the cardholder of the request at
the cardholder's former address and provides the cardholder with a
means to promptly report an incorrect address; (2) notifies the
cardholder of the address change request by another means of
communication previously agreed to by the issuer and the cardholder; or
(3) uses other means of evaluating the validity of the address change
in accordance with the reasonable policies and procedures established
by the card issuer to comply with the joint regulations described
earlier regarding identity theft.
For this reason, the Agencies also proposed special rules that
required credit and debit card issuers to assess the validity of change
of address notifications by notifying the cardholder or through certain
other means. The proposed regulations stated that a financial
institution or creditor that is a card issuer may incorporate the
requirements of Sec. --.91 into its Program.
As described in the section-by-section analysis that follows,
commenters generally requested changes that would make the proposed
rules more flexible.
2. Section-by-Section Analysis

Section --.91(a) Scope

The proposed rules stated that this section applies to a person,
described in proposed Sec. --.90(a), that issues a debit or credit
card. The Agencies did not receive any comments on this section.
In the final rules, for clarity, the Agencies deleted the cross-
reference to Sec. --.90(a). Each Agency also revised its scope
paragraph to list the entities over which it has jurisdiction that are
subject to Sec. --.91. Under the final rules, section --.91 applies to
any debit or credit card issuer (card issuer) that is subject to an
Agency's jurisdiction.

Section --.91(b) Definitions

The proposed rules included two definitions solely applicable to
the special rules for card issuers: ``cardholder'' and ``clear and
conspicuous.'' Section --.91(b) of the final rules also contains these
definitions as follows.

Section --.91(b)(1) Cardholder

Under section 114, the Agencies must prescribe regulations
requiring a card issuer to follow reasonable policies and procedures to
assess the validity of a change of address, before issuing an
additional or replacement card. Section 114 provides that a card issuer
may satisfy this requirement by notifying ``the cardholder.'' The term
``cardholder'' is not defined in the FACT Act. The preamble to the
proposed rules explained that the legislative record relating to this
provision indicates that ``issuers of credit cards and debit cards who
receive a consumer request for an additional or replacement card for an
existing account'' may assess the validity of the request by notifying
``the cardholder.'' \36\ As the preamble noted, the request,
presumably, will be valid if the consumer making the request and the
cardholder are one and the same ``consumer.'' Therefore, the proposal
defined ``cardholder'' as a consumer who has been issued a credit or
debit card. The preamble to the proposed rules also explained that,
because ``consumer'' is defined in the FCRA as an ``individual,'' \37\
the proposed regulations applied to any request for an additional or
replacement card by an individual, including a card for a business
purpose, such as a corporate card.
---------------------------------------------------------------------------

\36\ See 149 Cong. Rec. E2513 (daily ed. December 8, 2003)
(statement of Rep. Oxley) (emphasis added).
\37\ 15 U.S.C. 1681a(c).
---------------------------------------------------------------------------

Some commenters asked the Agencies to clarify that this definition
does not apply to holders of stored value cards, such as payroll and
gift cards, or to cards used to access a home equity line of credit.
Another commenter urged that the final rules exclude credit and debit
cards for a business purpose.
The final rules continue to define ``cardholder'' as a consumer who
has been issued a credit or debit card. Both ``credit card'' and
``debit card'' are defined in section 603(r) of the FCRA. \38\ The
definition of ``credit card'' is defined by cross-reference to section
103 of the Truth in Lending Act, 15 U.S.C. 1601, et seq. \39\ The
definition of ``debit card'' is any card issued by a financial
institution to a consumer for use in initiating an electronic fund
transfer from the account of the consumer at such financial institution
for the purposes of transferring money between accounts or obtaining
money, property, labor, or services. \40\
---------------------------------------------------------------------------

\38\ 15 U.S.C. 1681a.
\39\ See 15 U.S.C. 1681a(r)(2).
\40\ 15 U.S.C. 1681a(r)(3).
---------------------------------------------------------------------------

Section 603(r) of the FCRA provides that ``account'' and
``electronic fund transfer'' have the same meaning as those terms have
in the Electronic Funds Transfer Act (EFTA), 15 U.S.C.

[[Page 63734]]

1693, et seq. The EFTA, and Regulation E, 12 CFR part 205, govern
electronic fund transfers. In contrast to section 603(r) of the FCRA,
neither the EFTA nor Regulation E defines the term ``debit card.''
Instead, coverage under the EFTA and Regulation E depends upon whether
electronic fund transfers can be made to or from an ``account,''
meaning a checking, savings, or other consumer asset account
established primarily for personal, family or household purposes. The
Board recently issued a final rule expanding the definition of
``account'' under Regulation E to cover payroll card accounts. \41\
Therefore, a holder of a payroll card is a ``cardholder'' for purposes
of Sec. --.91(b)(1), provided that the card issuer is a ``financial
institution'' as defined in section 603(t) of the FCRA.
---------------------------------------------------------------------------

\41\ See 71 FR 51,437 (August 10, 2006).
---------------------------------------------------------------------------

The Board decided not to cover other types of prepaid cards as
accounts under Regulation E at the time it issued the payroll card
rule. Therefore, the definition of ``cardholder'' does not include the
holder of a gift card or other prepaid card product, unless and until
the Board elects to cover such cards as accounts under Regulation E.
The definition of ``cardholder'' would also include a recipient of
a home equity loan if the holder is able to access the proceeds of the
loan with a credit or debit card within the meaning of 15 U.S.C.
1681a(r).
Identity theft may occur in connection with a card that a consumer
uses for a business purpose and may affect the consumer's personal
credit standing. Additionally, the definition of ``consumer'' under the
FCRA is simply an ``individual.'' \42\ For this reason, the Agencies
continue to believe that the protections of this provision must extend
to consumers who hold a card for a personal, household, family or
business purpose.
---------------------------------------------------------------------------

\42\ 15 U.S.C. 1681a(c).
---------------------------------------------------------------------------

Section --.91(b)(2) Clear and conspicuous

The second proposed definition was for the phrase ``clear and
conspicuous.'' Proposed Sec. --.91 included a provision that required
any written or electronic notice provided by a card issuer to the
consumer pursuant to the regulations to be given in a ``clear and
conspicuous manner.'' The proposed regulations defined ``clear and
conspicuous'' based on the definition of this phrase found in the
Agencies' privacy rules.
The Agencies received no comments on the phrase ``clear and
conspicuous,'' and have adopted the definition as proposed in Sec.
--.91(b)(2).

Sections --.91(c) and (d) Address Validation

Proposed Sec. --.91(c) simply restated the statutory requirements
described above with some minor stylistic changes. A number of
commenters noted that the requirements of this section would be
difficult and expensive to implement. They stated that millions of
address changes are processed every year, though very few turn out to
be fraudulent.
By contrast, consumer groups suggested that the final regulations
should require the card issuer to notify the consumer of a request for
an address change followed by the request for an additional or
replacement card, unless there are special circumstances that prevent
doing so in a timely manner.
Many commenters recommended that the final rules provide credit and
debit card issuers with greater flexibility to verify address changes.
For example, they stated it is not clear that an address change linked
with a request for an additional card is a significant indicator of
identity theft. Therefore, they recommended the rules (1) specifically
permit card issuers to satisfy the requirements of this section by
verifying the address at the time the address change notification is
received, whether or not the notification is linked to a request for an
additional or replacement card; or (2) verify the address whenever a
request for an additional or replacement card is made, whether or not
the card issuer receives notification of an address change.
One commenter suggested that the rules should only apply to card
issuers that receive direct notification of an address change rather
than an address change notification from the U.S. Postal Service. The
commenter asserted that there is a higher risk of fraud with a direct
request for a change of address.
Consumer groups also recommended that the Agencies set a period
longer than the 30-day minimum for card issuers to be on alert after an
address change request. These commenters recommended that, because of
billing cycles and the time it takes to issue a new card, an issuer
should be required to assess the validity of an address change if it
receives a request for an additional or replacement card within at
least 90 days after the request for the address change.
Some commenters asked the Agencies to clarify what ``other means''
would be acceptable in assessing the validity of a change in address.
One commenter stated that it is not cost effective to contact the
customer, therefore, most card issuers would use ``other means'' of
assessing the validity of the change of address in accordance with the
policies and procedures the card issuer establishes pursuant to Sec.
--.90.
Commenters also asked the Agencies to clarify that the obligation
to assess the validity of a request for an address change is not
triggered unless the card issuer actually changes the cardholder's
address.
Some commenters asked the Agencies to clarify whether electronic
notices would be acceptable if the cardholder had previously contracted
for electronic communications. Consumer groups recommended electronic
notification be permitted only when the consumer consents in accordance
with the E-Sign Act.
The Agencies note that the statutory provision being implemented
here is quite specific. Congress mandated that the requirements set
forth in section 615(e)(1)(C) of the FCRA apply to notifications of
changes of address, which would necessarily include both those received
directly from consumers and those received from the Postal Service.
Congress also statutorily provided various methods to card issuers for
assessing the validity of a change of address. \43\ Accordingly, the
final rules reflect these methods.
---------------------------------------------------------------------------

\43\ See S. Rep. No. 108-166 at 14 (October 17,
2003)(accompanying S. 1753)(stating that a card issuer may rely on
authentication procedures that do not involve a separate
communication with the cardholder so long as the issuer has
reasonably assessed the validity of the address change.)
---------------------------------------------------------------------------

Under Sec. --.91(c) of the final rules, a card issuer that
receives an address change notification and, within at least 30 days, a
request for an additional or replacement card, may not issue an
additional or replacement card until it has notified the cardholder or
has otherwise assessed the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. --.90. The Agencies have concluded that
card issuers should be granted additional flexibility. Therefore, Sec.
--.91(d) clarifies that a card issuer may satisfy the requirements of
Sec. --.91(c) by validating an address, according to the methods set
forth in Sec. --.91(c)(1) or (2), when it receives an address change
notification, before it receives a request for an additional or
replacement card. The rules do not require a card issuer that issues an
additional or replacement card to validate an address whenever it
receives a request for such a card, because section 114 only requires
the validation of an address when the card issuer also has received a
notification of a change of address.

[[Page 63735]]

The Agencies also revised Sec. --.91 to clarify that a card issuer
must provide to the cardholder a ``reasonable'' means of promptly
reporting incorrect address changes whenever the card issuer notifies
the cardholder of the request for an additional or replacement card.
\44\
---------------------------------------------------------------------------

\44\ See S. Rep. No. 108-166 at 14 (October 17, 2003)
(accompanying S. 1753) (stating that a means of reporting an
incorrect change could be through the mail, by telephone, or
electronically.)
---------------------------------------------------------------------------

The Agencies declined to adopt the recommendation that an issuer
assess the validity of an address change if it receives a request for
an additional or replacement card within ``at least 90 days'' after an
address change notification, as ``at least 30 days'' may be a
reasonable period of time in some cases. However, a card issuer that
does not validate an address when it receives an address change
notification may find it prudent to validate the address before issuing
an additional or replacement card, even when it receives a request for
such a card more than 30 days after the notification of address change.
In sum, the Agencies expect card issuers to exercise diligence
commensurate with their own experiences with identity theft.
The Agencies also confirm that a card issuer is not obligated to
assess the validity of a notification of an address change after
receiving a request for an additional or replacement card if it
previously determined not to change the cardholder's address because
the address change request was fraudulent. \45\
---------------------------------------------------------------------------

\45\ This position is consistent with the legislative history of
this section. See S. Rep. No. 108-166 at 14 (Oct. 17, 2003)
(accompanying S. 1753) (stating that it would not be necessary for
the card issuer to take these steps ``if, despite receiving a
request for an address change, the issuer did not actually change
the cardholder's address for any reason (e.g., the card issuer had
previously determined that the request for an address change was
invalid)'').
---------------------------------------------------------------------------

Section --.91(e) Form of Notice

In the preamble to the proposed rules, the Agencies noted that
Congress had singled out this scenario involving card issuers and
placed it in section 114 because it is perceived to be a possible
indicator of identity theft. To highlight the important and urgent
nature of notice that a consumer receives from a card issuer pursuant
to Sec. --.91(c), the Agencies also proposed requiring that any
written or electronic notice that a card issuer provides under this
paragraph must be clear and conspicuous and provided separately from
its regular correspondence with the cardholder. The preamble to the
proposed rules stated that a card issuer could also provide notice
orally, in accordance with the policies and procedures the card issuer
has established.
A few commenters recommended that this proposed requirement apply
only if the issuer notifies the cardholder of the change of address
request at the cardholder's former address. These commenters stated
that, otherwise, the provision would prohibit other types of notices,
such as those in periodic statements. Another commenter stated that
this provision was not necessary because card issuers would send such
notices separately in any event.
The Agencies are not convinced that such a notice would be provided
separately from a card issuer's regular correspondence with the
cardholder unless required. Moreover, the Agencies do not agree that
this requirement should apply only if a card issuer chooses to notify
the cardholder of the change of address request at the cardholder's
former address in accordance with Sec. --.91(c)(1). Even where the
card issuer and cardholder agree to some other means for notice, this
alternative means does not change the important nature of the notice.
Therefore, Sec. --.91(e) of the final rules provides that any written
or electronic notice that the card issuer provides under this paragraph
must be clear and conspicuous, and provided separately from its regular
correspondence with the cardholder.

III. Section 315 of the FACT Act

A. Background

Section 315 of the FACT Act amends section 605 of the FCRA, 15
U.S.C. 1681c, by adding a new subsection (h). Section 605(h)(1)
requires that, when providing a consumer report to a person that
requests the report (the user), a nationwide consumer reporting agency,
as defined in section 603(p) of the FCRA, (CRA) must provide a notice
of the existence of a discrepancy if the address provided by the user
in its request ``substantially differs'' from the address the CRA has
in the consumer's file.
Section 605(h)(2) requires the Agencies to issue joint regulations
that provide guidance regarding reasonable policies and procedures a
user of a consumer report should employ when the user receives a notice
of address discrepancy. These regulations must describe reasonable
policies and procedures for a user of a consumer report to employ to
(i) enable it to form a reasonable belief that the user knows the
identity of the person for whom it has obtained a consumer report, and
(ii) reconcile the address of the consumer with the CRA, if the user
establishes a continuing relationship with the consumer and regularly
and in the ordinary course of business furnishes information to the
CRA.

B. Section-by-Section Analysis

Section --.82(a) Scope

Proposed Sec. --.82(a) noted that the scope of section 315 differs
from the scope of section 114 and explained that section 315 applies to
``users of consumer reports'' and ``persons requesting consumer
reports'' (hereinafter referred to as ``users''), as opposed to
financial institutions and creditors. Therefore, section 315 does not
apply to a financial institution or creditor that does not use consumer
reports. The Agencies did not receive any comments on this section and
have adopted it as proposed in the final rules.

Section --.82(b) Definition

Proposed Sec. --.82(b) defined ``notice of address discrepancy''
as ``a notice sent to a user of a consumer report by a CRA pursuant to
15 U.S.C. 1681c(h)(1), that informs the user of a substantial
difference between the address for the consumer provided by the user in
requesting the consumer report and the address or addresses the CRA has
in the consumer's file.'' \46\
---------------------------------------------------------------------------

\46\ All other terms used in this section have the same meanings
as set forth in the FCRA (15 U.S.C. 1681a).
---------------------------------------------------------------------------

In the preamble to the proposed rules, the Agencies noted that
section 605(h)(1) requiring CRAs to provide notices of address
discrepancy became effective on December 1, 2004. To the extent CRAs
each have developed their own standards for delivery of notices of
address discrepancy, the proposal noted that it is important for users
to be able to recognize and receive notices of address discrepancy,
especially if they are being delivered electronically by CRAs. For
example, CRAs may provide consumer reports with some type of a code to
indicate an address discrepancy. Users must be prepared to recognize
the code as an indication of an address discrepancy.
While some commenters agreed with the proposed definition, a number
of commenters suggested that the Agencies clarify that only a
``substantial'' discrepancy would trigger the requirements in this
provision and that obvious errors would not. Some commenters also
suggested that the Agencies provide examples of what constitutes a
``substantial difference.'' One commenter stated that users should be
able to determine when there is a substantial difference.

[[Page 63736]]

As noted earlier, section 605(h)(1) requires a CRA to send a notice
of address discrepancy when it determines that the address provided to
the CRA by a user ``substantially differs'' from the address the CRA
has in the consumer's file. The phrase ``substantially differs'' is not
defined in the statute. Instead, the statute allows each CRA to
construe this phrase as it chooses and, accordingly, to set the
standard it will use to determine when it will send a notice of address
discrepancy.
As required by section 605(h)(2), this rulemaking focuses on the
obligations of users that receive a notice of address discrepancy from
a CRA. The statute does not indicate that the Agencies are to define
the phrase ``substantially differs'' for CRAs or to permit users to
define that phrase themselves. Therefore, the final rules adopt the
proposed definition of ``notice of address discrepancy'' without
change.

Section --.82(c) Requirement to form a reasonable belief

Proposed Sec. --.82(c) implemented the requirement in section
605(h)(2)(B)(i) that the Agencies prescribe regulations describing
reasonable policies and procedures to enable the user to form a
reasonable belief that the user knows ``the identity of the person to
whom the consumer report pertains'' when the user receives a notice of
address discrepancy. Proposed Sec. --.82(c) stated that a user must
develop and implement reasonable policies and procedures for
``verifying the identity of the consumer for whom it has obtained a
consumer report'' whenever it receives a notice of address discrepancy.
The proposal stated further that these policies and procedures must be
designed to enable the user to form a reasonable belief that it knows
the identity of the consumer for whom it has obtained a consumer
report, or determine that it cannot do so.
A number of commenters stated that the statutory requirement that a
user form a reasonable belief that it knows the identity of the
consumer for whom it obtained a consumer report should only apply in
situations where the user establishes a continuing relationship with
the consumer.
A consumer group suggested that the language in the proposed
regulation permitting a user to determine that it cannot form a
reasonable belief of the identity of the consumer should be deleted
because the statute specifically requires a reasonable belief to be
formed. This commenter stated that the purpose of the statute was to
reduce the number of new accounts opened using false addresses, and
that permitting a user to satisfy its obligations under the regulations
by simply determining it cannot form a reasonable belief would allow
the user to open an account, effectively rendering the statute
meaningless.
The purpose of section 315 is to enhance the accuracy of consumer
information, specifically to ensure that the user has obtained the
correct consumer report for the consumer about whom it has requested
such a report. To implement this concept more clearly, Sec. --.82(c)
of the final rules provides that a user must develop and implement
reasonable policies and procedures designed to enable the user to form
a reasonable belief that a consumer report relates to the consumer
about whom it has requested the report when the user receives a notice
of address discrepancy.\47\
---------------------------------------------------------------------------

\47\ The Agencies acknowledge that an address discrepancy also
may be an indicator of identity theft. To address this problem, the
Agencies included address discrepancies as an example of a Red Flag
in connection with the Identity Theft Red Flag regulations.
---------------------------------------------------------------------------

The Agencies do not agree with commenters who suggested that the
proposed provision should apply only in connection with the
establishment of a continuing relationship with a consumer, in other
words, when a user is opening a new account. The statutory requirement
in section 605(h)(2)(B)(i) that a user form a reasonable belief that it
knows the identity of the consumer for whom it obtained a consumer
report applies whether or not the user subsequently establishes a
continuing relationship with the consumer. This is in contrast to the
additional statutory requirement in section 605(h)(2)(B)(ii) that a
user reconcile the address of the consumer with the CRA, only when the
user establishes a continuing relationship with the consumer.
In addition, a user may receive a notice of address discrepancy
with a consumer report, both in connection with the opening of an
account and in other circumstances when the user already has a
relationship with the consumer, such as when the consumer applies for
an increased credit line. The Agencies believe it is important for a
user to form a reasonable belief that a consumer report relates to the
consumer about whom it has requested the report in both of these cases.
Accordingly, the final rules do not limit this provision solely to the
establishment of new accounts.
Proposed Sec. --.82(c) also provided that if a user employs the
policies and procedures regarding identification and verification set
forth in the CIP rules,\48\ it would satisfy the requirement to have
policies and procedures to verify the identity of the consumer. This
provision took into consideration the fact that many users already may
be subject to the CIP rules, and have in place procedures to comply
with those rules, at least with respect to the opening of accounts.
Thus, a user could rely upon its existing CIP policies and procedures
to satisfy this requirement, so long as it applied them in all
situations where it receives a notice of address discrepancy. The
proposal also stated that any user, such as a landlord or employer, may
adopt the CIP rules and apply them in all situations where it receives
a notice of address discrepancy to meet this requirement, even if it is
not subject to a CIP rule.
---------------------------------------------------------------------------

\48\ See, e.g., 31 CFR 103.121(b)(2)(i) and (ii).
---------------------------------------------------------------------------

The Agencies requested comment on whether the CIP procedures would
be sufficient to enable a user that receives a notice of address
discrepancy with a consumer report to form a reasonable belief that it
knows the identity of the consumer for whom it obtained the report,
both in connection with the opening of an account, as well as in other
circumstances where a user obtains a consumer report, such as when a
user requests a consumer report to determine whether to increase the
consumer's credit line, or in the case of a landlord or employer, to
determine a consumer's eligibility to rent housing or for employment.
Many commenters supported the use of CIP to satisfy this
requirement. Some commenters, however, asked the Agencies to clarify
that once a consumer's identity was verified using CIP, it would not be
necessary to re-verify that consumer's identity under this provision.
Some commenters found the proposal's preamble language confusing.
These commenters did not understand why a user would need to use its
CIP policies in every situation where a notice of address discrepancy
was received in order to comply with this requirement; they felt that
it might be possible to form a reasonable belief without using CIP in
some circumstances.
Other commenters noted that the CIP rules, which were issued for
different purposes, are not the appropriate standard for investigating
a consumer's identity after a notice of address discrepancy because
those rules permit verification of an address to occur after an account
is opened and do not require contacting the consumer. One commenter
stated that it was not clear whether a user relying on the CIP rules to
satisfy the obligations under the regulation must comply with some or
all of the requirements in the CIP rules,

[[Page 63737]]

including those that require policies and procedures to address
circumstances when a user cannot form a reasonable belief it knows the
identity of the consumer.
The Agencies believe that comparing information provided by a CRA
to information the user obtains and uses (or has obtained and used) to
verify a consumer's identity pursuant to the requirements set forth in
the CIP rules is an appropriate way to satisfy this obligation,
particularly in connection with the opening of a new account. However,
when a user receives a notice of address discrepancy in connection with
an existing account, after already having identified and verified the
consumer in accordance with the CIP rules, the Agencies would not
expect a user to employ the CIP procedures again. To address this issue
and provide users with flexibility, Sec. --.82(c) of the final rule
provides examples of reasonable policies and procedures that a user may
employ to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report.
These examples include comparing information provided by the CRA with
information the user: (1) Obtains and uses to verify the consumer's
identity in accordance with the requirements of the CIP rules; (2)
maintains in its own records, such as applications, change of address
notifications, other customer account records, or retained CIP
documentation; or (3) obtains from third-party sources. Another example
is to verify the information in the consumer report provided by the CRA
with the consumer.
If a user cannot establish a reasonable belief that the consumer
report relates to the consumer about whom it has requested the report,
the Agencies expect the user will not use that report. While section
605(h)(2)(B)(i) is silent on this point, other laws may be applicable
in such a situation. For example, in the case of account openings, a
user that is subject to the CIP rules generally will need to document
how it has resolved the discrepancy between the address provided by the
consumer and the address in the consumer report.\49\ If the user cannot
establish a reasonable belief that it knows the true identity of the
consumer, it will need to implement the policies and procedures for
addressing these circumstances as required by the CIP rules, which may
involve not opening an account or closing an account.\50\ If a user is
a ``financial institution'' or ``creditor'' as defined by the FCRA, a
notice of address discrepancy may be a Red Flag and require an
appropriate response to prevent and mitigate identity theft under the
user's Identity Theft Prevention Program.
---------------------------------------------------------------------------

\49\ See, e.g., 31 CFR 103.121(b)(3)(i)(D).
\50\ See, e.g., 31 CFR 103.121(b)(2)(iii).
---------------------------------------------------------------------------

Section --.82(d)(1) Requirement To Furnish Consumer's Address to a
Consumer Reporting Agency

Proposed Sec. --.82(d)(1) provided that a user must develop and
implement reasonable policies and procedures for furnishing to the CRA
from whom it received the notice of address discrepancy an address for
the consumer that the user has reasonably confirmed is accurate when
the following three conditions are satisfied. The first condition, in
proposed Sec. --.82(d)(1)(i), was that the user must be able to form a
reasonable belief that it knows the identity of the consumer for whom
the consumer report was obtained. This condition would have ensured the
user would furnish a new address for the consumer to the CRA only after
the user had formed a reasonable belief that it knew the identity of
the consumer, using the policies and procedures set forth in paragraph
Sec. --.82(c).
The second condition, in proposed Sec. --.82(d)(1)(ii), was that
the user furnish the address to the CRA if it establishes or maintains
a continuing relationship with the consumer. Section 315 specifically
requires that the user furnish the consumer's address to the CRA if the
user establishes a continuing relationship with the consumer.
Therefore, proposed Sec. --.82(d)(1)(ii) reiterated this requirement.
However, because a user also may obtain a notice of address discrepancy
in connection with a consumer with whom it already has an existing
relationship, the proposal also provided that the user must furnish the
consumer's address to the CRA from whom the user has received a notice
of address discrepancy when the user maintains a continuing
relationship with the consumer.
Finally, the third condition, in proposed Sec. --.82(d)(1)(iii),
provided that if the user regularly and in the ordinary course of
business furnishes information to the CRA from which a notice of
address discrepancy pertaining to the consumer was obtained, the
consumer's address must be communicated to the CRA as part of the
information the user regularly provides.
A majority of commenters recommended that the requirement to
furnish a confirmed address should not apply to existing accounts.
These commenters maintained that such a requirement would exceed the
scope of the statute. They also noted that users often do not obtain
full consumer reports for existing customers--just credit scores. These
commenters noted that limited reports often do not contain an address
for a customer. Some commenters also felt existing relationships should
be excluded because users already would have verified a consumer's
address at the time of account opening.
The Agencies have modified this section as follows. The final rules
continue to provide that a user must develop and implement reasonable
policies and procedures for furnishing an address for the consumer that
the user has reasonably confirmed is accurate to the CRA when three
conditions are present. The first condition, in Sec. --.82(d)(1)(i),
has been revised to be consistent with the earlier changes in section
Sec. --.82(c) that focus more narrowly on accuracy and require that a
user form a reasonable belief that a consumer report relates to the
consumer about whom it requested the report. The second condition, in
Sec. --.82(d)(1)(ii), now applies only to new accounts and states that
a confirmed address must be furnished if the user ``establishes'' a
continuing relationship with the consumer. The reference to ``or
maintains'' a continuing relationship has been deleted. The Agencies
agree with commenters that section 605(h)(2)(B)(ii) does not require
the reporting of a confirmed address to a CRA in connection with
existing relationships. The Agencies have concluded that users are more
likely than a CRA to have an accurate address for an existing customer
and, therefore, should not be required by these rules to take
additional steps to confirm the accuracy of the customer's address.
Users already have an ongoing duty to correct and update information
for their existing customers under section 623 of the FCRA, 15 U.S.C.
1681s-2. Accordingly, under the final rules, the obligation to furnish
a confirmed address for the consumer to the CRA is applicable only to
new relationships. The third condition, in Sec. --.82(d)(1)(iii), has
been adopted in the final rule without substantive change.

Section --.82(d)(2) Requirement To Confirm Consumer's Address

In the preamble to the proposal, the Agencies noted that section
315 requires them to prescribe regulations describing reasonable
policies and procedures for a user ``to reconcile the address of the
consumer'' about whom it has obtained a notice of address discrepancy
with the CRA ``by furnishing such address'' to the CRA. (Emphasis
added.) The

[[Page 63738]]

Agencies noted that, even when the user is able to form a reasonable
belief that it knows the identity of the consumer, there may be many
reasons the initial address furnished by the consumer is incorrect. For
example, a consumer may have provided the address of a secondary
residence or inadvertently reversed a street number. To ensure that the
address furnished to the CRA is accurate, the Agencies proposed to
interpret the phrase, ``such address,'' as an address the user has
reasonably confirmed is accurate. This interpretation would have
required a user to take steps to ``reconcile'' the address it initially
received from the consumer when it receives a notice of address
discrepancy, rather than simply furnishing the initial address it
received from the consumer to the CRA. Proposed Sec. --.82(d)(2)
contained the following list of illustrative measures that a user may
employ to reasonably confirm the accuracy of the consumer's address:
Verifying the address with the person to whom the consumer
report pertains;
Reviewing its own records of the address provided to
request the consumer report;
Verifying the address through third-party sources; or
Using other reasonable means.
The Agencies solicited comment on whether these examples were
necessary, or whether different or additional examples should be
listed.
A number of commenters stated that requiring a user to confirm the
address furnished exceeded the scope of the statute. They asserted that
the benefit of improvements in the accuracy of addresses and the
prevention of identity theft would not outweigh the additional burden
of this requirement. A few commenters noted that complying with the CIP
rules should be sufficient to verify the address. Commenters also felt
that users should have the flexibility to establish their own
validation processes based on risk.
As stated earlier, the Agencies believe the purpose of the statute
is to enhance the accuracy of information relating to consumers by
requiring the user to furnish an address that the user has reasonably
confirmed is accurate.\51\ Simply providing the CRA with the initial
address supplied to the user by the consumer, and which caused the CRA
to send a notice of address discrepancy, would not serve this purpose.
The Agencies believe the options for confirmation listed in the
regulation provide sufficient flexibility for users to confirm
consumers' addresses. For this reason, they have been adopted in the
final rule as proposed, with minor technical changes. Section
--.82(d)(2)(i) has been revised to conform the language with Sec.
--.82(c). Section --.82(d)(2)(ii) has been revised to emphasize the
verification of the consumer's address rather than the review of the
user's records to determine whether the address given by the consumer
is the same.
---------------------------------------------------------------------------

\51\ This requirement is consistent with the legislative history
which provides that this section is intended to obligate the user to
utilize reasonable policies and procedures to resolve discrepancies.
See H.R. Rep. No. 108-263 at 46 (Sept. 4, 2003) (accompanying H.R.
2622).
---------------------------------------------------------------------------

Section --.82(d)(3) Timing

Section 315 specifies when a user must furnish the consumer's
address to the CRA. It states that this information must be furnished
for the reporting period in which the user's relationship with the
consumer is established. Accordingly, proposed Sec. --.82(d)(3)(i)
stated that, with respect to new relationships, the policies and
procedures a user develops in accordance with Sec. --.82(d)(1) must
provide that a user will furnish the consumer's address that it has
reasonably confirmed to the CRA as part of the information it regularly
furnishes for the reporting period in which it establishes a
relationship with the consumer.
The proposed rule also addressed other situations when a user may
receive a notice of address discrepancy. Proposed Sec. --.82(d)(3)(ii)
stated that in other circumstances, such as when the user already has
an existing relationship with the consumer, the user should furnish
this information for the reporting period in which the user has
reasonably confirmed the accuracy of the address of the consumer for
whom it has obtained a consumer report.
The Agencies also noted that, in order to satisfy the requirements
of both Sec. --.82(d)(1) and Sec. --.82(d)(3)(i), a user employing
the CIP rules would have to establish a continuing relationship and
verify the identity of the consumer during the same reporting period.
The Agencies recognized the timing provision for newly established
relationships could be problematic for users hoping to take full
advantage of the flexibility in timing for verification of identity
afforded by the CIP rules. As required by statute, proposed Sec.
--.82(d)(3)(i) stated that the reconciled address must be furnished for
the reporting period in which the user establishes a relationship with
the consumer. Proposed Sec. --.82(d)(1), which also mirrored the
requirement of the statute, required the reconciled address to be
furnished to the CRA only when the user both establishes a continuing
relationship with the consumer and forms a reasonable belief that it
knows the identity of the consumer to whom the consumer report relates.
Typically, the CIP rules permit an account to be opened (i.e.,
relationship to be established) if certain identifying information is
provided. Verification to establish the true identity of the customer
is required within a reasonable period of time after the account has
been opened. As explained in the preamble to the proposed rules, to
satisfy the requirements of both Sec. --.82(d)(1) and Sec.
--.82(d)(3)(i), a user employing the CIP rules would have to verify the
identity of the consumer using the identifying information it obtained
in accordance with the CIP rules within the same reporting period that
the user opens the account and establishes a continuing relationship
with the consumer.
The Agencies requested comment on whether the timing for responding
to notices of address discrepancy received in connection with newly
established relationships and in connection with circumstances other
than newly established relationships is appropriate. One commenter
objected to the requirement that a user employing the CIP rules would
have to both establish a continuing relationship and a reasonable
belief that it knows the consumer's identity during the same reporting
period. A few commenters noted that the timing for reporting should
simply be ``reasonable,'' such as the next reporting cycle.
Because the Agencies have determined that the requirement to
furnish a confirmed address will apply only to newly established
accounts, the Agencies have revised Sec. --.82(d)(3) to remove the
references to the timing for furnishing reports in connection with
other accounts, contained in the proposal. The final rules reflect the
language in section 605(h)(2)(B)(ii), and state that a user's policies
and procedures must provide that the user will furnish the consumer's
address that the user has reasonably confirmed is accurate to the
consumer reporting agency as part of the information it regularly
furnishes for the reporting period in which it establishes a
relationship with the consumer.
A timing issue still exists for a user that chooses to compare the
information in the consumer report with information that the user
obtains and uses to verify the consumer's identity in accordance with
the CIP rules for the purpose of forming a reasonable belief that a
consumer report relates to the consumer

[[Page 63739]]

about whom it has requested the report. However, the Agencies believe
that the benefits of being able to use CIP for this purpose should
outweigh any additional burden of having to establish a reasonable
belief that a consumer report relates to the consumer about whom it has
requested the report within the same reporting period that the user
opens the account and establishes a continuing relationship with the
consumer.

IV. General Provisions

The OCC, the Board, the FDIC, the OTS, and the NCUA \52\ proposed
to amend the first sentence in Sec. --.3, which contains the
definitions that are applicable throughout this part. This sentence
stated that the list of definitions in Sec. --.3 apply throughout the
part ``unless the context requires otherwise.'' These agencies proposed
to amend this introductory sentence to make clear that the definitions
in Sec. --.3 apply ``for purposes of this part, unless explicitly
stated otherwise.'' Thus, these definitions apply throughout the part
unless defined differently in an individual subpart. There were no
comments on this proposal, and the change to Sec. --.3 is adopted as
proposed.
---------------------------------------------------------------------------

\52\ The equivalent language for the FTC already exists in 16
CFR 603.1.
---------------------------------------------------------------------------

OTS proposed nonsubstantive, technical changes to its rule sections
on purpose and scope (Sec. 571.1) and disposal of consumer information
(Sec. 571.83). OTS explained that these changes were necessary in
light of the proposed incorporation of the address discrepancy section
into subpart I. There were no comments on these proposed changes and
they are adopted substantially as proposed. Further, since these
changes render the definition of ``you'' in Sec. 571.3(o) superfluous,
OTS is removing that definition.
The OCC's final rules add a purpose section at Sec. 41.1. The
final rules are simply restoring the purpose section of part 41 that
was inadvertently deleted when ``subpart D-Medical Information'' was
added to this part.

V. Effective Date

The Agencies received a number of comments regarding the effective
date of the final regulations and guidelines, although the proposed
rulemaking did not address this issue. While consumer groups
recommended that the effective date for compliance with the regulations
be the minimum time allowed by law, many financial institutions and
creditors requested the time for compliance be extended from between 12
to 24 months from issuance of the final rules. These commenters felt
they needed time to take an inventory of their existing systems and
develop new programs necessary for compliance. Some commenters noted
that they likely would use technological solutions to comply with the
rules and that it is necessary to schedule such projects well in
advance. Commenters also noted that compliance with the final rules may
require systemic and operational changes across business lines and
could affect relationships with vendors and third party service
providers that would require time to change.
Neither section 114 nor section 315 of the FACT Act specifically
addresses the effective date of the regulations issued pursuant to
these sections. Under the Administrative Procedure Act (APA), 5 U.S.C.
553(d), agencies must generally publish a substantive rule not less
than 30 days before its effective date. In addition, under section 302
of the Riegle Community Development and Regulatory Improvement Act of
1994 (CDRIA),\53\ rules issued by the Federal banking agencies that
impose additional reporting, disclosure, or other new requirements on
financial institutions generally will take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in the Federal Register. Because these final
rules are substantive and impose additional requirements on financial
institutions, the Agencies have provided for an effective date of
[January 1, 2008], consistent with the APA and CDRIA.
---------------------------------------------------------------------------

\53\ Pub. L. 103-325; 12 U.S.C. Sec. 4802(b).
---------------------------------------------------------------------------

At the same time, the Agencies have determined that it is
appropriate to provide all covered entities with a delayed compliance
date of November 1, 2008, to comply with the requirements of the final
rulemaking. Some financial institutions and creditors already employ a
variety of measures that satisfy the requirements of the final
rulemaking because these are usual and customary business practices to
minimize losses due to fraud, or as a result of already complying with
other existing regulations and guidance that relate to information
security, authentication, identity theft, and response programs.
However, the Agencies recognize that these entities may still need time
to evaluate their existing programs, and to integrate appropriate
elements from them into the Program and into the other policies and
procedures required by this final rulemaking. Further, the Agencies
recognize that some covered entities have not previously been subject
to any related regulations or guidance, and thus may need more time to
implement the final rules and guidelines. Therefore, the Agencies are
providing covered entities with a transition period to comply with the
requirements contained in the final rulemaking.

VI. Regulatory Analysis

A. Paperwork Reduction Act

In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3501 et seq., 5 CFR part 1320 Appendix A.1),
the Agencies have reviewed the final rulemaking and determined that it
contains collections of information subject to the PRA. The Board made
this determination under authority delegated to the Board by the Office
of Management and Budget (OMB). The information collection requirements
in the final rulemaking may be found in 12 CFR 41.82, 41.90, 41.91,
222.82, 222.90, 222.91, 334.82, 334.90, 334.91, 571.82, 571.90, 571.91,
717.82, 717.90; and 717.91; and 16 CFR 681.1, 681.2, and 681.3.
An agency may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid OMB control number. The information collection
requirements contained in this joint final rule were submitted by the
OCC, FDIC, OTS, NCUA, and FTC to OMB for review and approval under the
Paperwork Reduction Act of 1995. OMB assigned the following control
numbers to the collections of information: OMB Control Nos. 1557-0237
(OCC), 3064-0152 (FDIC), 1550-0113 (OTS), 3133-0175 (NCUA), and 3084-
0137 (FTC). The Board's OMB Control No. is 7100-0308.\54\
---------------------------------------------------------------------------

\54\ The information collections (ICs) in this rule will be
incorporated with the Board's Disclosure Requirements Associated
with Regulation V (OMB No. 7100-0308). The burden estimates provided
in this rule pertain only to the ICs associated with this final
rulemaking. The current OMB inventory for Regulation V is available
at: http://www.reginfo.gov/public/do/PRAMain.
---------------------------------------------------------------------------

Description of the Collection
Section 114: The proposed rules implementing section 114 required
each financial institution and creditor to (1) create an Identity Theft
Prevention Program (Program); (2) report to the board of directors, a
committee thereof or senior management, at least annually, on
compliance with the proposed regulations; and (3) train staff to
implement the Program.
In addition, the proposed rules required each credit and debit card
issuer (card issuer) to establish policies and procedures to (1) assess
the validity

[[Page 63740]]

of a change of address notification before honoring a request for an
additional or replacement card received during at least the first 30
days after it receives the notification; and (2) notify the cardholder
in writing, electronically, or orally, or use another means of
assessing the validity of the change of address.
Section 315: The proposed rules implementing section 315 required
each user of consumer reports to (1) develop reasonable policies and
procedures it would employ when it receives a notice of address
discrepancy from a CRA; and (2) to furnish an address the user
reasonably confirmed is accurate to the CRA from which it receives a
notice of address discrepancy.
The information collections in the final rulemaking are the same as
those in the proposal.
Comments Received
The Agencies sought comment on the burden estimates for the
information collections described in the proposal. The Agencies
received approximately 129 comments on the proposed rulemaking. Most
commenters maintained that proposal would impose additional regulatory
burden and asserted that the estimates of the cost of compliance should
be considerably higher than the Agencies projected. A few of these
commenters specifically addressed PRA burden, however, they did not
provide specific estimates of additional burden hours that would result
from the proposal. Some of these commenters stated that staff training
estimates were significantly underestimated. Other commenters stated
that the costs of compliance failed to consider the cost to third-party
service providers that the commenters characterized as being required
to implement the Program.
Explanation of Burden Estimates Under the Final Rulemaking
The Agencies believe that many of the comments received regarding
burden stemmed from commenters' misreading of the requirements of the
proposed rulemaking. The final rulemaking clarifies these requirements,
including those that relate to the information collections. It also
differs from the proposal as described below.
The Agencies continue to believe that most covered entities already
employ a variety of measures to detect and address identity theft that
are required by section 114 of the final rulemaking because these are
usual and customary business practices that they employ to minimize
losses due to fraud. In addition, the Agencies believe that many
financial institutions and creditors already have implemented some of
the requirements of the final rules implementing section 114 as a
result of having to comply with other existing regulations and
guidance, such as the CIP regulations implementing section 326 of the
USA PATRIOT Act, 31 U.S.C. 5318(l) that require verification of the
identity of persons opening new accounts),\55\ the Information Security
Standards that implement section 501(b) of the Gramm-Leach-Bliley Act
(GLBA), 15 U.S.C. 6801, and section 216 of the FACT Act, 15 U.S.C.
1681w,\56\ and guidance issued by the Agencies or the Federal Financial
Institutions Examination Council regarding information security,
authentication, identity theft, and response programs.\57\ The final
rulemaking underscores the ability of a financial institution or
creditor to incorporate into its Program its existing processes that
control reasonably foreseeable risks to customers or to its own safety
and soundness from identity theft, such as those already developed in
connection with the covered entity's fraud prevention program. Thus,
the burden estimate attributable to the creation of a Program is
unchanged.
---------------------------------------------------------------------------

\55\ See, e.g., 31 CFR 103.121 (banks, savings associations,
credit unions, and certain non-federally regulated banks); 31 CFR
103.122 (broker-dealers); 31 CFR 103.123 (futures commission
merchants).
\56\ 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 and
B, and 12 CFR 717 (credit unions); 16 CFR part 314 (financial
institutions that are not regulated by the Board, FDIC, NCUA, OCC
and OTS).
\57\ See, e.g., 12 CFR part 30, supp. A to app. B (national
banks); 12 CFR part 208, supp. A to app. D-2 and part 225, supp. A
to app. F (state member banks and holding companies); 12 CFR part
364, supp. A to app. B (state non-member banks); 12 CFR part 570,
supp. A to app. B (savings associations); 12 CFR 748, app. A and B
(credit unions); Federal Financial Institutions Examination Council
(FFIEC) Information Technology Examination Handbook's Information
Security Booklet (the ``IS Booklet'') available at http://www.ffiec.gov/guides.htm; FFIEC ``Authentication in an Internet
Banking Environment'' available at http://www.ffiec.gov/pdf/authentication_guidance.pdf; Board SR 01-11 (Supp) (Apr. 26, 2001)
available at: http://www.federalreserve.gov/boarddocs/srletters/2001/sr0111.htm; ``Guidance on Identity Theft and Pretext Calling,''
OCC AL 2001-4 (April 30, 2001); ``Identity Theft and Pretext
Calling,'' OTS CEO Letter 139 (May 4, 2001); NCUA Letter to
Credit Unions 01-CU-09, ``Identity Theft and Pretext Calling''
(Sept. 2001); OCC 2005-24, ``Threats from Fraudulent Bank Web Sites:
Risk Mitigation and Response Guidance for Web Site Spoofing
Incidents,'' (July 1, 2005); ``Phishing and E-mail Scams,'' OTS CEO
Letter 193 (Mar. 8, 2004); NCUA Letter to Credit Unions 04-
CU-12, ``Phishing Guidance for Credit Unions'' (Sept. 2004).
---------------------------------------------------------------------------

The final rulemaking also clarifies that only relevant staff need
be trained to implement the Program, as necessary--meaning that staff
already trained, for example, as a part of a covered entity's anti-
fraud prevention efforts do not need to be re-trained except as
necessary. Despite this clarification, in response to comments
received, the Agencies are increasing the burden estimates attributable
to training from two to four hours.
The Agencies' estimates attribute all burden to covered entities,
which are entities directly subject to the requirements of the final
rulemaking. A covered entity that outsources activities to a third-
party service provider is, in effect, reallocating to that service
provider the burden that it would otherwise have carried itself. Under
these circumstances, burden is, by contract, shifted from the covered
entity to the service provider, but the total amount of burden is not
increased. Thus, third-party service provider burden is already
included in the burden estimates provided for covered entities.
The Agencies continue to believe that card issuers already assess
the validity of change of address requests and, for the most part, have
automated the process of notifying the cardholder or using other means
to assess the validity of changes of address. Further, as commenters
requested, the final rulemaking clarifies that card issuers may satisfy
the requirements of this section by verifying the address at the time
the address change notification is received, before a request for an
additional or replacement card. Therefore, the estimates attributable
to this portion of the rulemaking are unchanged.
Regarding the final rules implementing section 315, the Agencies
recognize that users of consumer reports will need to develop policies
and procedures to employ upon receiving a notice of address discrepancy
in order to: (1) Ensure that the user has obtained the correct consumer
report for the consumer; and (2) confirm the accuracy of the address
the user furnishes to the CRA. However, under the final rules, a user
only must furnish a confirmed address to a CRA for new relationships.
Thus, the required policies and procedures will no longer need to
address the furnishing of confirmed addresses for existing
relationships, and users will not need to furnish to the CRA in
connection with existing relationships an address the user reasonably
confirmed is accurate.
The Agencies believe that users of credit reports covered by the
final rules,

[[Page 63741]]

on a regular basis, already furnish information to CRAs in response to
notices of address discrepancy because it is a usual and customary
business practice--except in connection with new deposit relationships.
For the proposed rulemaking, the Agencies had estimated that there
would be no implementation burden associated with furnishing confirmed
addresses to CRAs. However, as the result of additional research, the
Agencies now believe that some burden should be attributable to this
collection, to account for information furnished to CRAs for new
deposit relationships. Because this burden is offset by the reduction
in burden described above, the estimates for the collections
attributable to the final rules implementing section 315 remain
unchanged.
The Agencies continue to believe that 25 hours to develop a
Program, four hours to prepare an annual report, four hours to develop
policies and procedures to assess the validity of changes of address,
and four hours to develop policies and procedures to respond to notices
of address discrepancy, are reasonable estimates.
The potential respondents are national banks and Federal branches
and agencies of foreign banks and certain of their subsidiaries (OCC);
state member banks, uninsured state agencies and branches of foreign
banks, commercial lending companies owned or controlled by foreign
banks, and Edge and agreement corporations (Board); insured nonmember
banks, insured state branches of foreign banks, and certain of their
subsidiaries (FDIC); savings associations and certain of their
subsidiaries (OTS); Federally-chartered credit unions (NCUA); state-
chartered credit unions, non-bank lenders, mortgage brokers, motor
vehicle dealers, utility companies, and any other person that regularly
participates in a credit decision, including setting the terms of
credit (FTC).

Burden Estimates

The Agencies estimate the annual burden per respondent is 41 hours
(25 hours to develop a Program, four hours to prepare an annual report,
four hours for training, four hours for developing policies and
procedures to assess the validity of changes of address, and four hours
for developing policies and procedures to respond to notices of address
discrepancy). The Agencies attribute total burden to covered entities
as follows:
OCC:
Number of respondents: 1,806.
Total estimated annual burden: 74,046.
Board:
Number of respondents: 1,172.
Total Estimated Annual Burden: 48,052.
FDIC:
Number of respondents: 5,260.
Total Estimated Annual Burden: 215,660 hours.
OTS:
Number of respondents: 832.
Total Estimated Annual Burden: 34,112.
NCUA:
Number of respondents: 5,103.
Total Estimated Annual Burden: 209,223.
FTC Estimated Burden:\58\
---------------------------------------------------------------------------

\58\ Due to the varied nature of the entities subject to the
jurisdiction of the FTC, this Estimated Burden section reflects only
the view of the FTC. The banking regulatory agencies have jointly
prepared a separate analysis.
---------------------------------------------------------------------------

Section 114:
Estimated Hours Burden:
As discussed above, the final regulations require financial
institutions and creditors to conduct a risk assessment periodically to
determine whether they have covered accounts, which include, at a
minimum, consumer accounts. If the financial institutions and creditors
determine that they have covered accounts, the final regulations
require them to create a written Identity Theft Prevention Program
(Program) and they should report to the board of directors, a committee
thereof, or senior management at least annually on compliance with the
final regulations. The FCRA defines ``creditor'' to have the same
meaning as in section 702 of the Equal Credit Opportunity Act
(ECOA).\59\ Under Regulation B, which implements the ECOA, a creditor
means a person who regularly participates in a credit decision,
including setting the terms of credit. Regulation B defines credit as a
transaction in which the party has a right to defer payment of a debt,
regardless of whether the credit is for personal or commercial
purposes.\60\ Given the broad scope of entities covered, it is
difficult to determine precisely the number of financial institutions
and creditors that are subject to the FTC's jurisdiction. There are
numerous small businesses under the FTC's jurisdiction, and there is no
formal way to track them; moreover, as a whole, the entities under the
FTC's jurisdiction are so varied that there are no general sources that
provide a record of their existence. Nonetheless, FTC staff estimates
that the proposed regulations implementing section 114 will affect over
3,500 financial institutions \61\ and over 11 million creditors \62\
subject to the FTC's jurisdiction, for a combined total of
approximately 11.1 million affected entities. As detailed below, FTC
staff estimates that the average annual information collection burden
during the three-year period for which OMB clearance was sought will be
4,466,000 hours (rounded to the nearest thousand). The estimated annual
labor cost associated with this burden is $142,925,000 (rounded to the
nearest thousand).
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\59\ U.S.C. 1681a(r)(5).
\60\ Regulation B Equal Credit Opportunity, 12 CFR 202 (as
amended effective Apr. 15, 2003).
\61\ Under the FCRA, the only financial institutions over which
the FTC has jurisdiction are state-chartered credit unions. 15
U.S.C. 1681s. As of December 31, 2005, there were 3,302 state-
chartered federally-insured credit unions and 362 state-chartered
nonfederally insured credit unions, totaling 3,664 financial
institutions. See www.ncua.gov/news/quick_facts/quick_facts.html
and ``Disclosures for Non-Federally Insured Depository Institutions
under the Federal Deposit Insurance Corporation Improvement Act
(FDICIA),'' 70 FR 12823 (Mar. 16, 2005).
\62\ This estimate is derived from an analysis of a database of
U.S. businesses based on NAICS codes for businesses that market
goods or services to consumers or other businesses, which totaled
11,076,463 creditors subject to the FTC's jurisdiction.
---------------------------------------------------------------------------

For the proposed rule, FTC staff had divided affected entities into
two categories: entities that are subject to a high risk of identity
theft and entities that are subject to a low risk of identity theft.
Based on comments as well as changes in the final rule, FTC staff
believes that the affected entities can be categorized in three groups,
based on the nature of their businesses: entities subject to a high
risk of identity theft, entities subject to a low risk of identity
theft, but having consumer accounts that will require them to have a
written Program, and entities subject to a low risk of identity theft,
but not having consumer accounts.\63\
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\63\ In general, high-risk entities may provide consumer
financial services or other goods or services of value to identity
thieves such as telecommunication services or goods that are easily
convertible to cash, whereas low-risk entities may do business
primarily with other businesses or provide non-financial services or
goods that are not easily convertible to cash.
---------------------------------------------------------------------------

A. High-Risk Entities

In drafting its PRA analysis for the proposed regulations, FTC
staff believed that because motor vehicle dealers'' loans typically are
financed by financial institutions also subject to those regulations,
the dealers were likely to use the latter's programs as a basis to
develop their own. Therefore, although subject to a high risk of
identity theft, their burden would be less than other high-risk
entities. Commenters, however, noted among other concerns that some
motor vehicle dealers finance

[[Page 63742]]

their own loans. Thus, for this burden estimate, FTC staff no longer is
considering motor vehicle dealers separately from other high-risk
entities.
As noted above, the Agencies continue to believe that many of the
high-risk entities, as part of their usual and customary business
practices, already take steps to minimize losses due to fraud. The
final rulemaking clarifies that only relevant staff need be trained to
implement the Program, as necessary meaning, for example, that staff
already trained as a part of a covered entity's anti-fraud prevention
efforts do not need to be re-trained except as incrementally needed.
Notwithstanding this clarification, in response to comments received,
the Agencies are increasing the burden estimates attributable to
training from two to four hours, as is the FTC for high-risk entities
in their initial year of implementing the Program, but FTC staff
continues to believe that one hour of recurring annual training remains
a reasonable estimate.
The FTC staff maintains its estimate of 25 hours for high-risk
entities to create and implement a written Program, with an annual
recurring burden of 1 hour. As before, FTC staff anticipates that these
entities will incorporate policies and procedures that they likely
already have in place. The FTC staff continues to believe that
preparation of an annual report will take high-risk entities 4 hours
initially, with an annual recurring burden of 1 hour.

B. Low-Risk Entities

A few commenters believed that FTC staff had underestimated the
amount of time it would take low-risk entities to comply with the
proposed regulations. These commenters estimated that the amount of
time would range from 6 to 20 hours to create a program and 1 hour each
to train employees and draft the annual report. The FTC staff believes
these estimates were based on a misunderstanding of the requirements of
the proposed regulations, including that the list of 31 Red Flags in
the proposed guidelines was intended to be a checklist. The final
regulations clarify that the list of Red Flags is illustrative only.
Moreover, the emphasis of the written Program, as required under the
final regulations, is to identify risks of identity theft. To the
extent that entities with consumer accounts determine that they have a
minimal risk of identity theft, they would be tasked only with
developing a streamlined Program. Therefore, the FTC staff does not
believe that it would take such an entity 6 to 20 hours to develop a
Program, 1 hour to train employees, and 1 hour to draft an annual
report on risks of identity theft which are minimal or non-existent.
Nonetheless, FTC staff believes that it may have underestimated the
time low-risk entities may need to initially apply the final rule to
develop a Program. Thus, FTC staff has increased from 20 minutes to 1
hour its previously stated estimate for this activity.
The final regulations have been revised from the proposed
regulations to alleviate the burden of creating a written Program for
entities that determine that they do not have any covered accounts. The
FTC staff believes that entities subject to a low risk of identity
theft, but not having consumer accounts, will likely determine that
they do not have covered accounts. Such entities would not be required
to develop a written Program, and thus will not incur PRA burden. The
FTC staff estimates that approximately 9,191,496 \64\ of the 10,813,525
low-risk entities subject to the requirement to create a written
Program under the proposed regulations will not have covered accounts
under the final rule. Therefore, these 9,191,496 low-risk entities will
not be required to develop a written Program, thereby substantially
reducing the original burden hours estimate in the NPRM for low-risk
entities.
---------------------------------------------------------------------------

\64\ This estimate is derived from an analysis of a database of
U.S. businesses based on NAICS codes for businesses that market
goods or services to consumers or other businesses, net of the
number of creditors subject to the FTC's jurisdiction, an estimated
subset of which comprise anticipated low-risk entities not having
covered accounts under the final rule.
---------------------------------------------------------------------------

The FTC staff believes that for entities subject to a low risk of
identity theft, but having consumer accounts that will require them to
have a written Program, it will take such entities 1 hour to review the
final regulations and create a streamlined Program, with an annual
recurring burden of 5 minutes. The FTC staff believes that training
staff to be attentive to any future risks of identity theft will take
low-risk entities 10 minutes, with an annual recurring burden of 5
minutes. The FTC staff believes that preparing an annual report will
take low-risk entities 10 minutes, with an annual recurring burden of 5
minutes.
Accordingly, FTC staff estimates that the final regulations
implementing section 114 affect the following: 266,602 high-risk
entities subject to the FTC's jurisdiction at an average annual burden
of 13 hours per entity [average annual burden over 3-year clearance
period for creation and implementation of Program ((25+1+1)/3) plus
average annual burden over 3-year clearance period for staff training
((4+1+1)/3) plus average annual burden over 3-year clearance period for
preparing annual report ((4+1+1)/3)], for a total of 3,466,000 hours
(rounded to the nearest thousand); and 1,622,029 low-risk entities that
have consumer accounts subject to the FTC's jurisdiction at an average
annual burden of approximately 37 minutes per entity [average annual
burden over 3-year clearance period for creation and implementation of
streamlined Program ((60+5+5)/3) plus average annual burden over 3-year
clearance period for staff training ((10+5+5)/3) plus average annual
burden over 3-year clearance period for preparing annual report
((10+5+5)/3], for a total of 1,000,000 hours (rounded to the nearest
thousand).
The proposed regulations implementing Section 114 also require
credit and debit card issuers to establish policies and procedures to
assess the validity of a change of address request, including notifying
the cardholder or using another means of assessing the validity of the
change of address. The FTC received no comments on its burden estimates
in the NPRM and FTC staff does not believe that the changes made to the
final regulation have altered its original burden estimates.
Accordingly, FTC staff maintains that it will take 100 credit or debit
card issuers 4 hours to develop and implement policies and procedures
to assess the validity of a change of address request for a total
burden of 400 hours.
Estimated Cost Burden:
The FTC staff derived labor costs by applying appropriate estimated
hourly cost figures to the burden hours described above. It is
difficult to calculate with precision the labor costs associated with
the proposed regulations, as they entail varying compensation levels of
management and/or technical staff among companies of different sizes.
In the NPRM, FTC staff had estimated that low-risk entities would use
administrative support personnel at an hourly cost of $16.00. A few
commenters disagreed that low-risk entities would use administrative
support personnel, arguing instead that the Program would be
implemented at a managerial level, and the labor cost should be at
least $32.00 and possibly even $48.00. Therefore, in calculating the
cost figures, FTC staff assumes that for all entities, professional
technical personnel and/or managerial personnel will create and
implement the Program, prepare the annual report, train employees, and
assess the validity of a

[[Page 63743]]

change of address request, at an hourly rate of $32.00.\65\
---------------------------------------------------------------------------

\65\ The cost is derived from a mid-range among the reported
2006 Bureau of Labor Statistics rates for likely positions within
the professional technical and managerial categories. See June 2006
Bureau of Labor Statistics National Compensation Survey for
occupational wages in the United States at http://www.bls.gov/ncs/ocs/sp/ncbl0910.pdf (``June 2006 BLS NCS Survey'').
---------------------------------------------------------------------------

Based on the above estimates and assumptions, the total annual
labor costs for all categories of covered entities under the final
regulations implementing section 114 are $142,925,000 (rounded to the
nearest thousand) [(3,466,000 hours + 400 hours + 1,000,000 hours) x
$32.00)].
Section 315:
Estimated Hours Burden:
The Commission did not receive any comments relating to its
original burden estimates for the information collection requirements
under section 315. Although the final regulations were modified such
that they no longer require users to furnish a confirmed address to a
CRA for existing relationships, FTC staff does not believe that this
modification will significantly alter its original burden estimates.
Therefore, FTC staff burden estimates remain unchanged under section
315 from the estimates proposed in the NPRM. Accordingly, FTC staff
estimates that the average annual information collection burden during
the three-year period for which OMB clearance was sought will be
831,000 hours (rounded to the nearest thousand). The FTC staff
continues to assume that the policies and procedures for notice of
address discrepancy and furnishing the correct address will be set up
by administrative support personnel at an hourly rate of $16.\66\ Thus,
the estimated annual labor cost associated with this burden is
$13,296,000 (rounded to the nearest thousand).
---------------------------------------------------------------------------

\66\ This hourly wage is a conservative inflation-adjusted
updating of hourly mean wages ($14.86) shown for administrative
support personnel in the June 2006 BLS NCS Survey.
---------------------------------------------------------------------------

The Agencies have a continuing interest in the public's opinions of
our collections of information. At any time, comments regarding the
burden estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
OCC: Communications Division, Office of the Comptroller of the
Currency, Public Information Room, Mail stop 1-5, Attention: 1557-0237,
250 E Street, SW., Washington, DC 20219. In addition, comments may be
sent by fax to 202-874-4448, or by electronic mail to
[email protected]. You can inspect and photocopy the comments
at the OCC's Public Information Room, 250 E Street, SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling 202-874-5043.
Upon arrival, visitors will be required to present valid government-
issued photo identification and submit to security screening in order
to inspect and photocopy comments.
Board: You may submit comments, identified by R-1255, by any of the
following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments on http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
E-mail: [email protected]. Include docket number in
the subject line of the message.
Fax: 202-452-3819 or 202-452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit written comments, which should refer to 3064-
AD00, by any of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html.
Follow the instructions for submitting comments on the FDIC Web
site.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
E-mail: [email protected].
Mail: Robert E. Feldman, Executive Secretary, Attention: Comments,
FDIC, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the 550 17th
Street Building (located on F Street) on business days between 7 a.m.
and 5 p.m.
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal/propose/html
including any personal information provided. Comments may be inspected
at the FDIC Public Information Center, Room 100, 801 17th Street, NW.,
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.
OTS: Information Collection Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552;
send a facsimile transmission to (202) 906-6518; or send an e-mail to
related index on the OTS Internet site at http://www.ots.treas.gov. In
addition, interested persons may inspect the comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment, call (202) 906-5922, send an e-mail to
[email protected], or send a facsimile transmission to (202)
906-7755.
NCUA: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposedregs/proposedregs.html.
Follow the instructions for submitting comments.
E-mail: Address to [email protected]. Include ``[Your name]
Comments on -,'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above for e-
mail.
Mail: Address to Mary F. Rupp, Secretary of the Board, National
Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-
3428.
Hand Delivery/Courier: Same as mail address.
Additionally, commenters may send a copy of their comments to the
OMB desk officer for the OCC, Board, FDIC, OTS, and NCUA by mail to the
Office of Information and Regulatory Affairs, U.S. Office of Management
and Budget, New Executive Office Building, Room 10235, 725 17th Street,
NW., Washington, DC 20503, or by fax to (202) 395-6974.
FTC: Comments should refer to ``The Red Flags Rule: Project No.
R611019,'' and may be submitted by any of the following methods.
However, if the comment contains any material for which confidential
treatment is requested, it must be filed in paper form, and the first
page of the document

[[Page 63744]]

must be clearly labeled ``Confidential.'' \67\
---------------------------------------------------------------------------

\67\ Commission Rule 4.2(d), 16 CFR 4.2(d). The comment must be
accompanied by an explicit request for confidential treatment,
including the factual and legal basis for the request, and must
identify the specific portions of the comment to be withheld from
the public record. The request will be granted or denied by the
Commission's General Counsel, consistent with applicable law and the
public interest. See Commission Rule 4.9(c), 16 CFR 4.9(c).
---------------------------------------------------------------------------

E-mail: Comments filed in electronic form should be submitted by
clicking on the following Web link: https://secure.commentworks.com/ftc-redflags and following the instructions on the Web-based form. To
ensure that the Commission considers an electronic comment, you must
file it on the Web-based form at https://secure.commentworks.com/ftc-redflags.
Federal eRulemaking Portal: If this notice appears at http://www.regulations.gov, you may also file an electronic comment through
that Web site. The Commission will consider all comments that
regulations.gov forwards to it.
Mail or Hand Delivery: A comment filed in paper form should include
``The Red Flags Rule, Project No. R611019,'' both in the text and on
the envelope and should be mailed or delivered, with two complete
copies, to the following address: Federal Trade Commission/Office of
the Secretary, Room H-135 (Annex M), 600 Pennsylvania Avenue, NW.,
Washington, DC 20580. Because paper mail in the Washington area and at
the Commission is subject to delay, please consider submitting your
comments in electronic form, as prescribed above. The FTC is requesting
that any comment filed in paper form be sent by courier or overnight
service, if possible.
Comments on any proposed filing, recordkeeping, or disclosure
requirements that are subject to paperwork burden review under the
Paperwork Reduction Act should additionally be submitted to: Office of
Management and Budget, Attention: Desk Officer for the Federal Trade
Commission. Comments should be submitted via facsimile to (202) 395-
6974 because U.S. Postal Mail is subject to lengthy delays due to
heightened security precautions.
The FTC Act and other laws the Commission administers permit the
collection of public comments to consider and use in this proceeding as
appropriate. All timely and responsive public comments, whether filed
in paper or electronic form, will be considered by the Commission, and
will be available to the public on the FTC Web site, to the extent
practicable, at http://www.ftc.gov/os/publiccomments.htm. As a matter
of discretion, the FTC makes every effort to remove home contact
information for individuals from the public comments it receives before
placing those comments on the FTC Web site. More information, including
routine uses permitted by the Privacy Act, may be found in the FTC's
privacy policy, at http://www.ftc.gov/ftc/privacy.htm.
Members of the public also can request additional information or a
copy of the collection from:
OCC: Mary Gottlieb, OCC Clearance Officer, (202) 874-5090,
Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
Board: Michelle Shore, Clearance Officer, Division of Research and
Statistics (202) 452-3829.
FDIC: Steven F. Hanft, Clearance Officer, Legal Division, (202-898-
3907).
OTS: Ira L. Mills, OTS Clearance Officer, Litigation Division,
Chief Counsel's Office, at [email protected], (202) 906-6531, or
facsimile number (202) 906-6518.
NCUA: Regina M. Metz, Staff Attorney, Office of General Counsel,
(703) 518-6540.
FTC: See FOR FURTHER INFORMATION CONTACT above.

B. Regulatory Flexibility Act

OCC: Under section 605(b) of the Regulatory Flexibility Act (RFA),
5 U.S.C. 605(b), the OCC must either publish a Final Regulatory
Flexibility Analysis (FRFA) for a final rule or certify, along with a
statement providing the factual basis for such certification, the rule
will not have a significant economic impact on a substantial number of
small entities. The Small Business Administration has defined ``small
entities'' for banking purposes as a bank or savings institution with
assets of $165 million or less. See 13 CFR 121.201.
Based on its analysis and for the reasons stated below, the OCC
certifies that this final rulemaking will not have a significant
economic impact on a substantial number of small entities.
Rules Implementing Section 114
The proposed regulations implementing section 114 required the
development and establishment of a written identity theft prevention
program to detect, prevent, and mitigate identity theft. The proposed
regulations also required card issuers to assess the validity of a
notice of address change under certain circumstances.
In connection with the proposed rulemaking, the OCC concluded that
the proposed regulations implementing section 114, if adopted as
proposed, would not impose undue costs on national banks and would not
have a substantial economic impact on a substantial number of small
national banks. The OCC noted that national banks already employ a
variety of measures that satisfy the requirements of the rulemaking
because (1) such measures are a good business practice and generally
are a part of a bank's efforts to reduce losses due to fraud, and (2)
national banks already comply with other regulations and guidance that
relate to information security, authentication, identity theft, and
response programs. For example, national banks are already subject to
CIP rules requiring them to verify the identity of a person opening a
new account \68\ and already have various systems in place to detect
certain patterns, practices and specific activities that indicate the
possible existence of identity theft in connection with the opening of
new accounts. Similarly, national banks complying with the
``Interagency Guidelines Establishing Information Security Standards''
\69\ and guidance recently issued by the FFIEC titled ``Authentication
in an Internet Banking Environment'' \70\ already have policies and
procedures in place to detect attempted and actual intrusions into
customer information systems and to detect patterns, practices and
specific activities that indicate the possible existence of identity
theft in connection with existing accounts. Banks complying with the
OCC's ``Guidance on Identity Theft and Pretext Calling'' \71\ already
have policies and procedures to verify the validity of change of
address requests on existing accounts.
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\68\ 31 CFR 103.121; 12 CFR 21.21 (national banks).
\69\ 12 CFR part 30, app. B (national banks).
\70\ OCC Bulletin 2005-35 (Oct. 12, 2005).
\71\ OCC AL 2001-4 (April 30, 2001).
---------------------------------------------------------------------------

Nonetheless, the OCC specifically requested comment and specific
data on the size of the incremental burden creating an identity theft
prevention program would have on small national banks, given banks''
current practices and compliance with existing requirements. The OCC
also requested comment on how the final regulations might minimize any
burden imposed to the extent consistent with the requirements of the
FACT Act.
Commenters confirmed that the proposed regulations implementing
section 114 of the FACT Act are consistent with banks'' usual and
customary business practices used to minimize losses due to fraud in
connection with new and existing

[[Page 63745]]

accounts. They also confirmed that banks have implemented measures to
address many of the proposed requirements as a result of having to
comply with existing regulations and guidance. However, commenters also
asserted that the Agencies had underestimated the incremental burden
imposed by the proposed rules. They highlighted aspects of the proposal
that they maintained would have required banks to alter their current
practices and implement duplicative policies and procedures.
Only a few commenters provided estimates of additional burden that
would result from the proposed rules. Many of these comments stemmed
from a misreading of the requirements of the proposed rules. Further,
many commenters confused the Agencies' PRA estimates with the Agencies'
overall conclusions regarding regulatory burden.\72\
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\72\ The PRA focuses more narrowly on the time, effort, and
financial resources expended by persons to generate, maintain, or
provide information to or for a Federal agency. See 44 U.S.C. 3501
et seq.
---------------------------------------------------------------------------

The OCC believes that the final rules substantially address the
concerns of the commenters as follows:
The final rules allow a covered entity to tailor its
Program to its size, complexity and nature of its operations. The final
rules and guidelines do not require the use of any specific technology,
systems, processes or methodology.
The final rules list the four elements that must be a part
of a Program, and the steps that a covered entity must take to
administer the Program. The rules provide covered entities with greater
discretion to determine how to implement these mandates.
Additional requirements previously in the proposed rules
are now in guidelines that are located in Appendix J. The guidelines
describe various policies and procedures that a financial institution
or creditor must consider and include in its Program, where
appropriate, to satisfy the requirements of the final rules. The
preamble to the rules explains that an institution or creditor may
determine that particular guidelines are not appropriate to incorporate
into its Program as long as its Program contains reasonable policies
and procedures to meet the specific requirements of the final rules.
The guidelines clarify that a covered entity need not
create duplicate policies and procedures and 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.
The final rules clarify that a Program (including the Red
Flags determined to be relevant) may be periodically, rather than
continually, updated to reflect changes in risks to customers and to
the safety and soundness of the financial institution or creditor from
identity theft.
The rules focus on consumer accounts, and require a
Program to include only other accounts ``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.''
The definition of ``Red Flags'' no longer includes
reference to the ``possible risk'' of identity theft and no longer
incorporates precursors to identity theft.
The final rules clarify that the Red Flags in Supplement A
are examples rather than a mandatory checklist.
Supplement A includes a Red Flag for activity on an
inactive account in place of a separate guideline.
The final rules clarify that the Board of Directors or a
committee thereof must approve only the initial written Program. The
rules provide a covered entity with the discretion to determine whether
the Board or management will approve changes to the Program and the
extent of Board involvement in oversight of the Program.
The final rules clarify that only relevant staff must be
trained to implement the Program, as necessary.
Card issuers may satisfy the requirements of this section
by verifying the address at the time the address change notification is
received, whether or not the notification is linked to a request for an
additional or replacement card--building on issuers' existing
procedures.
Covered entities need not comply with the final rules
until November 1, 2008.
The Agencies did consider whether it would be appropriate to extend
different treatment or exempt small covered entities from the
requirements of this section of the final rulemaking. The Agencies note
that identity theft can occur in small entities as well as large ones.
The Agencies do not believe that an exemption for small entities is
appropriate given the flexibility built into the final rules and
guidelines and the importance of the statutory goals and mandate of
section 114.
As a result of the changes and clarifications noted above, this
section of the final rule is far more flexible and less burdensome than
that in the proposed rules while still fulfilling the statutory
mandates enumerated in section 114. Moreover, the OCC has concluded
that the incremental cost of these final rules and guidelines will not
impose undue costs and will not have a significant economic impact on a
substantial number of small entities.
Rules Implementing Section 315
The proposed regulations implementing section 315 required a user
of consumer reports to have policies and procedures to enable the user
to form a reasonable belief that it knows the identity of the consumer
for whom it has obtained a consumer report. The proposed rules also
required the user to furnish to the CRA from whom it received the
notice of address discrepancy an address for the consumer that the user
has reasonably confirmed is accurate when the user: (1) Is able to form
a reasonable belief that it knows the identity of the consumer for whom
the consumer report was obtained; (2) establishes or maintains a
continuing relationship with the consumer; and (3) regularly and in the
ordinary course of business furnishes information to the CRA from which
a notice of address discrepancy pertaining to the consumer was
obtained.
In connection with the proposed rulemaking the OCC noted that the
FACT Act already requires CRAs to provide notices of address
discrepancy to users of credit reports. The OCC stated that with
respect to new accounts, a national bank already is required by the CIP
rules to ensure that it knows the identity of a person opening a new
account and to keep a record describing the resolution of any
substantive discrepancy discovered during the verification process. The
OCC also stated that as a matter of good business practice, most
national banks currently have policies and procedures in place to
respond to notices of address discrepancy when they are provided in
connection with both new and existing accounts, by furnishing an
address for the consumer that the bank has reasonably confirmed is
accurate to the CRA from which it received the notice of address
discrepancy.
The OCC specifically requested comment on whether the proposed
requirements differ from small banks' current practices and whether the
proposed requirements on users of consumer reports to have policies and
procedures to respond to the receipt of an address discrepancy could be
altered

[[Page 63746]]

to minimize any burden imposed to the extent consistent with the
requirements of the FACT Act.
Many suggestions received in response to this solicitation for
comment would have required a statutory change. However, many
commenters noted that section 315 does not require the reporting of a
confirmed address to a CRA for a notice of address discrepancy received
for an existing account. These commenters stated that the level of
regulatory burden imposed by this requirement would be significant and
would force users to reconcile and verify addresses millions of times a
year in connection with routine account maintenance. Commenters
maintained that this would result in enormous costs that provide
relatively little benefit to consumers. The final rules address these
comments and accordingly, under the rules implementing section 315, a
user is not obligated to furnish a confirmed address for the consumer
to the CRA in connection with existing accounts.
Although, a bank will likely have to modify its existing procedures
to add a new procedure for promptly reporting to CRAs the reconciled
address for new deposit accounts, the OCC has concluded that the final
rules implementing section 315 will not impose undue costs on national
banks and will have not have a significant economic impact on a
substantial number of small entities. Finally, as mentioned earlier,
the final rules provide a transition period and do not require covered
entities to fully comply with these requirements until November 1,
2008.
Board: The Board prepared an initial regulatory flexibility
analysis as required by the Regulatory Flexibility Act (RFA) (5 U.S.C.
601 et seq.) in connection with the July 18, 2006 proposed rule. The
Board received one comment on its regulatory flexibility analysis.
Under Section 605(b) of the RFA, 5 U.S.C. 605(b), the regulatory
flexibility analysis otherwise required under Section 604 of the RFA is
not required if an agency certifies, along with a statement providing
the factual basis for such certification, that the rule will not have a
significant economic impact on a substantial number of small entities.
Based on its analysis and for the reasons stated below, the Board
certifies that this final rule will not have a significant economic
impact on a substantial number of small entities.
1. Statement of the need for, and objectives of, the final rule.
The FACT Act amends the FCRA and was enacted, in part, for the
purpose of helping to reduce identity theft. Section 114 of the FACT
Act amends section 615 of the FCRA and directs the Board, together with
the other 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.
Section 315 of the FACT Act adds section 605(h)(2) to the FCRA and
requires 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. The Board received no comments on the reasons for the
proposed rule. The Board is adopting the final rule to implement
sections 114 and 315 of the FACT Act. The SUPPLEMENTARY INFORMATION
above contains information on the objectives of the final rule.
2. Summary of issues raised by comments in response to the initial
regulatory flexibility analysis.
In accordance with Section 3(a) of the RFA, the Board conducted an
initial regulatory flexibility analysis in connection with the proposed
rule. One commenter, the Mortgage Bankers Association (MBA), responded
to the initial regulatory flexibility analysis and stated that contrary
to the Agencies' belief, the proposed rule would have a significant
economic impact on a substantial number of affected small entities. The
MBA stated that commercial and multifamily mortgage lenders should not
be subject to the proposed rule because it would constitute useless
regulatory burden. Three commenters (Independent Community Bankers of
America, The Financial Services Roundtable and BITS, and KeyCorp)
believed that the Board and the other Agencies had underestimated the
costs of compliance. The issues raised by these commenters did not
apply uniquely to small entities and are described in the Paperwork
Reduction Act section above.
Some small financial institutions expressed concern about the
flexibility granted by the proposal. As stated in the Overview of
Proposal and Comments Received, these commenters preferred to have more
structured guidance that describes how to develop and implement a
Program and what they would need to do to achieve compliance. In
addition, one commenter expressed concern that smaller institutions
would be particularly burdened by the proposal's requirement that the
Program be designed to address changing identity risks ``as they
arise.''
3. Description and estimate of small entities affected by the final
rule.
The final rule applies to all banks that are members of the Federal
Reserve System (other than national banks) and their respective
operating subsidiaries, branches and Agencies of foreign banks (other
than Federal branches, Federal Agencies, and insured State branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25A of
the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.). The
Board's rule will apply to the following institutions (numbers
approximate): State member banks (881), operating subsidiaries that are
not functionally regulated with in the meaning of section 5(c)(5) of
the Bank Holding Company Act of 1956, as amended (877), U.S. branches
and agencies of foreign banks (219), commercial lending companies owned
or controlled by foreign banks (3), and Edge and agreement corporations
(64), for a total of approximately 2,044 institutions. The Board
estimates that more than 1,448 of these institutions could be
considered small entities with assets of $165 million or less.
4. Recordkeeping, reporting, and other compliance requirements.
Section 114 requires the Board to prescribe regulations that
require financial institutions and creditors to establish reasonable
policies and procedures to implement guidelines established by the
Board and other federal agencies that address identity theft with
respect to account holders and customers. This would be implemented by
requiring a covered financial institution or creditor to create an
Identity Theft Prevention Program that detects, prevents and mitigates
the risk of identity theft applicable to its accounts.
Section 114 also requires the Board to adopt regulations applicable
to credit and debit card issuers to implement policies and procedures
to assess the validity of change of address requests. The final rule
implements this by requiring credit and debit card issuers to establish
reasonable policies and procedures to assess the validity of a change
of address if it receives notification of a change of address for a
debit or credit card account and, within a short period of time
afterwards (during at least the first 30 days after it receives such
notification), the issuer receives a request for an additional or
replacement card for the same account.
Section 315 requires the Board to prescribe regulations that
provide guidance regarding the reasonable policies and procedures that
a user of

[[Page 63747]]

consumers' reports should employ to verify the identity of a consumer
when a consumer reporting agency provides a notice of address
discrepancy with the consumer reporting agency in certain
circumstances. The final rule requires users of consumer reports to
develop and implement reasonable policies and procedures for verifying
the identity of a consumer for whom it has obtained a consumer report
and for whom it receives a notice of address discrepancy and to
reconcile an address discrepancy with the appropriate consumer
reporting agency in certain circumstances.
5. Steps taken to minimize the economic impact on small entities.
The Board and the other Agencies have attempted to minimize the
economic impact on small entities by providing more flexibility in
developing a Program and moving certain detail contained in the
proposed regulations to the guidelines. In addition, to allow small
entities and creditors to tailor their Programs to their operations,
the final rules provide 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 Board has also eliminated the
requirement for institutions to update their Program in response to
changing identity theft risks ``as they arise.'' The final rule instead
requires ``periodic'' updating.
FDIC: The FDIC prepared an initial regulatory flexibility analysis
as required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et
seq.) in connection with the July 18, 2006 proposed rule. Under Section
605(b) of the RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis
otherwise required under Section 604 of the RFA is not required if an
agency certifies, along with a statement providing the factual basis
for such certification, that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA to include banks with less than $165 in assets).
Based on its analysis and for the reasons stated below, the FDIC
certifies that this final rule will not have a significant economic
impact on a substantial number of small entities
Under the final rule implementing FACT Act Section 114, financial
institutions and creditors must have a written program that includes
controls to address the identity theft risks they have identified.
Credit and debit card issuers must also have additional policies and
procedures to assess the validity of change of address requests.
The final rule would apply to all FDIC-insured state nonmember
banks, approximately 3,260 of which are small entities. The rule is
drafted in a flexible manner that allows institutions to develop and
implement different types of programs based upon their size,
complexity, and the nature and scope of their activities. The final
rules and guidelines do not require the use of any specific technology,
systems, processes or methodology.
The guidelines clarify that a covered entity need not create
duplicate policies and procedures and 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. The FDIC believes that many institutions have already
implemented a significant portion of the detection and mitigation
efforts required by the rule.
With respect to the portion of the rule covering card issuers,
those entities may satisfy the requirements of this section by
verifying the address at the time the address change notification is
received, whether or not the notification is linked to a request for an
additional or replacement card--building on issuers'' existing
procedures.
Under the final rule implementing FACT Act Section 315, a user of
consumer reports (which constitutes most, if not all, FDIC-insured
state nonmember banks) must have policies and procedures to enable the
user to form a reasonable belief that it knows the identity of the
consumer for whom it has obtained a consumer report. Although, a bank
will likely have to modify its existing procedures to add a new
procedure for promptly reporting to consumer reporting agencies the
reconciled address for new deposit accounts, the FDIC has concluded
that the final rules implementing section 315--which only obligates a
user to furnish a confirmed address for the consumer to the consumer
reporting agency in connection with new, and not existing, accounts--
will not impose undue costs on banks and will not have a significant
economic impact on a substantial number of small entities.
Moreover, the final rules provide a transition period and do not
require covered entities to fully comply with these requirements until
November 1, 2008.
OTS: Under section 605(b) of the Regulatory Flexibility Act (RFA),
5 U.S.C. 605(b), OTS must either publish a Final Regulatory Flexibility
Analysis (FRFA) for a final rule or certify, along with a statement
providing the factual basis for such certification, the rule will not
have a significant economic impact on a substantial number of small
entities. The Small Business Administration has defined ``small
entities'' to include savings associations with total assets of $165
million or less. 13 CFR 121.201.
The rule will implement section 114 and 315 of the FACT Act and
will apply to all savings associations (and federal savings
associations operating subsidiaries that are not functionally regulated
within the meaning of section 5(c)(5) of the Bank Holding Company Act),
424 of which have assets of less than or equal to $165 million. Based
on its analysis and for the reasons stated below, OTS certifies that
this final rulemaking will not have a significant economic impact on a
substantial number of small entities.
Rules Implementing Section 114
The proposed regulations implementing section 114 required the
development and establishment of a written identity theft prevention
program to detect, prevent, and mitigate identity theft. The proposed
regulations also required card issuers to assess the validity of a
notice of address change under certain circumstances.
In connection with the proposed rulemaking, OTS concluded that the
proposed regulations implementing section 114, if adopted as proposed,
would not impose undue costs on savings associations and would not have
a substantial economic impact on a substantial number of small savings
associations. OTS noted that savings associations already employ a
variety of measures that satisfy the requirements of the rulemaking
because (1) such measures are a good business practice and generally
are a part of a thrift's efforts to reduce losses due to fraud, and (2)
savings associations already comply with other regulations and guidance
that relate to information security, authentication, identity theft,
and response programs. For example, savings associations are already
subject to CIP rules requiring them to verify the identity of a person
opening a new account \73\ and already have various systems in place to
detect certain patterns, practices and specific activities that
indicate the possible existence of identity theft in connection with
the opening of new accounts. Similarly, savings associations complying
with the ``Interagency Guidelines Establishing

[[Page 63748]]

Information Security Standards'' \74\ and guidance recently issued by
the FFIEC titled ``Authentication in an Internet Banking Environment''
\75\ already have policies and procedures in place to detect attempted
and actual intrusions into customer information systems and to detect
patterns, practices and specific activities that indicate the possible
existence of identity theft in connection with existing accounts.
Savings associations complying with OTS's guidance on ``Identity Theft
and Pretext Calling'' \76\ already have policies and procedures to
verify the validity of change of address requests on existing accounts.
---------------------------------------------------------------------------

\73\ 31 CFR 103.121; 12 CFR 563.177 (savings associations).
\74\ 12 CFR part 570, app. B (savings associations).
\75\ OTS CEO Letter 228 (Oct. 12, 2005).
\76\ OTS CEO Letter 139 (May 4, 2001).
---------------------------------------------------------------------------

Nonetheless, OTS specifically requested comment and specific data
on the size of the incremental burden creating an identity theft
prevention program would have on small saving associations, given their
current practices and compliance with existing requirements. OTS also
requested comment on how the final regulations might minimize any
burden imposed to the extent consistent with the requirements of the
FACT Act.
Commenters confirmed that the proposed regulations implementing
section 114 of the FACT Act are consistent with savings associations'
usual and customary business practices used to minimize losses due to
fraud in connection with new and existing accounts. They also confirmed
that savings associations have implemented measures to address many of
the proposed requirements as a result of having to comply with existing
regulations and guidance. However, commenters also asserted that the
Agencies had underestimated the incremental burden imposed by the
proposed rules. They highlighted aspects of the proposal that they
maintained would have required savings associations to alter their
current practices and implement duplicative policies and procedures.
Only a few commenters provided estimates of additional burden that
would result from the proposed rules. Many of these comments stemmed
from a misreading of the requirements of the proposed rules. Further,
many commenters confused the Agencies' PRA estimates with the Agencies'
overall conclusions regarding regulatory burden.\77\
---------------------------------------------------------------------------

\77\ The PRA focuses more narrowly on the time, effort, and
financial resources expended by persons to generate, maintain, or
provide information to or for a Federal agency. See 44 U.S.C. 3501
et seq.
---------------------------------------------------------------------------

OTS believes that the final rules substantially address the
concerns of the commenters as follows:
The final rules allow a covered entity to tailor its
Program to its size, complexity and nature of its operations. The final
rules and guidelines do not require the use of any specific technology,
systems, processes or methodology.
The final rules list the four elements that must be a part
of a Program, and the steps that a covered entity must take to
administer the Program. The rules provide covered entities with greater
discretion to determine how to implement these mandates.
Additional requirements previously in the proposed rules
are now in guidelines that are located in Appendix J. The guidelines
describe various policies and procedures that a financial institution
or creditor must consider and include in its Program, where
appropriate, to satisfy the requirements of the final rules. The
preamble to the rules explains that an institution or creditor may
determine that particular guidelines are not appropriate to incorporate
into its Program as long as its Program contains reasonable policies
and procedures to meet the specific requirements of the final rules.
The guidelines clarify that a covered entity need not
create duplicate policies and procedures and 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.
The final rules clarify that a Program (including the Red
Flags determined to be relevant) may be periodically, rather than
continually, updated to reflect changes in risks to customers and to
the safety and soundness of the financial institution or creditor from
identity theft.
The rules focus on consumer accounts, and require a
Program to include only other accounts ``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.''
The definition of ``Red Flags'' no longer includes
reference to the ``possible risk'' of identity theft and no longer
incorporates precursors to identity theft.
The final rules clarify that the Red Flags in Supplement A
are examples rather than a mandatory checklist.
Supplement A includes a Red Flag for activity on an
inactive account in place of a separate guideline.
The final rules clarify that the Board of Directors or a
committee thereof must approve only the initial written Program. The
rules provide a covered entity with the discretion to determine whether
the Board or management will approve changes to the Program and the
extent of Board involvement in oversight of the Program.
The final rules clarify that only relevant staff must be
trained to implement the Program, as necessary.
Card issuers may satisfy the requirements of this section
by verifying the address at the time the address change notification is
received, whether or not the notification is linked to a request for an
additional or replacement card--building on issuers' existing
procedures.
Covered entities need not comply with the final rules
until November 1, 2008.
The Agencies did consider whether it would be appropriate to extend
different treatment or exempt small covered entities from the
requirements of this section of the final rulemaking. The Agencies note
that identity theft can occur in small entities as well as large ones.
The Agencies do not believe that an exemption for small entities is
appropriate given the flexibility built into the final rules and
guidelines and the importance of the statutory goals and mandate of
section 114.
As a result of the changes and clarifications noted above, this
section of the final rule is far more flexible and less burdensome than
that in the proposed rules while still fulfilling the statutory
mandates enumerated in section 114. Moreover, OTS has concluded that
the incremental cost of these final rules and guidelines will not
impose undue costs and will not have a significant economic impact on a
substantial number of small entities.
Rules Implementing Section 315
The proposed regulations implementing section 315 required a user
of consumer reports to have policies and procedures to enable the user
to form a reasonable belief that it knows the identity of the consumer
for whom it has obtained a consumer report. The proposed rules also
required the user to furnish to the CRA from whom it received the
notice of address discrepancy an address for the consumer that the user
has reasonably confirmed is accurate when the user: (1) Is able to form
a reasonable belief that it knows the identity of the consumer

[[Page 63749]]

for whom the consumer report was obtained; (2) establishes or maintains
a continuing relationship with the consumer; and (3) regularly and in
the ordinary course of business furnishes information to the CRA from
which a notice of address discrepancy pertaining to the consumer was
obtained.
In connection with the proposed rulemaking OTS noted that the FACT
Act already requires CRAs to provide notices of address discrepancy to
users of credit reports. OTS stated that with respect to new accounts,
a savings association already is required by the CIP rules to ensure
that it knows the identity of a person opening a new account and to
keep a record describing the resolution of any substantive discrepancy
discovered during the verification process. OTS also stated that as a
matter of good business practice, most savings associations currently
have policies and procedures in place to respond to notices of address
discrepancy when they are provided in connection with both new and
existing accounts, by furnishing an address for the consumer that the
association has reasonably confirmed is accurate to the CRA from which
it received the notice of address discrepancy.
OTS specifically requested comment on whether the proposed
requirements differ from small savings associations' current practices
and whether the proposed requirements on users of consumer reports to
have policies and procedures to respond to the receipt of an address
discrepancy could be altered to minimize any burden imposed to the
extent consistent with the requirements of the FACT Act.
Many suggestions received in response to this solicitation for
comment would have required a statutory change. However, many
commenters noted that section 315 does not require the reporting of a
confirmed address to a CRA for a notice of address discrepancy received
for an existing account. These commenters stated that the level of
regulatory burden imposed by this requirement would be significant and
would force users to reconcile and verify addresses millions of times a
year in connection with routine account maintenance. Commenters
maintained that this would result in enormous costs that provide
relatively little benefit to consumers. The final rules address these
comments and, accordingly, under the rules implementing section 315, a
user is not obligated to furnish a confirmed address for the consumer
to the CRA in connection with existing accounts.
Although, a savings association will likely have to modify its
existing procedures to add a new procedure for promptly reporting to
CRAs the reconciled address for new deposit accounts, OTS has concluded
that the final rules implementing section 315 will not impose undue
costs on savings associations and will have not have a significant
economic impact on a substantial number of small entities. Finally, as
mentioned earlier, the final rules provide a transition period and do
not require covered entities to fully comply with these requirements
until November 1, 2008.
FTC: The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-612,
requires that the Commission provide an Initial Regulatory Flexibility
Analysis (``IRFA'') with a proposed rule and a Final Regulatory
Flexibility Analysis (``FRFA''), if any, with the final rule, unless
the Commission certifies that the rule will not have a significant
economic impact on a substantial number of small entities. See 5 U.S.C.
603-605.
The Commission hereby certifies that the final regulations will not
have a significant economic impact on a substantial number of small
business entities. The Commission recognizes that the final regulations
will affect a substantial number of small businesses. We do not expect,
however, that the final regulations will have a significant economic
impact on these small entities.
The Commission continues to believe that a precise estimate of the
number of small entities that fall under the final regulations is not
currently feasible. Based on changes made to the final regulations in
response to comments received, however, and the Commission's own
experience and knowledge of industry practices, the Commission also
continues to believe that the cost and burden to small business
entities of complying with the final regulations are minimal.
Accordingly, this document serves as notice to the Small Business
Administration of the agency's certification of no effect. Nonetheless,
the Commission has decided to publish a FRFA with these final
regulations. Therefore, the Commission has prepared the following
analysis:
1. Need for and Objectives of the Rule
The FTC is charged with enforcing the requirements of sections 114
and 315 of the Fair and Accurate Credit Transactions Act of 2003 (FACT
Act) (15 U.S.C. Sec. Sec. 1681m(e) and 1681c(h)(2)), which require the
FTC to establish guidelines for financial institutions and creditors
identifying patterns, practices, and specific forms of activity, that
indicate the possible existence of identity theft, and regulations
requiring each financial institution and creditor to establish policies
and procedures for implementing the guidelines. In addition, section
114 requires credit and debit card issuers to establish policies and
procedures to assess the validity of a change of address request.
Section 315 requires the FTC to develop policies and procedures that a
user of consumer reports must employ when such a user receives a notice
of address discrepancy from a consumer reporting agency described in
section 603(p) of the FCRA. In this action, the FTC promulgates final
rules that would implement these requirements of the FACT Act.
2. Significant Issues Received by Public Comment
The Commission received a number of comments on the effect of the
proposed regulations. Some of the comments addressed the effect of the
proposed regulations on businesses generally, and did not identify
small businesses as a particular category. The FTC staff, therefore,
has included all comments in this FRFA that raised potentially
significant compliance issues for small businesses, regardless of
whether the commenter identified small businesses as being an affected
category.
In drafting its PRA analysis for the proposed regulations, FTC
staff believed that because motor vehicle dealers' loans typically are
financed by financial institutions also subject to those regulations,
the dealers were likely to use the latter's programs as a basis to
develop their own. Therefore, although subject to a high risk of
identity theft, their burden would be less than other high-risk
entities. Commenters, however, noted among other concerns that some
motor vehicle dealers finance their own loans. Thus, FTC staff no
longer is considering motor vehicle dealers separately from other high-
risk entities.
As noted in the PRA analysis, the Agencies continue to believe that
many of the high-risk entities, as part of their usual and customary
business practices, already take steps to minimize losses due to fraud.
The final rulemaking clarifies that only relevant staff need be trained
to implement the Program, as necessary--meaning, for example, that
staff already trained as a part of a covered entity's anti-fraud
prevention efforts do not need to be re-trained except as incrementally
needed. Notwithstanding this clarification, in response to comments
received, the Agencies are increasing the burden estimates attributable
to training from two to four hours, as is the FTC for high-risk
entities in their initial year of

[[Page 63750]]

implementing the Program, but FTC staff continues to believe that one
hour of recurring annual training remains a reasonable estimate.
A few commenters believed that FTC staff had underestimated the
amount of time it would take low-risk entities to comply with the
proposed regulations. These commenters estimated that the amount of
time would range from 6 to 20 hours to create a program and 1 hour each
to train employees and draft the annual report. The FTC staff believes
these estimates were based on a misunderstanding of the requirements of
the proposed regulations, including that the list of 31 Red Flags in
the proposed guidelines was intended to be a checklist. The final
regulations clarify that the list of Red Flags is illustrative only.
Moreover, the emphasis of the written Program, as required under the
final regulations, is to identify risks of identity theft. To the
extent that entities with consumer accounts determine that they have a
minimal risk of identity theft, they would be tasked only with
developing a streamlined Program. Therefore, FTC staff does not believe
that it would take such an entity 6 to 20 hours to develop a Program, 1
hour to train employees, and 1 hour to draft an annual report on risks
of identity theft which are minimal or non-existent. Nonetheless, FTC
staff believes that it may have underestimated the time low-risk
entities may need to initially apply the final rule to develop a
Program. Thus, FTC staff has increased from 20 minutes to 1 hour its
previously stated estimate for this activity.
In addition, the final regulations have been revised from the
proposed regulations to alleviate the burden of creating a written
Program for entities that determine that they do not have any covered
accounts. The FTC staff believes that entities subject to a low risk of
identity theft, but not having consumer accounts, will likely determine
that they do not have covered accounts. Such entities would not be
required to develop a written Program. The FTC staff estimates that
approximately 9,191,496 \78\ of the 10,813,525 low-risk entities
subject to the requirement to create a written Program under the
proposed regulations will not have covered accounts under the final
rule. Therefore, although these 9,191,496 low-risk entities will have
to conduct a periodic risk assessment to determine if they covered
accounts, they will not be required to develop a written Program,
thereby substantially reducing the original burden estimate in the NPRM
for low-risk entities.
---------------------------------------------------------------------------

\78\ This estimate is derived from an analysis of a database of
U.S. businesses based on NAICS codes for businesses that market
goods or services to consumers or other businesses, net of the
number of creditors subject to the FTC's jurisdiction, an estimated
subset of which comprise anticipated low-risk entities not having
covered accounts under the final rule.
---------------------------------------------------------------------------

The FTC received additional comments on its IRFA requesting that
the FTC delay implementation of the final rules for small businesses by
a minimum of six months, consider creating a certification form for
low-risk entities, and develop a small business compliance guide. The
Agencies have set a mandatory compliance deadline of November 1, 2008,
thereby providing all entities with well over six months in which to
implement the final regulations. The FTC staff will be developing a
small business compliance guide prior to the mandatory compliance
deadline of November 1, 2008. The FTC staff will consider whether to
include any model forms in such guide.
The FTC did not receive any comments on its IRFA for the proposed
regulations implementing section 114 requiring credit and debit card
issuers to establish policies and procedures to assess the validity of
a change of address request, including notifying the cardholder or
using another means of assessing the validity of the change of address.
The FTC staff does not believe that the changes made to the final
regulation have altered its original burden estimates.
The FTC did not receive any comments on its IRFA relating to the
proposed regulations under section 315.
3. Small Entities to Which the Final Rule Will Apply
The final regulations apply to a wide variety of business
categories under the Small Business Size Standards. Generally, the
final regulations would apply to financial institutions, creditors, and
users of consumer reports. In particular, entities under FTC's
jurisdiction covered by section 114 include State-chartered credit
unions, non-bank lenders, mortgage brokers, automobile dealers, utility
companies, telecommunications companies, and any other person that
regularly participates in a credit decision, including setting the
terms of credit. The section 315 requirements apply to State-chartered
credit unions, non-bank lenders, insurers, landlords, employers,
mortgage brokers, automobile dealers, collection agencies, and any
other person who requests a consumer report from a consumer reporting
agency described in section 603(p) of the FCRA.
Given the coverage of the final rules, a very large number of small
entities across almost every industry could be subject to the final
rules. For the majority of these entities, a small business is defined
by the Small Business Administration as one whose average annual
receipts do not exceed $6.5 million or who have fewer than 500
employees.\79\
---------------------------------------------------------------------------

\79\ These numbers represent the size standards for most retail
and service industries ($6.5 million total receipts) and
manufacturing industries (500 employees). A list of the SBA's size
standards for all industries can be found at http://www.sba.gov/size/summary-whatis.html.
---------------------------------------------------------------------------

Section 114: As discussed in the PRA section of this Notice, given
the broad scope of section 114's requirements, it is difficult to
determine with precision the number of financial institutions and
creditors that are subject to the FTC's jurisdiction. There are
numerous small businesses under the FTC's jurisdiction and there is no
formal way to track them; moreover, as a whole, the entities under the
FTC's jurisdiction are so varied that there are no general sources that
provide a record of their existence. Nonetheless, FTC staff estimates
that the final regulations implementing section 114 will affect over
3500 financial institutions and over 11 million creditors \80\ subject
to the FTC's jurisdiction, for a combined total of approximately 11.1
million affected entities. Of this total, the FTC staff expects that
well over 90% of these firms qualify as small businesses under existing
size standards (i.e., $165 million in assets for financial institutions
and $6.5 million in sales for many creditors).
---------------------------------------------------------------------------

\80\ This estimate is derived from census data of U.S.
businesses based on NAICS codes for businesses that market goods or
services to consumers and businesses. 2003 County Business Patterns,
U.S. Census Bureau (http://censtats.census.gov/cgi- bin/cbpnaic/
cbpsel.pl); and 2002 Economic Census, Bureau (http://www.census.gov/econ/census02/).
---------------------------------------------------------------------------

One commenter acknowledged that the FTC's estimates as to the
number of small entities that will be affected were accurate, but did
not provide precise numbers.
The final regulations implementing section 114 also require credit
and debit card issuers to establish policies and procedures to assess
the validity of a change of address request. Indeed, the final
regulations require credit and debit card issuers to notify the
cardholder or to use another means of assessing the validity of the
change of address. FTC staff believes that there may be as many as
3,764 credit or debit card issuers that fall under the jurisdiction of
the FTC and that well over 90% of these firms qualify as small
businesses under existing size standards (i.e., $165 million in assets
for financial

[[Page 63751]]

institutions and $6.5 million in sales for many creditors).
The Commission did not receive any comments to the IRFA on the
latter credit or debit card issuers that would allow it to determine
the precise number of small entities that will be affected.
Section 315: As discussed in the PRA section of this Notice, given
the broad scope of section 315's requirements, it is difficult to
determine with precision the number of users of consumer reports that
are subject to the FTC's jurisdiction. There are numerous small
businesses under the FTC's jurisdiction and there is no formal way to
track them; moreover, as a whole, the entities under the FTC's
jurisdiction are so varied that there are no general sources that
provide a record of their existence. Nonetheless, FTC staff estimates
that the final regulations implementing section 315 will affect
approximately 1.6 million users of consumer reports subject to the
FTC's jurisdiction \81\ and that well over 90% of these firms qualify
as small businesses under existing size standards (i.e., $165 million
in assets for financial institutions and $6.5 million in sales for many
creditors).
---------------------------------------------------------------------------

\81\ This estimate is derived from census data of U.S.
businesses based on NAICS codes for businesses that market goods or
services to consumers and businesses. 2003 County Business Patterns,
U.S. Census Bureau (http://censtats.census.gov/cgi-bin/cbpnaic/cbpsel.pl); and 2002 Economic Census, Bureau (http://www.census.gov/econ/census02/).
---------------------------------------------------------------------------

The Commission did not receive any comments to the IRFA on the
proposed regulations under Section 315 that would allow it to determine
the precise number of small entities that will be affected.
4. Projected Reporting, Recordkeeping and Other Compliance Requirements
The final requirements will involve some increased costs for
affected parties. Most of these costs will be incurred by those
required to conduct periodic risk assessments, and draft identity theft
Programs and annual reports. There will also be costs associated with
training, and for credit and debit card issuers to establish policies
and procedures to assess the validity of a change of address request.
In addition, there will be costs related to developing reasonable
policies and procedures that a user of consumer reports must employ
when a user receives a notice of address discrepancy from a consumer
reporting agency, and for furnishing an address that the user has
reasonably confirmed is accurate. The Commission does not expect,
however, that the increased costs associated with the final regulations
will be significant as explained below.
Section 114: The FTC staff estimates that there may be as many as
90% of the businesses affected by the proposed rules under section 114
that are subject to a high risk of identity theft that qualify as small
businesses. It is likely that many such entities already engage in
various activities to minimize losses due to fraud as part of their
usual and customary business practices. Accordingly, the impact of the
proposed requirements would be merely incremental and not significant.
In particular, the rule will direct many of these entities to
consolidate their existing policies and procedures into a written
Program and may require some additional staff training.
The FTC expects that well over 90% of the businesses affected by
the proposed rules under section 114 that are subject to a low risk of
identity theft qualify as small businesses under existing size
standards (i.e., $165 million in assets for financial institutions and
$6.5 million in sales for many creditors). The final requirements are
drafted in a flexible manner that limits the burden on a substantial
majority of low-risk entities to conducting periodic risk assessments
for covered accounts, and allows the remaining minority of low-risk
entities to develop and implement different types of programs based
upon their size, complexity, and the nature and scope of their
activities. As a result, the FTC staff expects that the burden on these
low-risk entities will be minimal (i.e., not significant). The final
regulations would require low-risk entities that have covered accounts
that have no existing identity theft procedures to state in writing
their low-risk of identity theft, train staff to be attentive to future
risks of identity theft, and, if appropriate, prepare an annual report.
The FTC staff believes that, for the affected low-risk entities, such
activities will be not be complex or resource-intensive tasks.
The final regulations implementing section 114 also require credit
and debit card issuers to establish policies and procedures to assess
the validity of a change of address request. It is likely that most of
the entities have automated the process of notifying the cardholder or
using other means to assess the validity of the change of address such
that implementation will pose no further burden. For those that do not,
the FTC staff expects that a small number of such entities (100) will
need to develop policies and procedures to assess the validity of a
change of address request. The impacts on such entities should not be
significant, however.
In calculating the costs, FTC staff assumes that for all entities,
professional technical personnel and/or managerial personnel will
conduct the periodic risk assessment, create and implement the Program,
prepare the annual report, train employees, and assess the validity of
a change of address request.
Section 315: The final regulations implementing section 315 provide
guidance regarding reasonable policies and procedures that a user of
consumer reports must employ when a user receives a notice of address
discrepancy from a consumer reporting agency. The final regulations
also require a user of consumer reports to furnish an address that the
user has reasonably confirmed is accurate to the consumer reporting
agency from which it receives a notice of address discrepancy, but only
to the extent that such user regularly and in the ordinary course of
business furnishes information to such consumer reporting agency. The
FTC staff believes that the impacts on users of consumer reports that
are small businesses will not be significant. As discussed in the PRA
section of the NPRM, the FTC staff believes that it will not take users
of consumer reports under FTC jurisdiction a significant amount of time
to develop policies and procedures that they will employ when they
receive a notice of address discrepancy. FTC staff believes that only
10,000 of such users of consumer reports furnish information to
consumer reporting agencies as part of their usual and customary
business practices and that approximately 20% of these entities qualify
as small businesses. Therefore, the staff estimates that 2,000 small
businesses will be affected by this portion of the final regulation
that requires furnishing the correct address. As discussed in the PRA
section of this NPRM, FTC staff estimates that it will not take such
users of consumer reports a significant amount of time to develop the
policies and procedures for furnishing the correct address to the
consumer reporting agencies pursuant to the final regulations for
implementing section 315. The FTC staff estimates that the costs
associated with these impacts will not be significant.
In calculating these costs, FTC staff assumes that the policies and
procedures for notice of address discrepancy and furnishing the correct
address will be set up by administrative support personnel.

[[Page 63752]]

5. Steps Taken To Minimize Significant Economic Impact of the Rule on
Small Entities
The Commission considered whether any significant alternatives,
consistent with the purposes of the FACT Act, could further minimize
the final regulations' impact on small entities. The FTC asked for
comment on this issue. The final requirements are drafted in a flexible
manner that limits the burden on a substantial majority of low-risk
entities to conducting periodic risk assessments for covered accounts
and allows the remaining minority of low-risk entities to develop and
implement different types of programs based upon their size,
complexity, and the nature and scope of their activities. In addition,
a commenter requested that the FTC delay implementation of the final
rules for small businesses by a minimum of six months, produce a
shortened Red Flags list, consider creating a certification form for
low-risk entities, and develop a small business compliance guide. The
Agencies have set a mandatory compliance deadline of November 1, 2008,
thereby providing all entities with well over six months in which to
implement the final regulations. As discussed in the PRA analysis
infra, the Agencies have clarified that the Red Flags Supplement is
illustrative only, and is not intended to be used as a checklist.
Therefore, the Agencies did not consider it necessary to alter the Red
Flags listed. The FTC staff will be developing a small business
compliance guide prior to the mandatory compliance deadline of November
1, 2008. The FTC staff will consider whether to include any model forms
in such guide.

C. OCC and OTS Executive Order 12866 Determination

The OCC and the OTS each have independently determined that the
final rule is not a ``significant regulatory action'' as defined in
Executive Order 12866 because the annual effect on the economy is less
than $100 million. Accordingly, a regulatory assessment is not
required.

D. OCC and OTS Executive Order 13132 Determination

The OCC and the OTS each has determined that these final rules do
not have any federalism implications for purposes of Executive Order
13132.

E. NCUA Executive Order 13132 Determination

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on State and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5)
voluntarily complies with the Executive Order. These final rules apply
only to federally chartered credit unions and would not have
substantial direct effects on the States, on the connection between the
national government and the States, or on the distribution of power and
responsibilities among the various levels of government. The NCUA has
determined that these final rules do not constitute a policy that has
federalism implications for purposes of the Executive Order.

F. OCC and OTS Unfunded Mandates Reform Act of 1995 Determination

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requests that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private section, of
$100 million or more in any one year. If a budgetary impact statement
is required, section 205, of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule.
The OCC and OTS each has determined that this rule will not result
in expenditures by State, local, and tribal governments, or by the
private sector, of $100 million or more. National banks and savings
associations already employ a variety of measures that satisfy the
requirements of the final rulemaking because, as described earlier,
these are usual and customary business practices to minimize losses due
to fraud, or because, as described earlier, they already comply with
other existing regulations and guidance that relate to information
security, authentication, identity theft, and response programs.
Accordingly, neither the OCC not the OTS has prepared a budgetary
impact statement or specifically addressed the regulatory alternatives
considered.

G. NCUA: The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

The NCUA has determined that these final rules will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).

H. NCUA: Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) Determination

A SBREFA (Pub. L. 104-121) reporting requirement is triggered in
instances where NCUA issues a final rule as defined by section 551 of
the Administrative Procedure Act, 5 U.S.C. 551. NCUA has determined
this final rule is not a major rule for purposes of SBREFA and the
Office of Management and Budget (OMB) has concurred.

I. Plain Language

Section 722 of the Gramm-Leach-Bliley Act (12 U.S.C. 4809) requires
the Federal banking agencies and the NCUA to use ``plain language'' in
all proposed and final rules published in the Federal Register. The
Agencies received no comments on how to make the rules easier to
understand, and believe the final rules are presented in a clear and
straightforward manner.

List of Subjects

12 CFR Part 41

Banks, banking, Consumer protection, National Banks, Reporting and
recordkeeping requirements.

12 CFR Part 222

Banks, banking, Holding companies, state member banks.

12 CFR Part 334

Administrative practice and procedure, Bank deposit insurance,
Banks, banking, Reporting and recordkeeping requirements, Safety and
soundness.

12 CFR Part 364

Administrative practice and procedure, Bank deposit insurance,
Banks, banking, Reporting and recordkeeping requirements, Safety and
Soundness.

12 CFR Part 571

Consumer protection, Credit, Fair Credit Reporting Act, Privacy,
Reporting and recordkeeping requirements, Savings associations.

12 CFR Part 717

Consumer protection, Credit unions, Fair credit reporting, Privacy,
Reporting and recordkeeping requirements.

16 CFR Part 681

Fair Credit Reporting Act, Consumer reports, Consumer report users,
Consumer reporting agencies, Credit, Creditors, Information furnishers,
Identity theft, Trade practices.

[[Page 63753]]

Department of the Treasury

Office of the Comptroller of the Currency
12 CFR Chapter I

Authority and Issuance

0
For the reasons discussed in the joint preamble, the Office of the
Comptroller of the Currency amends Part 41 of title 12, chapter I, of
the Code of Federal Regulations as follows:

PART 41--FAIR CREDIT REPORTING

0
1. The authority citation for part 41 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 24 (Seventh), 93a, 481, 484, and
1818; 15 U.S.C. 1681a, 1681b, 1681c, 1681m, 1681s, 1681s-3, 1681t,
1681w, Sec. 214, Pub. L. 108-159, 117 Stat. 1952.

Subpart A--General Provisions

0
2. Section 41.1 is added to read as follows:

Sec. 41.1 Purpose.

(a) Purpose. The purpose of this part is to establish standards for
national banks regarding consumer report information. In addition, the
purpose of this part is to specify the extent to which national banks
may obtain, use, or share certain information. This part also contains
a number of measures national banks must take to combat consumer fraud
and related crimes, including identity theft.
(b) [Reserved]

0
3. Amend Sec. 41.3 by revising the introductory text to read as
follows:

Sec. 41.3 Definitions.

For purposes of this part, unless explicitly stated otherwise:
* * * * *

0
4. Revise the heading for Subpart I to read as follows:

Subpart I--Duties of Users of Consumer Reports Regarding Address
Discrepancies and Records Disposal

0
5. Add Sec. 41.82 to read as follows:

Sec. 41.82 Duties of users regarding address discrepancies.

(a) Scope. This section applies to a user of consumer reports
(user) that receives a notice of address discrepancy from a consumer
reporting agency, and that is a national bank, Federal branch or agency
of a foreign bank, or any of their operating subsidiaries that are not
functionally regulated within the meaning of section 5(c)(5) of the
Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(c)(5)).
(b) Definition. For purposes of this section, a notice of address
discrepancy means a notice sent to a user by a consumer reporting
agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a
substantial difference between the address for the consumer that the
user provided to request the consumer report and the address(es) in the
agency's file for the consumer.
(c) Reasonable belief. (1) Requirement to form a reasonable belief.
A user must develop and implement reasonable policies and procedures
designed to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report,
when the user receives a notice of address discrepancy.
(2) Examples of reasonable policies and procedures. (i) Comparing
the information in the consumer report provided by the consumer
reporting agency with information the user:
(A) Obtains and uses to verify the consumer's identity in
accordance with the requirements of the Customer Information Program
(CIP) rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
(B) Maintains in its own records, such as applications, change of
address notifications, other customer account records, or retained CIP
documentation; or
(C) Obtains from third-party sources; or
(ii) Verifying the information in the consumer report provided by
the consumer reporting agency with the consumer.
(d) Consumer's address. (1) Requirement to furnish consumer's
address to a consumer reporting agency. A user must develop and
implement reasonable policies and procedures for furnishing an address
for the consumer that the user has reasonably confirmed is accurate to
the consumer reporting agency from whom it received the notice of
address discrepancy when the user:
(i) Can form a reasonable belief that the consumer report relates
to the consumer about whom the user requested the report;
(ii) Establishes a continuing relationship with the consumer; and
(iii) Regularly and in the ordinary course of business furnishes
information to the consumer reporting agency from which the notice of
address discrepancy relating to the consumer was obtained.
(2) Examples of confirmation methods. The user may reasonably
confirm an address is accurate by:
(i) Verifying the address with the consumer about whom it has
requested the report;
(ii) Reviewing its own records to verify the address of the
consumer;
(iii) Verifying the address through third-party sources; or
(iv) Using other reasonable means.
(3) Timing. The policies and procedures developed in accordance
with paragraph (d)(1) of this section must provide that the user will
furnish the consumer's address that the user has reasonably confirmed
is accurate to the consumer reporting agency as part of the information
it regularly furnishes for the reporting period in which it establishes
a relationship with the consumer.

0
6. Add Subpart J to part 41 to read as follows:
Subpart J--Identity Theft Red Flags
Sec.
41.90 Duties regarding the detection, prevention, and mitigation of
identity theft.
41.91 Duties of card issuers regarding changes of address.

Subpart J--Identity Theft Red Flags

Sec. 41.90 Duties regarding the detection, prevention, and mitigation
of identity theft.

(a) Scope. This section applies to a financial institution or
creditor that is a national bank, Federal branch or agency of a foreign
bank, and any of their operating subsidiaries that are not functionally
regulated within the meaning of section 5(c)(5) of the Bank Holding
Company Act of 1956, as amended (12 U.S.C. 1844(c)(5)).
(b) Definitions. For purposes of this section and Appendix J, the
following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes:
(i) An extension of credit, such as the purchase of property or
services involving a deferred payment; and
(ii) A deposit account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign bank, the
managing official in charge of the branch or agency; and
(ii) In the case of any other creditor that does not have a board
of directors, a designated employee at the level of senior management.
(3) Covered account means:
(i) 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,
such as a credit card account, mortgage loan, automobile loan, margin
account, cell

[[Page 63754]]

phone account, utility account, checking account, or savings account;
and
(ii) 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.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and
includes lenders such as banks, finance companies, automobile dealers,
mortgage brokers, utility companies, and telecommunications companies.
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identity theft has the same meaning as in 16 CFR 603.2(a).
(9) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(10) Service provider means a person that provides a service
directly to the financial institution or creditor.
(c) Periodic Identification of Covered Accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor must conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program. (1)
Program requirement. Each financial institution or creditor that offers
or maintains one or more covered accounts must develop and implement a
written Identity Theft Prevention Program (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. The
Program must be appropriate to the size and complexity of the financial
institution or creditor and the nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix J of this part and include in its Program those guidelines
that are appropriate.

Sec. 41.91 Duties of card issuers regarding changes of address.

(a) Scope. This section applies to an issuer of a debit or credit
card (card issuer) that is a national bank, Federal branch or agency of
a foreign bank, and any of their operating subsidiaries that are not
functionally regulated within the meaning of section 5(c)(5) of the
Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(c)(5)).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit or
debit card.
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a change of address if it receives notification of a change of
address for a consumer's debit or credit card account and, within a
short period of time afterwards (during at least the first 30 days
after it receives such notification), the card issuer receives a
request for an additional or replacement card for the same account.
Under these circumstances, the card issuer may not issue an additional
or replacement card, until, in accordance with its reasonable policies
and procedures and for the purpose of assessing the validity of the
change of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 41.90 of this part.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.

Appendices D-I [Reserved]

0
7. Add and reserve appendices D through I to part 41.

0
8. Add Appendix J to part 41 to read as follows:

Appendix J to Part 41--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Section 41.90 of this part requires each financial institution
and creditor that offers or maintains one or more covered accounts,
as defined in Sec. 41.90(b)(3) of this part, to develop and provide
for the continued administration of a written Program to detect,
prevent, and mitigate identity theft in connection with the opening
of a covered account or any existing covered account. These
guidelines are intended to assist financial institutions and
creditors in the

[[Page 63755]]

formulation and maintenance of a Program that satisfies the
requirements of Sec. 41.90 of this part.

I. The Program

In designing its Program, a financial institution or creditor
may incorporate, as appropriate, its existing policies, procedures,
and other arrangements that control reasonably foreseeable risks to
customers or to the safety and soundness of the financial
institution or creditor from identity theft.

II. Identifying Relevant Red Flags

(a) Risk Factors. A financial institution or creditor should
consider the following factors in identifying relevant Red Flags for
covered accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.
(b) Sources of Red Flags. Financial institutions and creditors
should incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution
or creditor has experienced;
(2) Methods of identity theft that the financial institution or
creditor has identified that reflect changes in identity theft
risks; and
(3) Applicable supervisory guidance.
(c) Categories of Red Flags. The Program should include relevant
Red Flags from the following categories, as appropriate. Examples of
Red Flags from each of these categories are appended as Supplement A
to this Appendix J.
(1) Alerts, notifications, or other warnings received from
consumer reporting agencies or service providers, such as fraud
detection services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying
information, such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to,
a covered account; and
(5) Notice from customers, victims of identity theft, law
enforcement authorities, or other persons regarding possible
identity theft in connection with covered accounts held by the
financial institution or creditor.

III. Detecting Red Flags

The Program's policies and procedures should address the
detection of Red Flags in connection with the opening of covered
accounts and existing covered accounts, such as by:
(a) Obtaining identifying information about, and verifying the
identity of, a person opening a covered account, for example, using
the policies and procedures regarding identification and
verification set forth in the Customer Identification Program rules
implementing 31 U.S.C. 5318(l) (31 CFR 103.121); and
(b) Authenticating customers, monitoring transactions, and
verifying the validity of change of address requests, in the case of
existing covered accounts.

IV. Preventing and Mitigating Identity Theft

The Program's policies and procedures should provide for
appropriate responses to the Red Flags the financial institution or
creditor has detected that are commensurate with the degree of risk
posed. In determining an appropriate response, a financial
institution or creditor should consider aggravating factors that may
heighten the risk of identity theft, such as a data security
incident that results in unauthorized access to a customer's account
records held by the financial institution, creditor, or third party,
or notice that a customer has provided information related to a
covered account held by the financial institution or creditor to
someone fraudulently claiming to represent the financial institution
or creditor or to a fraudulent website. Appropriate responses may
include the following:
(a) Monitoring a covered account for evidence of identity theft;
(b) Contacting the customer;
(c) Changing any passwords, security codes, or other security
devices that permit access to a covered account;
(d) Reopening a covered account with a new account number;
(e) Not opening a new covered account;
(f) Closing an existing covered account;
(g) Not attempting to collect on a covered account or not
selling a covered account to a debt collector;
(h) Notifying law enforcement; or
(i) Determining that no response is warranted under the
particular circumstances.

V. Updating the Program

Financial institutions and creditors should update the Program
(including the Red Flags determined to be relevant) periodically, to
reflect changes in risks to customers or to the safety and soundness
of the financial institution or creditor from identity theft, based
on factors such as:
(a) The experiences of the financial institution or creditor
with identity theft;
(b) Changes in methods of identity theft;
(c) Changes in methods to detect, prevent, and mitigate identity
theft;
(d) Changes in the types of accounts that the financial
institution or creditor offers or maintains; and
(e) Changes in the business arrangements of the financial
institution or creditor, including mergers, acquisitions, alliances,
joint ventures, and service provider arrangements.

VI. Methods for Administering the Program

(a) Oversight of Program. Oversight by the board of directors,
an appropriate committee of the board, or a designated employee at
the level of senior management should include:
(1) Assigning specific responsibility for the Program's
implementation;
(2) Reviewing reports prepared by staff regarding compliance by
the financial institution or creditor with Sec. 41.90 of this part;
and
(3) Approving material changes to the Program as necessary to
address changing identity theft risks.
(b) Reports. (1) In general. Staff of the financial institution
or creditor responsible for development, implementation, and
administration of its Program should report to the board of
directors, an appropriate committee of the board, or a designated
employee at the level of senior management, at least annually, on
compliance by the financial institution or creditor with Sec. 41.90
of this part.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: the
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; service provider arrangements;
significant incidents involving identity theft and management's
response; and recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.

VII. Other Applicable Legal Requirements

Financial institutions and creditors should be mindful of other
related legal requirements that may be applicable, such as:
(a) For financial institutions and creditors that are subject to
31 U.S.C. 5318(g), filing a Suspicious Activity Report in accordance
with applicable law and regulation;
(b) Implementing any requirements under 15 U.S.C. 1681c-1(h)
regarding the circumstances under which credit may be extended when
the financial institution or creditor detects a fraud or active duty
alert;
(c) Implementing any requirements for furnishers of information
to consumer reporting agencies under 15 U.S.C. 1681s-2, for example,
to correct or update inaccurate or incomplete information, and to
not report information that the furnisher has reasonable cause to
believe is inaccurate; and
(d) Complying with the prohibitions in 15 U.S.C. 1681m on the
sale, transfer, and placement for collection of certain debts
resulting from identity theft.

Supplement A to Appendix J

In addition to incorporating Red Flags from the sources
recommended in section II.b. of the Guidelines in Appendix J of this
part, each financial institution or creditor may consider
incorporating into its Program, whether singly or in combination,
Red Flags from the following illustrative examples in connection
with covered accounts:

[[Page 63756]]

Alerts, Notifications or Warnings from a Consumer Reporting Agency

1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 41.82(b) of this part.
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.

Suspicious Documents

5. Documents provided for identification appear to have been
altered or forged.
6. The photograph or physical description on the identification
is not consistent with the appearance of the applicant or customer
presenting the identification.
7. Other information on the identification is not consistent
with information provided by the person opening a new covered
account or customer presenting the identification.
8. Other information on the identification is not consistent
with readily accessible information that is on file with the
financial institution or creditor, such as a signature card or a
recent check.
9. An application appears to have been altered or forged, or
gives the appearance of having been destroyed and reassembled.

Suspicious Personal Identifying Information

10. Personal identifying information provided is inconsistent
when compared against external information sources used by the
financial institution or creditor. For example:
a. The address does not match any address in the consumer
report; or
b. The Social Security Number (SSN) has not been issued, or is
listed on the Social Security Administration's Death Master File.
11. Personal identifying information provided by the customer is
not consistent with other personal identifying information provided
by the customer. For example, there is a lack of correlation between
the SSN range and date of birth.
12. Personal identifying information provided is associated with
known fraudulent activity as indicated by internal or third-party
sources used by the financial institution or creditor. For example:
a. The address on an application is the same as the address
provided on a fraudulent application; or
b. The phone number on an application is the same as the number
provided on a fraudulent application.
13. Personal identifying information provided is of a type
commonly associated with fraudulent activity as indicated by
internal or third-party sources used by the financial institution or
creditor. For example:
a. The address on an application is fictitious, a mail drop, or
a prison; or
b. The phone number is invalid, or is associated with a pager or
answering service.
14. The SSN provided is the same as that submitted by other
persons opening an account or other customers.
15. The address or telephone number provided is the same as or
similar to the account number or telephone number submitted by an
unusually large number of other persons opening accounts or other
customers.
16. The person opening the covered account or the customer fails
to provide all required personal identifying information on an
application or in response to notification that the application is
incomplete.
17. Personal identifying information provided is not consistent
with personal identifying information that is on file with the
financial institution or creditor.
18. For financial institutions and creditors that use challenge
questions, the person opening the covered account or the customer
cannot provide authenticating information beyond that which
generally would be available from a wallet or consumer report.

Unusual Use of, or Suspicious Activity Related to, the Covered Account

19. Shortly following the notice of a change of address for a
covered account, the institution or creditor receives a request for
a new, additional, or replacement card or a cell phone, or for the
addition of authorized users on the account.
20. A new revolving credit account is used in a manner commonly
associated with known patterns of fraud patterns. For example:
a. The majority of available credit is used for cash advances or
merchandise that is easily convertible to cash (e.g., electronics
equipment or jewelry); or
b. The customer fails to make the first payment or makes an
initial payment but no subsequent payments.
21. A covered account is used in a manner that is not consistent
with established patterns of activity on the account. There is, for
example:
a. Nonpayment when there is no history of late or missed
payments;
b. A material increase in the use of available credit;
c. A material change in purchasing or spending patterns;
d. A material change in electronic fund transfer patterns in
connection with a deposit account; or
e. A material change in telephone call patterns in connection
with a cellular phone account.
22. A covered account that has been inactive for a reasonably
lengthy period of time is used (taking into consideration the type
of account, the expected pattern of usage and other relevant
factors).
23. Mail sent to the customer is returned repeatedly as
undeliverable although transactions continue to be conducted in
connection with the customer's covered account.
24. The financial institution or creditor is notified that the
customer is not receiving paper account statements.
25. The financial institution or creditor is notified of
unauthorized charges or transactions in connection with a customer's
covered account.

Notice From Customers, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection With Covered Accounts Held by the Financial Institution or
Creditor

26. The financial institution or creditor is notified by a
customer, a victim of identity theft, a law enforcement authority,
or any other person that it has opened a fraudulent account for a
person engaged in identity theft.

Board of Governors of the Federal Reserve System

12 CFR Chapter II.

Authority and Issuance

0
For the reasons set forth in the joint preamble, part 222 of title 12,
chapter II, of the Code of Federal Regulations is amended as follows:

PART 222--FAIR CREDIT REPORTING (REGULATION V)

0
1. The authority citation for part 222 continues to read as follows:

Authority: 15 U.S.C. 1681a, 1681b, 1681c, 1681m, 1681s, 1681s-2,
1681s-3, 1681t, and 1681w; Secs. 3 and 214, Pub. L. 108-159, 117
Stat. 1952.

Subpart A--General Provisions

0
2. Section 222.3 is amended by revising the introductory text to read
as follows:

Sec. 222.3 Definitions.

For purposes of this part, unless explicitly stated otherwise:
* * * * *

0
3. The heading for Subpart I is revised to read as follows:

Subpart I--Duties of Users of Consumer Reports Regarding Address
Discrepancies and Records Disposal

0
4. A new Sec. 222.82 is added to read as follows:

Sec. 222.82 Duties of users regarding address discrepancies.

(a) Scope. This section applies to a user of consumer reports
(user) that receives a notice of address discrepancy from a consumer
reporting agency, and that is a member bank of the Federal Reserve
System (other than a national bank) and its respective operating
subsidiaries, a branch or agency of a foreign bank (other than a
Federal branch, Federal agency, or insured State branch of a foreign
bank), commercial

[[Page 63757]]

lending company owned or controlled by a foreign bank, and an
organization operating under section 25 or 25A of the Federal Reserve
Act (12 U.S.C. 601 et seq., and 611 et seq.).
(b) Definition. For purposes of this section, a notice of address
discrepancy means a notice sent to a user by a consumer reporting
agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a
substantial difference between the address for the consumer that the
user provided to request the consumer report and the address(es) in the
agency's file for the consumer.
(c) Reasonable belief. (1) Requirement to form a reasonable belief.
A user must develop and implement reasonable policies and procedures
designed to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report,
when the user receives a notice of address discrepancy.
(2) Examples of reasonable policies and procedures. (i) Comparing
the information in the consumer report provided by the consumer
reporting agency with information the user:
(A) Obtains and uses to verify the consumer's identity in
accordance with the requirements of the Customer Information Program
(CIP) rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
(B) Maintains in its own records, such as applications, change of
address notifications, other customer account records, or retained CIP
documentation; or
(C) Obtains from third-party sources; or
(ii) Verifying the information in the consumer report provided by
the consumer reporting agency with the consumer.
(d) Consumer's address. (1) Requirement to furnish consumer's
address to a consumer reporting agency. A user must develop and
implement reasonable policies and procedures for furnishing an address
for the consumer that the user has reasonably confirmed is accurate to
the consumer reporting agency from whom it received the notice of
address discrepancy when the user:
(i) Can form a reasonable belief that the consumer report relates
to the consumer about whom the user requested the report;
(ii) Establishes a continuing relationship with the consumer; and
(iii) Regularly and in the ordinary course of business furnishes
information to the consumer reporting agency from which the notice of
address discrepancy relating to the consumer was obtained.
(2) Examples of confirmation methods. The user may reasonably
confirm an address is accurate by:
(i) Verifying the address with the consumer about whom it has
requested the report;
(ii) Reviewing its own records to verify the address of the
consumer;
(iii) Verifying the address through third-party sources; or
(iv) Using other reasonable means.
(3) Timing. The policies and procedures developed in accordance
with paragraph (d)(1) of this section must provide that the user will
furnish the consumer's address that the user has reasonably confirmed
is accurate to the consumer reporting agency as part of the information
it regularly furnishes for the reporting period in which it establishes
a relationship with the consumer.

0
5. A new Subpart J is added to part 222 to read as follows:
Subpart J--Identity Theft Red Flags
Sec.
222.90 Duties regarding the detection, prevention, and mitigation of
identity theft.
222.91 Duties of card issuers regarding changes of address.

Subpart J--Identity Theft Red Flags

Sec. 222.90 Duties regarding the detection, prevention, and
mitigation of identity theft.

(a) Scope. This section applies to financial institutions and
creditors that are member banks of the Federal Reserve System (other
than national banks) and their respective operating subsidiaries,
branches and agencies of foreign banks (other than Federal branches,
Federal agencies, and insured State branches of foreign banks),
commercial lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act (12 U.S.C. 601 et seq., and 611 et seq.).
(b) Definitions. For purposes of this section and Appendix J, the
following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes:
(i) An extension of credit, such as the purchase of property or
services involving a deferred payment; and
(ii) A deposit account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign bank, the
managing official in charge of the branch or agency; and
(ii) In the case of any other creditor that does not have a board
of directors, a designated employee at the level of senior management.
(3) Covered account means:
(i) 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,
such as a credit card account, mortgage loan, automobile loan, margin
account, cell phone account, utility account, checking account, or
savings account; and
(ii) 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.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and
includes lenders such as banks, finance companies, automobile dealers,
mortgage brokers, utility companies, and telecommunications companies.
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identity theft has the same meaning as in 16 CFR 603.2(a).
(9) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(10) Service provider means a person that provides a service
directly to the financial institution or creditor.
(c) Periodic Identification of Covered Accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor must conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program. (1)
Program requirement. Each financial institution or creditor that offers
or maintains one or more covered accounts must develop and implement a
written Identity Theft Prevention Program (Program) that is designed to
detect, prevent, and mitigate

[[Page 63758]]

identity theft in connection with the opening of a covered account or
any existing covered account. The Program must be appropriate to the
size and complexity of the financial institution or creditor and the
nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix J of this part and include in its Program those guidelines
that are appropriate.

Sec. 222.91 Duties of card issuers regarding changes of address.

(a) Scope. This section applies to a person described in Sec.
222.90(a) that issues a debit or credit card (card issuer).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit or
debit card.
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a change of address if it receives notification of a change of
address for a consumer's debit or credit card account and, within a
short period of time afterwards (during at least the first 30 days
after it receives such notification), the card issuer receives a
request for an additional or replacement card for the same account.
Under these circumstances, the card issuer may not issue an additional
or replacement card, until, in accordance with its reasonable policies
and procedures and for the purpose of assessing the validity of the
change of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 222.90 of this part.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.

Appendices D-I [Reserved]

0
6. Appendices D through I to part 222 are added and reserved.

0
7. A new Appendix J is added to part 222 to read as follows:

Appendix J to Part 222--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Section 222.90 of this part requires each financial institution
and creditor that offers or maintains one or more covered accounts,
as defined in Sec. 222.90(b)(3) of this part, to develop and
provide for the continued administration of a written Program to
detect, prevent, and mitigate identity theft in connection with the
opening of a covered account or any existing covered account. These
guidelines are intended to assist financial institutions and
creditors in the formulation and maintenance of a Program that
satisfies the requirements of Sec. 222.90 of this part.

I. The Program

II. Identifying Relevant Red Flags

III. Detecting Red Flags

[[Page 63759]]

implementing 31 U.S.C. 5318(l) (31 CFR 103.121); and
(b) Authenticating customers, monitoring transactions, and
verifying the validity of change of address requests, in the case of
existing covered accounts.

IV. Preventing and Mitigating Identity Theft

V. Updating the Program

VI. Methods for Administering the Program

(a) Oversight of Program. Oversight by the board of directors,
an appropriate committee of the board, or a designated employee at
the level of senior management should include:
(1) Assigning specific responsibility for the Program's
implementation;
(2) Reviewing reports prepared by staff regarding compliance by
the financial institution or creditor with Sec. 222.90 of this
part; and
(3) Approving material changes to the Program as necessary to
address changing identity theft risks.
(b) Reports. (1) In general. Staff of the financial institution
or creditor responsible for development, implementation, and
administration of its Program should report to the board of
directors, an appropriate committee of the board, or a designated
employee at the level of senior management, at least annually, on
compliance by the financial institution or creditor with Sec.
222.90 of this part.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: the
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; service provider arrangements;
significant incidents involving identity theft and management's
response; and recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.

VII. Other Applicable Legal Requirements

Supplement A to Appendix J

Alerts, Notifications or Warnings from a Consumer Reporting Agency

1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 222.82(b) of this part.
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.

Suspicious Documents

Suspicious Personal Identifying Information

[[Page 63760]]

13. Personal identifying information provided is of a type
commonly associated with fraudulent activity as indicated by
internal or third-party sources used by the financial institution or
creditor. For example:
a. The address on an application is fictitious, a mail drop, or
a prison; or
b. The phone number is invalid, or is associated with a pager or
answering service.
14. The SSN provided is the same as that submitted by other
persons opening an account or other customers.
15. The address or telephone number provided is the same as or
similar to the account number or telephone number submitted by an
unusually large number of other persons opening accounts or other
customers.
16. The person opening the covered account or the customer fails
to provide all required personal identifying information on an
application or in response to notification that the application is
incomplete.
17. Personal identifying information provided is not consistent
with personal identifying information that is on file with the
financial institution or creditor.
18. For financial institutions and creditors that use challenge
questions, the person opening the covered account or the customer
cannot provide authenticating information beyond that which
generally would be available from a wallet or consumer report.

Unusual Use of, or Suspicious Activity Related to, the Covered
Account

Notice from Customers, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection with Covered Accounts Held by the Financial Institution
or Creditor

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

0
For the reasons discussed in the joint preamble, the Federal Deposit
Insurance Corporation is amending 12 CFR parts 334 and 364 of title 12,
Chapter III, of the Code of Federal Regulations as follows:

PART 334--FAIR CREDIT REPORTING

0
1. The authority citation for part 334 is revised to read as follows:

Authority: 12 U.S.C. 1818, 1819 (Tenth) and 1831p-1; 15 U.S.C.
1681a, 1681b, 1681c, 1681m, 1681s, 1681s-3, 1681t, 1681w, 6801 and
6805, Pub. L. 108-159, 117 Stat. 1952.

Subpart A--General Provisions

0
2. Amend Sec. 334.3 by revising the introductory text to read as
follows:

Sec. 334.3 Definitions.

For purposes of this part, unless explicitly stated otherwise:
* * * * *

0
3. Revise the heading for Subpart I as shown below.

Subpart I--Duties of Users of Consumer Reports Regarding Address
Discrepancies and Records Disposal

0
4. Add Sec. 334.82 to read as follows:

Sec. 334.82 Duties of users regarding address discrepancies.

(a) Scope. This section applies to a user of consumer reports
(user) that receives a notice of address discrepancy from a consumer
reporting agency and that is an insured state nonmember bank, insured
state licensed branch of a foreign bank, or a subsidiary of such
entities (except brokers, dealers, persons providing insurance,
investment companies, and investment advisers).
(b) Definition. For purposes of this section, a notice of address
discrepancy means a notice sent to a user by a consumer reporting
agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a
substantial difference between the address for the consumer that the
user provided to request the consumer report and the address(es) in the
agency's file for the consumer.
(c) Reasonable belief. (1) Requirement to form a reasonable belief.
A user must develop and implement reasonable policies and procedures
designed to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report,
when the user receives a notice of address discrepancy.
(2) Examples of reasonable policies and procedures. (i) Comparing
the information in the consumer report provided by the consumer
reporting agency with information the user:
(A) Obtains and uses to verify the consumer's identity in
accordance with the requirements of the Customer Information Program
(CIP) rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
(B) Maintains in its own records, such as applications, change of
address notifications, other customer account records, or retained CIP
documentation; or
(C) Obtains from third-party sources; or
(ii) Verifying the information in the consumer report provided by
the consumer reporting agency with the consumer.
(d) Consumer's address. (1) Requirement to furnish consumer's
address to a consumer reporting agency. A user must develop and
implement reasonable policies and procedures for furnishing an address
for the consumer that the user has reasonably confirmed is accurate to
the consumer reporting agency from whom it received the notice of
address discrepancy when the user:
(i) Can form a reasonable belief that the consumer report relates
to the consumer about whom the user requested the report;
(ii) Establishes a continuing relationship with the consumer; and
(iii) Regularly and in the ordinary course of business furnishes
information to the consumer reporting agency from which the notice of
address discrepancy relating to the consumer was obtained.
(2) Examples of confirmation methods. The user may reasonably
confirm an address is accurate by:
(i) Verifying the address with the consumer about whom it has
requested the report;

[[Page 63761]]

(ii) Reviewing its own records to verify the address of the
consumer;
(iii) Verifying the address through third-party sources; or
(iv) Using other reasonable means.
(3) Timing. The policies and procedures developed in accordance
with paragraph (d)(1) of this section must provide that the user will
furnish the consumer's address that the user has reasonably confirmed
is accurate to the consumer reporting agency as part of the information
it regularly furnishes for the reporting period in which it establishes
a relationship with the consumer.

0
5. Add Subpart J to part 334 to read as follows:
Subpart J--Identity Theft Red Flags
Sec.
334.90 Duties regarding the detection, prevention, and mitigation of
identity theft.
334.91 Duties of card issuers regarding changes of address.

Subpart J--Identity Theft Red Flags

Sec. 334.90 Duties regarding the detection, prevention, and
mitigation of identity theft.

(a) Scope. This section applies to a financial institution or
creditor that is an insured state nonmember bank, insured state
licensed branch of a foreign bank, or a subsidiary of such entities
(except brokers, dealers, persons providing insurance, investment
companies, and investment advisers).
(b) Definitions. For purposes of this section and Appendix J, the
following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes:
(i) An extension of credit, such as the purchase of property or
services involving a deferred payment; and
(ii) A deposit account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign bank, the
managing official in charge of the branch or agency; and
(ii) In the case of any other creditor that does not have a board
of directors, a designated employee at the level of senior management.
(3) Covered account means:
(i) 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,
such as a credit card account, mortgage loan, automobile loan, margin
account, cell phone account, utility account, checking account, or
savings account; and
(ii) 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.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and
includes lenders such as banks, finance companies, automobile dealers,
mortgage brokers, utility companies, and telecommunications companies.
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identity theft has the same meaning as in 16 CFR 603.2(a).
(9) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(10) Service provider means a person that provides a service
directly to the financial institution or creditor.
(c) Periodic Identification of Covered Accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor must conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program--(1)
Program requirement. Each financial institution or creditor that offers
or maintains one or more covered accounts must develop and implement a
written Identity Theft Prevention Program (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. The
Program must be appropriate to the size and complexity of the financial
institution or creditor and the nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix J of this part and include in its Program those guidelines
that are appropriate.

Sec. 334.91 Duties of card issuers regarding changes of address.

(a) Scope. This section applies to an issuer of a debit or credit
card (card issuer) that is an insured state nonmember bank, insured
state licensed branch of a foreign bank, or a subsidiary of such
entities (except brokers, dealers, persons providing insurance,
investment companies, and investment advisers).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit or
debit card.
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a

[[Page 63762]]

change of address if it receives notification of a change of address
for a consumer's debit or credit card account and, within a short
period of time afterwards (during at least the first 30 days after it
receives such notification), the card issuer receives a request for an
additional or replacement card for the same account. Under these
circumstances, the card issuer may not issue an additional or
replacement card, until, in accordance with its reasonable policies and
procedures and for the purpose of assessing the validity of the change
of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 334.90 of this part.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.

Appendices D-I [Reserved]

0
6. Add and reserve appendices D through I to part 334.

0
7. Add Appendix J to part 334 to read as follows:

Appendix J to Part 334--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Section 334.90 of this part requires each financial institution
and creditor that offers or maintains one or more covered accounts,
as defined in Sec. 334.90(b)(3) of this part, to develop and
provide for the continued administration of a written Program to
detect, prevent, and mitigate identity theft in connection with the
opening of a covered account or any existing covered account. These
guidelines are intended to assist financial institutions and
creditors in the formulation and maintenance of a Program that
satisfies the requirements of Sec. 334.90 of this part.

I. The Program

II. Identifying Relevant Red Flags

III. Detecting Red Flags.

The Program's policies and procedures should address the
detection of Red Flags in connection with the opening of covered
accounts and existing covered accounts, such as by:
(a) Obtaining identifying information about, and verifying the
identity of, a person opening a covered account, for example, using
the policies and procedures regarding identification and
verification set forth in the Customer Identification Program rules
implementing 31 U.S.C. 5318(l)(31 CFR 103.121); and
(b) Authenticating customers, monitoring transactions, and
verifying the validity of change of address requests, in the case of
existing covered accounts.

IV. Preventing and Mitigating Identity Theft.

The Program's policies and procedures should provide for
appropriate responses to the Red Flags the financial institution or
creditor has detected that are commensurate with the degree of risk
posed. In determining an appropriate response, a financial
institution or creditor should consider aggravating factors that may
heighten the risk of identity theft, such as a data security
incident that results in unauthorized access to a customer's account
records held by the financial institution, creditor, or third party,
or notice that a customer has provided information related to a
covered account held by the financial institution or creditor to
someone fraudulently claiming to represent the financial institution
or creditor or to a fraudulent Web site. Appropriate responses may
include the following:
(a) Monitoring a covered account for evidence of identity theft;
(b) Contacting the customer;
(c) Changing any passwords, security codes, or other security
devices that permit access to a covered account;
(d) Reopening a covered account with a new account number;
(e) Not opening a new covered account;
(f) Closing an existing covered account;
(g) Not attempting to collect on a covered account or not
selling a covered account to a debt collector;
(h) Notifying law enforcement; or
(i) Determining that no response is warranted under the
particular circumstances.

V. Updating the Program.

VI. Methods for Administering the Program

[[Page 63763]]

financial institution or creditor with Sec. 334.90 of this part.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: the
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; service provider arrangements;
significant incidents involving identity theft and management's
response; and recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.

VII. Other Applicable Legal Requirements

Supplement A to Appendix J

Alerts, Notifications or Warnings from a Consumer Reporting Agency

1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 334.82(b) of this part.
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.

Suspicious Documents

Suspicious Personal Identifying Information

Unusual Use of, or Suspicious Activity Related to, the Covered
Account

[[Page 63764]]

PART 364--STANDARDS FOR SAFETY AND SOUNDNESS

0
8. The authority citation for part 364 is revised to read as follows:

Authority: 12 U.S.C. 1818 and 1819 (Tenth), 1831p-1; 15 U.S.C.
1681b, 1681s, 1681w, 6801(b), 6805(b)(1).

0
9. Add the following sentence at the end of Sec. 364.101(b):

Sec. 364.101 Standards for safety and soundness.

* * * * *
(b) * * * The interagency regulations and guidelines on identity
theft detection, prevention, and mitigation prescribed pursuant to
section 114 of the Fair and Accurate Credit Transactions Act of 2003,
15 U.S.C. 1681m(e), are set forth in Sec. Sec. 334.90, 334.91, and
Appendix J of part 334.

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision
12 CFR Chapter V

Authority and Issuance

0
For the reasons discussed in the joint preamble, the Office of Thrift
Supervision is amending part 571 of title 12, chapter V, of the Code of
Federal Regulations as follows:

PART 571--FAIR CREDIT REPORTING

0
1. Revise the authority citation for part 571 to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1828, 1831p-1,
and 1881-1884; 15 U.S.C. 1681b, 1681c, 1681m, 1681s, 1681s-1, 1681t
and 1681w; 15 U.S.C. 6801 and 6805; Sec. 214 Pub. L. 108-159, 117
Stat. 1952.

Subpart A--General Provisions

0
2. Amend Sec. 571.1 by revising paragraph (b)(9) and adding a new
paragraph (b)(10) to read as follows:

Sec. 571.1 Purpose and Scope.

* * * * *
(b) scope.
* * * * *
(9)(i) The scope of Sec. 571.82 of Subpart I of this part is
stated in Sec. 571.82(a) of this part.
(ii) The scope of Sec. 571.83 of Subpart I of this part is stated
in Sec. 571.83(a) of this part.
(10)(i) The scope of Sec. 571.90 of Subpart J of this part is
stated in Sec. 571.90(a) of this part.
(ii) The scope of Sec. 571.91 of Subpart J of this part is stated
in Sec. 571.91(a) of this part.

0
3. Amend Sec. 571.3 by:
0
a. Removing paragraph (o); and
0
b. Revising the introductory text to read as follows:

Sec. 571.3 Definitions.

For purposes of this part, unless explicitly stated otherwise:
* * * * *

0
4. Revise the heading for Subpart I as shown below.

Subpart I--Duties of Users of Consumer Reports Regarding Address
Discrepancies and Records Disposal

0
5. Add Sec. 571.82 to read as follows:

Sec. 571.82 Duties of users regarding address discrepancies.

(a) Scope. This section applies to a user of consumer reports
(user) that receives a notice of address discrepancy from a consumer
reporting agency, and that is a savings association whose deposits are
insured by the Federal Deposit Insurance Corporation or, in accordance
with Sec. 559.3(h)(1) of this chapter, a federal savings association
operating subsidiary that is not functionally regulated within the
meaning of section 5(c)(5) of the Bank Holding Company Act of 1956, as
amended (12 U.S.C. 1844(c)(5)).
(b) Definition. For purposes of this section, a notice of address
discrepancy means a notice sent to a user by a consumer reporting
agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a
substantial difference between the address for the consumer that the
user provided to request the consumer report and the address(es) in the
agency's file for the consumer.
(c) Reasonable belief. (1) Requirement to form a reasonable belief.
A user must develop and implement reasonable policies and procedures
designed to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report,
when the user receives a notice of address discrepancy.
(2) Examples of reasonable policies and procedures. (i) Comparing
the information in the consumer report provided by the consumer
reporting agency with information the user:
(A) Obtains and uses to verify the consumer's identity in
accordance with the requirements of the Customer Information Program
(CIP) rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
(B) Maintains in its own records, such as applications, change of
address notifications, other customer account records, or retained CIP
documentation; or
(C) Obtains from third-party sources; or
(ii) Verifying the information in the consumer report provided by
the consumer reporting agency with the consumer.
(d) Consumer's address. (1) Requirement to furnish consumer's
address to a consumer reporting agency. A user must develop and
implement reasonable policies and procedures for furnishing an address
for the consumer that the user has reasonably confirmed is accurate to
the consumer reporting agency from whom it received the notice of
address discrepancy when the user:
(i) Can form a reasonable belief that the consumer report relates
to the consumer about whom the user requested the report;
(ii) Establishes a continuing relationship with the consumer; and
(iii) Regularly and in the ordinary course of business furnishes
information to the consumer reporting agency from which the notice of
address discrepancy relating to the consumer was obtained.
(2) Examples of confirmation methods. The user may reasonably
confirm an address is accurate by:
(i) Verifying the address with the consumer about whom it has
requested the report;
(ii) Reviewing its own records to verify the address of the
consumer;
(iii) Verifying the address through third-party sources; or
(iv) Using other reasonable means.
(3) Timing. The policies and procedures developed in accordance
with paragraph (d)(1) of this section must provide that the user will
furnish the consumer's address that the user has reasonably confirmed
is accurate to the consumer reporting agency as part of the information
it regularly furnishes for the reporting period in which it establishes
a relationship with the consumer.

0
6. Amend Sec. 571.83 by:
0
a. Redesignating paragraphs (a) and (b) as paragraphs (b) and (c),
respectively.
0
b. Adding a new paragraph (a) to read as follows:

Sec. 571.83 Disposal of consumer information.

(a) Scope. This section applies to savings associations whose
deposits are

[[Page 63765]]

insured by the Federal Deposit Insurance Corporation and federal
savings association operating subsidiaries in accordance with Sec.
559.3(h)(1) of this chapter (defined as ``you'').
* * * * *
0
7. Add Subpart J to part 571 to read as follows:
Subpart J--Identity Theft Red Flags
Sec.
571.90 Duties regarding the detection, prevention, and mitigation of
identity theft.
571.91 Duties of card issuers regarding changes of address.

Subpart J--Identity Theft Red Flags

Sec. 571.90 Duties regarding the detection, prevention, and
mitigation of identity theft.

(a) Scope. This section applies to a financial institution or
creditor that is a savings association whose deposits are insured by
the Federal Deposit Insurance Corporation or, in accordance with Sec.
559.3(h)(1) of this chapter, a federal savings association operating
subsidiary that is not functionally regulated within the meaning of
section 5(c)(5) of the Bank Holding Company Act of 1956, as amended (12
U.S.C. 1844(c)(5)).
(b) Definitions. For purposes of this section and Appendix J, the
following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes:
(i) An extension of credit, such as the purchase of property or
services involving a deferred payment; and
(ii) A deposit account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign bank, the
managing official in charge of the branch or agency; and
(ii) In the case of any other creditor that does not have a board
of directors, a designated employee at the level of senior management.
(3) Covered account means:
(i) 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,
such as a credit card account, mortgage loan, automobile loan, margin
account, cell phone account, utility account, checking account, or
savings account; and
(ii) 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.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and
includes lenders such as banks, finance companies, automobile dealers,
mortgage brokers, utility companies, and telecommunications companies.
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identity theft has the same meaning as in 16 CFR 603.2(a).
(9) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(10) Service provider means a person that provides a service
directly to the financial institution or creditor.
(c) Periodic Identification of Covered Accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor must conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program. (1)
Program requirement. Each financial institution or creditor that offers
or maintains one or more covered accounts must develop and implement a
written Identity Theft Prevention Program (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. The
Program must be appropriate to the size and complexity of the financial
institution or creditor and the nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix J of this part and include in its Program those guidelines
that are appropriate.

Sec. 571.91 Duties of card issuers regarding changes of address.

(a) Scope. This section applies to an issuer of a debit or credit
card (card issuer) that is a savings association whose deposits are
insured by the Federal Deposit Insurance Corporation or, in accordance
with Sec. 559.3(h)(1) of this chapter, a federal savings association
operating subsidiary that is not functionally regulated within the
meaning of section 5(c)(5) of the Bank Holding Company Act of 1956, as
amended (12 U.S.C. 1844(c)(5)).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit or
debit card.
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a

[[Page 63766]]

change of address if it receives notification of a change of address
for a consumer's debit or credit card account and, within a short
period of time afterwards (during at least the first 30 days after it
receives such notification), the card issuer receives a request for an
additional or replacement card for the same account. Under these
circumstances, the card issuer may not issue an additional or
replacement card, until, in accordance with its reasonable policies and
procedures and for the purpose of assessing the validity of the change
of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 571.90 of this part.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.

Appendices D-I [Reserved]

0
8. Add and reserve appendices D through I to part 571.

0
9. Add Appendix J to part 571 to read as follows:

Appendix J to Part 571--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Section 571.90 of this part requires each financial institution
and creditor that offers or maintains one or more covered accounts,
as defined in Sec. 571.90(b)(3) of this part, to develop and
provide for the continued administration of a written Program to
detect, prevent, and mitigate identity theft in connection with the
opening of a covered account or any existing covered account. These
guidelines are intended to assist financial institutions and
creditors in the formulation and maintenance of a Program that
satisfies the requirements of Sec. 571.90 of this part.

I. The Program

II. Identifying Relevant Red Flags

III. Detecting Red Flags

IV. Preventing and Mitigating Identity Theft

V. Updating the Program

VI. Methods for Administering the Program

[[Page 63767]]

employee at the level of senior management, at least annually, on
compliance by the financial institution or creditor with Sec.
571.90 of this part.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: the
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; service provider arrangements;
significant incidents involving identity theft and management's
response; and recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.

VII. Other Applicable Legal Requirements

Supplement A to Appendix J

Alerts, Notifications or Warnings from a Consumer Reporting Agency

1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 571.82(b) of this part.
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.

Suspicious Documents

Suspicious Personal Identifying Information

Unusual Use of, or Suspicious Activity Related to, the Covered
Account

[[Page 63768]]

transactions in connection with a customer's covered account.

Notice from Customers, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection With Covered Accounts Held by the Financial Institution
or Creditor

National Credit Union Administration

12 CFR Chapter VII

Authority and Issuance

0
For the reasons discussed in the joint preamble, the National Credit
Union Administration is amending part 717 of title 12, chapter VII, of
the Code of Federal Regulations as follows:

PART 717--FAIR CREDIT REPORTING

0
1. The authority citation for part 717 is revised to read as follows:

Authority: 12 U.S.C. 1751 et seq.; 15 U.S.C. 1681a, 1681b,
1681c, 1681m, 1681s, 1681s-1, 1681t, 1681w, 6801 and 6805, Pub. L.
108-159, 117 Stat. 1952.

Subpart A--General Provisions

0
2. Amend Sec. 717.3 by revising the introductory text to read as
follows:

Sec. 717.3 Definitions.

For purposes of this part, unless explicitly stated otherwise:
* * * * *

0
3. Revise the heading for Subpart I as shown below.

Subpart I--Duties of Users of Consumer Reports Regarding Address
Discrepancies and Records Disposal

0
4. Add Sec. 717.82 to read as follows:

Sec. 717.82 Duties of users regarding address discrepancies.

(a) Scope. This section applies to a user of consumer reports
(user) that receives a notice of address discrepancy from a consumer
reporting agency, and that is federal credit union.
(b) Definition. For purposes of this section, a notice of address
discrepancy means a notice sent to a user by a consumer reporting
agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a
substantial difference between the address for the consumer that the
user provided to request the consumer report and the address(es) in the
agency's file for the consumer.
(c) Reasonable belief--(1) Requirement to form a reasonable belief.
A user must develop and implement reasonable policies and procedures
designed to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report,
when the user receives a notice of address discrepancy.
(2) Examples of reasonable policies and procedures. (i) Comparing
the information in the consumer report provided by the consumer
reporting agency with information the user:
(A) Obtains and uses to verify the consumer's identity in
accordance with the requirements of the Customer Information Program
(CIP) rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
(B) Maintains in its own records, such as applications, change of
address notifications, other member account records, or retained CIP
documentation; or
(C) Obtains from third-party sources; or
(ii) Verifying the information in the consumer report provided by
the consumer reporting agency with the consumer.
(d) Consumer's address--(1) Requirement to furnish consumer's
address to a consumer reporting agency. A user must develop and
implement reasonable policies and procedures for furnishing an address
for the consumer that the user has reasonably confirmed is accurate to
the consumer reporting agency from whom it received the notice of
address discrepancy when the user:
(i) Can form a reasonable belief that the consumer report relates
to the consumer about whom the user requested the report;
(ii) Establishes a continuing relationship with the consumer; and
(iii) Regularly and in the ordinary course of business furnishes
information to the consumer reporting agency from which the notice of
address discrepancy relating to the consumer was obtained.
(2) Examples of confirmation methods. The user may reasonably
confirm an address is accurate by:
(i) Verifying the address with the consumer about whom it has
requested the report;
(ii) Reviewing its own records to verify the address of the
consumer;
(iii) Verifying the address through third-party sources; or
(iv) Using other reasonable means.
(3) Timing. The policies and procedures developed in accordance
with paragraph (d)(1) of this section must provide that the user will
furnish the consumer's address that the user has reasonably confirmed
is accurate to the consumer reporting agency as part of the information
it regularly furnishes for the reporting period in which it establishes
a relationship with the consumer.

0
5. Add Subpart J to part 717 to read as follows:
Subpart J--Identity Theft Red Flags
Sec.
717.90 Duties regarding the detection, prevention, and mitigation of
identity theft.
717.91 Duties of card issuers regarding changes of address.

Subpart J--Identity Theft Red Flags

Sec. 717.90 Duties regarding the detection, prevention, and
mitigation of identity theft.

(a) Scope. This section applies to a financial institution or
creditor that is a federal credit union.
(b) Definitions. For purposes of this section and Appendix J, the
following definitions apply:
(1) Account means a continuing relationship established by a person
with a federal credit union to obtain a product or service for
personal, family, household or business purposes. Account includes:
(i) An extension of credit, such as the purchase of property or
services involving a deferred payment; and
(ii) A share or deposit account.
(2) The term board of directors refers to a federal credit union's
board of directors.
(3) Covered account means:
(i) An account that a federal credit union offers or maintains,
primarily for personal, family, or household purposes, that involves or
is designed to permit multiple payments or transactions, such as a
credit card account, mortgage loan, automobile loan, checking account,
or share account; and
(ii) Any other account that the federal credit union offers or
maintains for which there is a reasonably foreseeable risk to members
or to the safety and soundness of the federal credit union from
identity theft, including financial, operational, compliance,
reputation, or litigation risks.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
(6) Customer means a member that has a covered account with a
federal credit union.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identity theft has the same meaning as in 16 CFR 603.2(a).
(9) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(10) Service provider means a person that provides a service
directly to the federal credit union.

[[Page 63769]]

(c) Periodic Identification of Covered Accounts. Each federal
credit union must periodically determine whether it offers or maintains
covered accounts. As a part of this determination, a federal credit
union must conduct a risk assessment to determine whether it offers or
maintains covered accounts described in paragraph (b)(3)(ii) of this
section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program. (1)
Program requirement. Each federal credit union that offers or maintains
one or more covered accounts must develop and implement a written
Identity Theft Prevention Program (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. The Program must be
appropriate to the size and complexity of the federal credit union and
the nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
federal credit union offers or maintains, and incorporate those Red
Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the federal credit union;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
members and to the safety and soundness of the federal credit union
from identity theft.
(e) Administration of the Program. Each federal credit union that
is required to implement a Program must provide for the continued
administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each federal credit union that is required to
implement a Program must consider the guidelines in Appendix J of this
part and include in its Program those guidelines that are appropriate.

Sec. 717.91 Duties of card issuers regarding changes of address.

(a) Scope. This section applies to an issuer of a debit or credit
card (card issuer) that is a federal credit union.
(b) Definitions. For purposes of this section:
(1) Cardholder means a member who has been issued a credit or debit
card.
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a change of address if it receives notification of a change of
address for a member's debit or credit card account and, within a short
period of time afterwards (during at least the first 30 days after it
receives such notification), the card issuer receives a request for an
additional or replacement card for the same account. Under these
circumstances, the card issuer may not issue an additional or
replacement card, until, in accordance with its reasonable policies and
procedures and for the purpose of assessing the validity of the change
of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and
(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 717.90 of this part.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.

Appendices D-I [Reserved]

0
6. Add and reserve appendices D through I to part 717.

0
7. Add Appendix J to part 717 to read as follows:

Appendix J to Part 717--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Section 717.90 of this part requires each federal credit union
that offers or maintains one or more covered accounts, as defined in
Sec. 717.90(b)(3) of this part, to develop and provide for the
continued administration of a written Program to detect, prevent,
and mitigate identity theft in connection with the opening of a
covered account or any existing covered account. These guidelines
are intended to assist federal credit unions in the formulation and
maintenance of a Program that satisfies the requirements of Sec.
717.90 of this part.

I. The Program

In designing its Program, a federal credit union may
incorporate, as appropriate, its existing policies, procedures, and
other arrangements that control reasonably foreseeable risks to
members or to the safety and soundness of the federal credit union
from identity theft.

II. Identifying Relevant Red Flags

(a) Risk Factors. A federal credit union should consider the
following factors in identifying relevant Red Flags for covered
accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.
(b) Sources of Red Flags. Federal credit unions should
incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the federal credit union
has experienced;
(2) Methods of identity theft that the federal credit union has
identified that reflect changes in identity theft risks; and
(3) Applicable supervisory guidance.
(c) Categories of Red Flags. The Program should include relevant
Red Flags from the following categories, as appropriate. Examples of
Red Flags from each of these categories are appended as Supplement A
to this Appendix J.
(1) Alerts, notifications, or other warnings received from
consumer reporting agencies or service providers, such as fraud
detection services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying
information, such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to,
a covered account; and

[[Page 63770]]

(5) Notice from members, victims of identity theft, law
enforcement authorities, or other persons regarding possible
identity theft in connection with covered accounts held by the
federal credit union.

III. Detecting Red Flags

The Program's policies and procedures should address the
detection of Red Flags in connection with the opening of covered
accounts and existing covered accounts, such as by:
(a) Obtaining identifying information about, and verifying the
identity of, a person opening a covered account, for example, using
the policies and procedures regarding identification and
verification set forth in the Customer Identification Program rules
implementing 31 U.S.C. 5318(l) (31 CFR 103.121); and
(b) Authenticating members, monitoring transactions, and
verifying the validity of change of address requests, in the case of
existing covered accounts.

IV. Preventing and Mitigating Identity Theft

The Program's policies and procedures should provide for
appropriate responses to the Red Flags the federal credit union has
detected that are commensurate with the degree of risk posed. In
determining an appropriate response, a federal credit union should
consider aggravating factors that may heighten the risk of identity
theft, such as a data security incident that results in unauthorized
access to a member's account records held by the federal credit
union or a third party, or notice that a member has provided
information related to a covered account held by the federal credit
union to someone fraudulently claiming to represent the federal
credit union or to a fraudulent website. Appropriate responses may
include the following:
(a) Monitoring a covered account for evidence of identity theft;
(b) Contacting the member;
(c) Changing any passwords, security codes, or other security
devices that permit access to a covered account;
(d) Reopening a covered account with a new account number;
(e) Not opening a new covered account;
(f) Closing an existing covered account;
(g) Not attempting to collect on a covered account or not
selling a covered account to a debt collector;
(h) Notifying law enforcement; or
(i) Determining that no response is warranted under the
particular circumstances.

V. Updating the Program

Federal credit unions should update the Program (including the
Red Flags determined to be relevant) periodically, to reflect
changes in risks to members or to the safety and soundness of the
federal credit union from identity theft, based on factors such as:
(a) The experiences of the federal credit union with identity
theft;
(b) Changes in methods of identity theft;
(c) Changes in methods to detect, prevent, and mitigate identity
theft;
(d) Changes in the types of accounts that the federal credit
union offers or maintains; and
(e) Changes in the business arrangements of the federal credit
union, including mergers, acquisitions, alliances, joint ventures,
and service provider arrangements.

VI. Methods for Administering the Program

(a) Oversight of Program. Oversight by the board of directors,
an appropriate committee of the board, or a designated employee at
the level of senior management should include:
(1) Assigning specific responsibility for the Program's
implementation;
(2) Reviewing reports prepared by staff regarding compliance by
the federal credit union with Sec. 717.90 of this part; and
(3) Approving material changes to the Program as necessary to
address changing identity theft risks.
(b) Reports. (1) In general. Staff of the federal credit union
responsible for development, implementation, and administration of
its Program should report to the board of directors, an appropriate
committee of the board, or a designated employee at the level of
senior management, at least annually, on compliance by the federal
credit union with Sec. 717.90 of this part.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: the
effectiveness of the policies and procedures of the federal credit
union in addressing the risk of identity theft in connection with
the opening of covered accounts and with respect to existing covered
accounts; service provider arrangements; significant incidents
involving identity theft and management's response; and
recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
federal credit union engages a service provider to perform an
activity in connection with one or more covered accounts the federal
credit union should take steps to ensure that the activity of the
service provider is conducted in accordance with reasonable policies
and procedures designed to detect, prevent, and mitigate the risk of
identity theft. For example, a federal credit union could require
the service provider by contract to have policies and procedures to
detect relevant Red Flags that may arise in the performance of the
service provider's activities, and either report the Red Flags to
the federal credit union, or to take appropriate steps to prevent or
mitigate identity theft.

VII. Other Applicable Legal Requirements

Federal credit unions should be mindful of other related legal
requirements that may be applicable, such as:
(a) Filing a Suspicious Activity Report under 31 U.S.C. 5318(g)
and 12 CFR 748.1(c);
(b) Implementing any requirements under 15 U.S.C. 1681c-1(h)
regarding the circumstances under which credit may be extended when
the federal credit union detects a fraud or active duty alert;
(c) Implementing any requirements for furnishers of information
to consumer reporting agencies under 15 U.S.C. 1681s-2, for example,
to correct or update inaccurate or incomplete information, and to
not report information that the furnisher has reasonable cause to
believe is inaccurate; and
(d) Complying with the prohibitions in 15 U.S.C. 1681m on the
sale, transfer, and placement for collection of certain debts
resulting from identity theft.

Supplement A to Appendix J

In addition to incorporating Red Flags from the sources
recommended in section II.b. of the Guidelines in Appendix J of this
part, each federal credit union may consider incorporating into its
Program, whether singly or in combination, Red Flags from the
following illustrative examples in connection with covered accounts:

Alerts, Notifications or Warnings From a Consumer Reporting Agency

1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 717.82(b) of this part.
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or member, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.

Suspicious Documents

5. Documents provided for identification appear to have been
altered or forged.
6. The photograph or physical description on the identification
is not consistent with the appearance of the applicant or member
presenting the identification.
7. Other information on the identification is not consistent
with information provided by the person opening a new covered
account or member presenting the identification.
8. Other information on the identification is not consistent
with readily accessible information that is on file with the federal
credit union, such as a signature card or a recent check.
9. An application appears to have been altered or forged, or
gives the appearance of having been destroyed and reassembled.

Suspicious Personal Identifying Information

10. Personal identifying information provided is inconsistent
when compared against external information sources used by the
federal credit union. For example:
a. The address does not match any address in the consumer
report; or
b. The Social Security Number (SSN) has not been issued, or is
listed on the Social Security Administration's Death Master File.
11. Personal identifying information provided by the member is
not consistent with other personal identifying information provided
by the member. For example, there is a lack of correlation between
the SSN range and date of birth.

[[Page 63771]]

12. Personal identifying information provided is associated with
known fraudulent activity as indicated by internal or third-party
sources used by the federal credit union. For example:
a. The address on an application is the same as the address
provided on a fraudulent application; or
b. The phone number on an application is the same as the number
provided on a fraudulent application.
13. Personal identifying information provided is of a type
commonly associated with fraudulent activity as indicated by
internal or third-party sources used by the federal credit union.
For example:
a. The address on an application is fictitious, a mail drop, or
prison; or
b. The phone number is invalid, or is associated with a pager or
answering service.
14. The SSN provided is the same as that submitted by other
persons opening an account or other members.
15. The address or telephone number provided is the same as or
similar to the account number or telephone number submitted by an
unusually large number of other persons opening accounts or other
members.
16. The person opening the covered account or the member fails
to provide all required personal identifying information on an
application or in response to notification that the application is
incomplete.
17. Personal identifying information provided is not consistent
with personal identifying information that is on file with the
federal credit union.
18. For federal credit unions that use challenge questions, the
person opening the covered account or the member cannot provide
authenticating information beyond that which generally would be
available from a wallet or consumer report.

Unusual Use of, or Suspicious Activity Related to, the Covered
Account

19. Shortly following the notice of a change of address for a
covered account, the institution or creditor receives a request for
a new, additional, or replacement card or a cell phone, or for the
addition of authorized users on the account.
20. A new revolving credit account is used in a manner commonly
associated with known patterns of fraud patterns. For example:
a. The majority of available credit is used for cash advances or
merchandise that is easily convertible to cash (e.g., electronics
equipment or jewelry); or
b. The member fails to make the first payment or makes an
initial payment but no subsequent payments.
21. A covered account is used in a manner that is not consistent
with established patterns of activity on the account. There is, for
example:
a. Nonpayment when there is no history of late or missed
payments;
b. A material increase in the use of available credit;
c. A material change in purchasing or spending patterns;
d. A material change in electronic fund transfer patterns in
connection with a deposit account; or
e. A material change in telephone call patterns in connection
with a cellular phone account.
22. A covered account that has been inactive for a reasonably
lengthy period of time is used (taking into consideration the type
of account, the expected pattern of usage and other relevant
factors).
23. Mail sent to the member is returned repeatedly as
undeliverable although transactions continue to be conducted in
connection with the member's covered account.
24. The federal credit union is notified that the member is not
receiving paper account statements.
25. The federal credit union is notified of unauthorized charges
or transactions in connection with a member's covered account.

Notice From Members, Victims of Identity Theft, Law Enforcement
Authorities, or Other Persons Regarding Possible Identity Theft in
Connection With Covered Accounts Held by the Federal Credit Union

26. The federal credit union is notified by a member, a victim
of identity theft, a law enforcement authority, or any other person
that it has opened a fraudulent account for a person engaged in
identity theft.

FEDERAL TRADE COMMISSION

16 CFR Part 681

Authority and Issuance

0
For the reasons discussed in the joint preamble, the Commission is
adding part 681 of title 16 of the Code of Federal Regulations as
follows:
PART 681--IDENTITY THEFT RULES
Sec.
681.1 Duties of users of consumer reports regarding address
discrepancies.
681.2 Duties regarding the detection, prevention, and mitigation of
identity theft.
681.3 Duties of card issuers regarding changes of address.

Appendix A to Part 681--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Authority: Pub. L. 108-159, sec. 114 and sec. 315; 15 U.S.C.
1681m(e) and 15 U.S.C. 1681c(h).

Sec. 681.1 Duties of users regarding address discrepancies.

(a) Scope. This section applies to users of consumer reports that
are subject to administrative enforcement of the FCRA by the Federal
Trade Commission pursuant to 15 U.S.C. 1681s(a)(1) (users).
(b) Definition. For purposes of this section, a notice of address
discrepancy means a notice sent to a user by a consumer reporting
agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a
substantial difference between the address for the consumer that the
user provided to request the consumer report and the address(es) in the
agency's file for the consumer.
(c) Reasonable belief. (1) Requirement to form a reasonable belief.
A user must develop and implement reasonable policies and procedures
designed to enable the user to form a reasonable belief that a consumer
report relates to the consumer about whom it has requested the report,
when the user receives a notice of address discrepancy.
(2) Examples of reasonable policies and procedures. (i) Comparing
the information in the consumer report provided by the consumer
reporting agency with information the user:
(A) Obtains and uses to verify the consumer's identity in
accordance with the requirements of the Customer Information Program
(CIP) rules implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
(B) Maintains in its own records, such as applications, change of
address notifications, other customer account records, or retained CIP
documentation; or
(C) Obtains from third-party sources; or
(ii) Verifying the information in the consumer report provided by
the consumer reporting agency with the consumer.
(d) Consumer's address. (1) Requirement to furnish consumer's
address to a consumer reporting agency. A user must develop and
implement reasonable policies and procedures for furnishing an address
for the consumer that the user has reasonably confirmed is accurate to
the consumer reporting agency from whom it received the notice of
address discrepancy when the user:
(i) Can form a reasonable belief that the consumer report relates
to the consumer about whom the user requested the report;
(ii) Establishes a continuing relationship with the consumer; and
(iii) Regularly and in the ordinary course of business furnishes
information to the consumer reporting agency from which the notice of
address discrepancy relating to the consumer was obtained.
(2) Examples of confirmation methods. The user may reasonably
confirm an address is accurate by:
(i) Verifying the address with the consumer about whom it has
requested the report;
(ii) Reviewing its own records to verify the address of the
consumer;
(iii) Verifying the address through third-party sources; or
(iv) Using other reasonable means.
(3) Timing. The policies and procedures developed in accordance

[[Page 63772]]

with paragraph (d)(1) of this section must provide that the user will
furnish the consumer's address that the user has reasonably confirmed
is accurate to the consumer reporting agency as part of the information
it regularly furnishes for the reporting period in which it establishes
a relationship with the consumer.

Sec. 681.2 Duties regarding the detection, prevention, and mitigation
of identity theft.

(a) Scope. This section applies to financial institutions and
creditors that are subject to administrative enforcement of the FCRA by
the Federal Trade Commission pursuant to 15 U.S.C. 1681s(a)(1).
(b) Definitions. For purposes of this section, and Appendix A, the
following definitions apply:
(1) Account means a continuing relationship established by a person
with a financial institution or creditor to obtain a product or service
for personal, family, household or business purposes. Account includes:
(i) An extension of credit, such as the purchase of property or
services involving a deferred payment; and
(ii) A deposit account.
(2) The term board of directors includes:
(i) In the case of a branch or agency of a foreign bank, the
managing official in charge of the branch or agency; and
(ii) In the case of any other creditor that does not have a board
of directors, a designated employee at the level of senior management.
(3) Covered account means:
(i) 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,
such as a credit card account, mortgage loan, automobile loan, margin
account, cell phone account, utility account, checking account, or
savings account; and
(ii) 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.
(4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
(5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and
includes lenders such as banks, finance companies, automobile dealers,
mortgage brokers, utility companies, and telecommunications companies.
(6) Customer means a person that has a covered account with a
financial institution or creditor.
(7) Financial institution has the same meaning as in 15 U.S.C.
1681a(t).
(8) Identity theft has the same meaning as in 16 CFR 603.2(a).
(9) Red Flag means a pattern, practice, or specific activity that
indicates the possible existence of identity theft.
(10) Service provider means a person that provides a service
directly to the financial institution or creditor.
(c) Periodic Identification of Covered Accounts. Each financial
institution or creditor must periodically determine whether it offers
or maintains covered accounts. As a part of this determination, a
financial institution or creditor must conduct a risk assessment to
determine whether it offers or maintains covered accounts described in
paragraph (b)(3)(ii) of this section, taking into consideration:
(1) The methods it provides to open its accounts;
(2) The methods it provides to access its accounts; and
(3) Its previous experiences with identity theft.
(d) Establishment of an Identity Theft Prevention Program. (1)
Program requirement. Each financial institution or creditor that offers
or maintains one or more covered accounts must develop and implement a
written Identity Theft Prevention Program (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. The
Program must be appropriate to the size and complexity of the financial
institution or creditor and the nature and scope of its activities.
(2) Elements of the Program. The Program must include reasonable
policies and procedures to:
(i) Identify relevant Red Flags for the covered accounts that the
financial institution or creditor offers or maintains, and incorporate
those Red Flags into its Program;
(ii) Detect Red Flags that have been incorporated into the Program
of the financial institution or creditor;
(iii) Respond appropriately to any Red Flags that are detected
pursuant to paragraph (d)(2)(ii) of this section to prevent and
mitigate identity theft; and
(iv) Ensure the Program (including the Red Flags determined to be
relevant) is updated periodically, to reflect changes in risks to
customers and to the safety and soundness of the financial institution
or creditor from identity theft.
(e) Administration of the Program. Each financial institution or
creditor that is required to implement a Program must provide for the
continued administration of the Program and must:
(1) Obtain approval of the initial written Program from either its
board of directors or an appropriate committee of the board of
directors;
(2) Involve the board of directors, an appropriate committee
thereof, or a designated employee at the level of senior management in
the oversight, development, implementation and administration of the
Program;
(3) Train staff, as necessary, to effectively implement the
Program; and
(4) Exercise appropriate and effective oversight of service
provider arrangements.
(f) Guidelines. Each financial institution or creditor that is
required to implement a Program must consider the guidelines in
Appendix A of this part and include in its Program those guidelines
that are appropriate.

Sec. 681.3 Duties of card issuers regarding changes of address.

(a) Scope. This section applies to a person described in Sec.
681.2(a) that issues a debit or credit card (card issuer).
(b) Definitions. For purposes of this section:
(1) Cardholder means a consumer who has been issued a credit or
debit card.
(2) Clear and conspicuous means reasonably understandable and
designed to call attention to the nature and significance of the
information presented.
(c) Address validation requirements. A card issuer must establish
and implement reasonable policies and procedures to assess the validity
of a change of address if it receives notification of a change of
address for a consumer's debit or credit card account and, within a
short period of time afterwards (during at least the first 30 days
after it receives such notification), the card issuer receives a
request for an additional or replacement card for the same account.
Under these circumstances, the card issuer may not issue an additional
or replacement card, until, in accordance with its reasonable policies
and procedures and for the purpose of assessing the validity of the
change of address, the card issuer:
(1)(i) Notifies the cardholder of the request:
(A) At the cardholder's former address; or
(B) By any other means of communication that the card issuer and
the cardholder have previously agreed to use; and

[[Page 63773]]

(ii) Provides to the cardholder a reasonable means of promptly
reporting incorrect address changes; or
(2) Otherwise assesses the validity of the change of address in
accordance with the policies and procedures the card issuer has
established pursuant to Sec. 681.2 of this part.
(d) Alternative timing of address validation. A card issuer may
satisfy the requirements of paragraph (c) of this section if it
validates an address pursuant to the methods in paragraph (c)(1) or
(c)(2) of this section when it receives an address change notification,
before it receives a request for an additional or replacement card.
(e) Form of notice. Any written or electronic notice that the card
issuer provides under this paragraph must be clear and conspicuous and
provided separately from its regular correspondence with the
cardholder.

Appendix A to Part 681--Interagency Guidelines on Identity Theft
Detection, Prevention, and Mitigation

Section 681.2 of this part requires each financial institution
and creditor that offers or maintains one or more covered accounts,
as defined in Sec. 681.2(b)(3) of this part, to develop and provide
for the continued administration of a written Program to detect,
prevent, and mitigate identity theft in connection with the opening
of a covered account or any existing covered account. These
guidelines are intended to assist financial institutions and
creditors in the formulation and maintenance of a Program that
satisfies the requirements of Sec. 681.2 of this part.

I. The Program

II. Identifying Relevant Red Flags

(a) Risk Factors. A financial institution or creditor should
consider the following factors in identifying relevant Red Flags for
covered accounts, as appropriate:
(1) The types of covered accounts it offers or maintains;
(2) The methods it provides to open its covered accounts;
(3) The methods it provides to access its covered accounts; and
(4) Its previous experiences with identity theft.
(b) Sources of Red Flags. Financial institutions and creditors
should incorporate relevant Red Flags from sources such as:
(1) Incidents of identity theft that the financial institution
or creditor has experienced;
(2) Methods of identity theft that the financial institution or
creditor has identified that reflect changes in identity theft
risks; and
(3) Applicable supervisory guidance.
(c) Categories of Red Flags. The Program should include relevant
Red Flags from the following categories, as appropriate. Examples of
Red Flags from each of these categories are appended as Supplement A
to this Appendix A.
(1) Alerts, notifications, or other warnings received from
consumer reporting agencies or service providers, such as fraud
detection services;
(2) The presentation of suspicious documents;
(3) The presentation of suspicious personal identifying
information, such as a suspicious address change;
(4) The unusual use of, or other suspicious activity related to,
a covered account; and
(5) Notice from customers, victims of identity theft, law
enforcement authorities, or other persons regarding possible
identity theft in connection with covered accounts held by the
financial institution or creditor.

III. Detecting Red Flags

IV. Preventing and Mitigating Identity Theft

V. Updating the Program

VI. Methods for Administering the Program

(a) Oversight of Program. Oversight by the board of directors,
an appropriate committee of the board, or a designated employee at
the level of senior management should include:
(1) Assigning specific responsibility for the Program's
implementation;
(2) Reviewing reports prepared by staff regarding compliance by
the financial institution or creditor with Sec. 681.2 of this part;
and
(3) Approving material changes to the Program as necessary to
address changing identity theft risks.
(b) Reports. (1) In general. Staff of the financial institution
or creditor responsible for development, implementation, and
administration of its Program should report to the board of
directors, an appropriate committee of the board, or a designated
employee at the level of senior management, at least annually, on
compliance by the financial institution or creditor with Sec. 681.2
of this part.
(2) Contents of report. The report should address material
matters related to the Program and evaluate issues such as: The
effectiveness of the policies and procedures of the financial
institution or creditor in addressing the risk of identity theft in
connection with the opening of covered accounts and with respect to
existing covered accounts; service provider arrangements;
significant incidents involving identity theft and management's
response; and recommendations for material changes to the Program.
(c) Oversight of service provider arrangements. Whenever a
financial institution or creditor engages a service provider to
perform an activity in connection with one or more covered accounts
the financial institution or creditor should take steps to ensure
that the activity of the service provider is conducted in accordance
with reasonable policies and procedures designed to detect, prevent,
and mitigate the risk of identity theft. For example, a financial
institution or creditor could require the service provider by
contract to have policies and procedures to detect relevant Red
Flags

[[Page 63774]]

that may arise in the performance of the service provider's
activities, and either report the Red Flags to the financial
institution or creditor, or to take appropriate steps to prevent or
mitigate identity theft.

VII. Other Applicable Legal Requirements

Supplement A to Appendix A

In addition to incorporating Red Flags from the sources
recommended in section II.b. of the Guidelines in Appendix A of this
part, each financial institution or creditor may consider
incorporating into its Program, whether singly or in combination,
Red Flags from the following illustrative examples in connection
with covered accounts:

Alerts, Notifications or Warnings from a Consumer Reporting Agency

1. A fraud or active duty alert is included with a consumer
report.
2. A consumer reporting agency provides a notice of credit
freeze in response to a request for a consumer report.
3. A consumer reporting agency provides a notice of address
discrepancy, as defined in Sec. 681.1(b) of this part.
4. A consumer report indicates a pattern of activity that is
inconsistent with the history and usual pattern of activity of an
applicant or customer, such as:
a. A recent and significant increase in the volume of inquiries;
b. An unusual number of recently established credit
relationships;
c. A material change in the use of credit, especially with
respect to recently established credit relationships; or
d. An account that was closed for cause or identified for abuse
of account privileges by a financial institution or creditor.

Suspicious Documents

Suspicious Personal Identifying Information

Unusual Use of, or Suspicious Activity Related to, the Covered
Account

Dated: October 5, 2007.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, October 29, 2007.
Jennifer J. Johnson,
Secretary of the Board.

Dated at Washington, DC, this 16th day of October, 2007.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: October 24, 2007.

[[Page 63775]]

By the Office of Thrift Supervision.
John M. Reich,
Director.
By order of the National Credit Union Administration Board,
October 15, 2007.
Mary Rupp,
Secretary of the Board.
By direction of the Commission.

Donald S. Clark,
Secretary.
[FR Doc. 07-5453 Filed 11-8-07; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P; 7535-01-P;
6750-01-P