Archive for category: Compliance

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Banks Serve Communities with Invisible Credit in an Effort to Develop Financially Capable Consumers

By Hannah Flanders

Throughout the United States, millions of Americans are left out of mainstream financial services due to their credit score, or lack thereof. As financial inclusion — with particular emphasis on providing the underbanked access, expanding opportunities for all, and eliminating barriers — becomes increasingly critical in ensuring every consumer has the possibility to gain wealth, it is equally as important that banks understand the unique challenges these individuals face and how they can best be served.

What Does it Mean to be Credit Invisible?

According to information compiled by Oliver Wyman based on data by Experian and previous Consumer Financial Protection Bureau (CFPB) research, around 28 million American adults are credit invisible. Additionally, 21 million adults in the U.S. are considered unscorable. Defined as one’s lack of credit history and score, credit invisibility often results in difficulty accessing credit products. Unscorability, on the other hand, defines the limited information one has in their mainstream credit file and therefore their lack of ability to generate a conventional credit score.

The CFPB highlights that not only are a disproportional number of credit invisible customers located in low-income neighborhoods, but that around 15% of Black and Hispanic consumers are credit invisible in comparison to only around 9% of white customers.

However, as 90% of the top lenders throughout the U.S. require at least six months of recorded credit activity, according to the credit bureau Experian, credit invisible consumers often do not have access to reliable means to establish and expand their credit.

With minimum balance requirements and fees being cited within the top five reasons as to why 4.5% of households in the U.S. remain unbanked, according to the Federal Deposit Insurance Corporation’s (FDIC) 2021 FDIC National Survey of Unbanked and Under-banked Households report, it is critical that bankers find alternative solutions for those looking to expand their opportunities, meet their financial goals, own a home, or simply begin their financial journey.

Providing Accessible Credit

Lack of access to mainstream financial services or other low-cost credit products often does not stop individuals from borrowing or seeking certain forms of financial assistance. In fact, this may inadvertently cause one to engage in high-cost, potentially predatory lending cycles.

“Banks throughout America play an important role in not only providing opportunities for consumers to access traditional credit services, but also in assisting individuals to establish and maintain their credit,” says Jeff Langkamp, vice president — chief compliance officer at Bank Five Nine in Oconomowoc. “Having no credit score most likely means that individuals will have to pay a higher interest rate or use payday lenders who charge outrageously high interest rates. Additionally, establishing a credit score to purchase a house or car allows families to build generational wealth.”

To bankers, providing access to credit may mean offering secured credit cards or developing a credit invisible loan program, which involves making smaller loans to invisibles to gradually build their scores or looking beyond the standard evaluation producers to aspects such as their residency and employment stability.

At Bank Five Nine, customers have access to the Achieve Credit Builder™ program, an account certified as meeting the Bank On National Account Standards. The product, according to Langkamp, helps individuals establish or repair their credit at little to no cost.

“The average age of our customers that are taking part in the credit builder program is 26, so the product is helping younger individuals as they begin their credit journey,” highlights Langkamp.

Positioning Consumers for Success

In December 2022, Fannie Mae announced that it would be strengthening its underwriting program Desktop Underwriter® to responsibly expand eligibility and further simplify the borrowing process for individuals without credit scores.

“Traditional lending practices make it hard for borrowers with no credit score to access credit,” said Malloy Evans, executive vice president and head of single-family business, in the press release published on December 6.“[As a result,] Fannie Mae has taken steps that may help them responsibly qualify for a home loan using data that provides a more holistic view of how they manage their money.”

The enhancements released by Fannie Mae update existing eligibility criteria to permit standard loan-to-value (LTV), combined loan-to-value (CLTV), and high credit loan-to-value (HCLTV) ratios on certain properties and expand the standard maximum allowable debt-to-income ratio to 50%. Additionally, the organization has created an automated option for documenting nontraditional credit sources to simplify the process for both the lender and the borrower.

A significant component of this update also includes allowing borrower-permissioned data that consider a borrower’s transaction patterns and balance trends.

Embracing Alternative Credit Data

As many banks and businesses across the U.S. look to alternative ways to promote financial capability among all consumers, many are looking to consumer-permissioned data. Experian defines alternative credit as expanded Fair Credit Reporting Act (FCRA)-regulated data. This data often includes rental payments, small-dollar loans, and other consumer-permissioned data.

“Each individual situation is different; the most important thing is finding a plan that fits the needs and financial goals of the individual,” emphasizes Langkamp. “In addition to resources like Achieve Credit Builder™, our bank encourages our customers to take advantage of self-reporting opportunities like rental housing, and other payments that may not be reflected on a credit report.”

As establishing good credit remains a critical component of one’s ability to acquire wealth, self-reporting has quickly become an integral aspect in assisting individuals to easily establish a credit score.

In an effort to make credit accessible to all communities, Experian has developed free resources for consumers to utilize as they develop their credit score. Experian Go™ provides individuals with education and insights unique to their credit journey. Experian Boost™ allows consumers to connect their bank account or credit card to their Experian credit file. By making on-time payments, individuals can highlight their good spending habits and raise their credit score.

“By using expanded data sources and better analytics in credit decisions, banks can help more consumers gain access to credit while making more informed decisions,” says Greg Wright, executive vice president and chief product officer for Experian Consumer Information Services. “This is a win for both lenders and consumers — and it’s just the right thing to do.”

Wright adds that score models used today have historically left nearly 50 million Americans living with a limited credit history locked out of the credit ecosystem. “Leveraging expanded data sources and advanced analytics can help change this narrative,” he emphasizes.

While credit invisible and unscorable individuals remain a significant portion of our communities, there are many opportunities for banks to assist. Whether it be offering low-cost products and secured credit cards or encouraging consumers to utilize resources that educate them on their individual credit journey, bankers play a major role in promoting financial security for generations to come.

“This is an exciting time for the banking and financial services industry,” concludes Wright. “By leveraging the right tools, we are nearing a point where we can say — no matter who you are, where you live, or what part of your financial journey you’re on — that we can score you and help you access the financial services you need.”

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Executive Letter: 2023 Brings Adjusted Regulatory Thresholds

Rose Oswald PoelsBy Rose Oswald Poels

Happy New Year! As we step into 2023, there are several thresholds which have been adjusted by both state and federal regulators which go into effect now that the new year has arrived. Below is a collection of thresholds effective January 1, 2023, including a link to pull each publication for reference.

  • Based upon the annual percentage increase in the CPI-W as of 06/01/2022, the exemption threshold for Regulation Z (Truth in Lending Act) will increase to $66,400, up from $61,000.
  • Based upon the annual percentage increase in the CPI-W as of 01/01/2022, the exemption threshold for Regulation M (Consumer Leasing Act) will increase to $66,400, up from $61,000.
  • Based on the CPI-W in effect as of 06/01/2022, the exemption threshold under Regulation Z for HPML appraisals will increase to $31,000, up from $28,500.
  • Based on the 8.6 percent increase in the average of the CPI-W for the 12-month period ending in November 2022, the asset-size threshold to be exempt from collecting HMDA data in 2023 is adjusted to $54 million, up from $50 million.
  • The dollar amount of the maximum allowable charge for disclosures by a consumer reporting agency (CRA) to a consumer pursuant to FCRA section 609 for the 2023 calendar year is $14.50.
  • The asset-size threshold which exempts creditors from the requirement to establish an escrow account for HPMLs will be:
    • For creditors and their affiliates that regularly extended covered transactions secured by first liens, the asset-size threshold is adjusted to $2.537 billion, up from $2.336 billion; and
    • The exemption threshold for certain insured depository institutions with assets of $10 billion or less is adjusted to $11.374 billion, up from $10.473 billion.
  • Based on the CPI-W in effect as of 06/01/2022, the dollar amount thresholds for HOEPA and QM-related loans have been adjusted as follows:
    • For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $24,866.
    • The adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,243.
    • For QMs under the General QM loan definition in § 1026.43(e)(2), the thresholds for the spread between the annual percentage rate (APR) and the average prime offer rate (APOR) will be:
      • 2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $124,331;
      • 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $74,599 but less than $124,331;
      • 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $74,599;
      • 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $124,331;
      • 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $74,599; or
      • 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $74,599.
    • For all categories of QMs, the thresholds for total points and fees will be:
      • 3 percent of the total loan amount for a loan greater than or equal to $124,331;
      • $3,730 for a loan amount greater than or equal to $74,599 but less than $124,331;
      • 5 percent of the total loan amount for a loan greater than or equal to $24,866 but less than $74,599;
      • $1,243 for a loan amount greater than or equal to $15,541 but less than $24,866; and
      • 8 percent of the total loan amount for a loan amount less than $15,541.
  • For open-end consumer credit plans under TILA, the threshold that triggers requirements to disclose minimum interest charges will remain unchanged at $1.00.
  • Based upon the CPI-W, the CRA regulation has adjusted the asset-size thresholds used to define “small bank” and “intermediate small bank” to be:
    • Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.503 billion.
    • Intermediate small bank means a small bank with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years
  • The DFI has established the interest rate that must be paid on required escrow accounts under section 138.052(5) of the Wisconsin Statutes. The new rate is 0.11%.
  • The FDIC Designated Reserve Ratio remains 2 percent for 2023.
  • The OCC assessment rates are reduced for the general assessment fee schedule. OCC has maintained assessment rates from 2022 for the independent trust and independent credit card fee schedules. Also, there is no inflation adjustment to assessment rates.
  • Contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500, up from $20,500. The limit on annual contributions to an IRA increased to $6,500, up from $6,000.
  • Multifamily loan purchase caps for Fannie Mae and Freddie Mac will be $75 billion for each enterprise, for a combined total of $150 billion. The caps reflect an anticipated contraction of the multifamily originations market this year. FHFA will require that at least 50 percent of Fannie’s and Freddie’s multifamily business be mission-driven affordable housing.
  • The conforming loan limit values for mortgages to be acquired by Fannie Mae and Freddie Mac in 2023 for one-unit properties will be $726,200, an increase from $647,200.
  • New loan limits for FHA’s Single Family Title II Forward and Home Equity Conversion Mortgage (HECM) insurance programs, based upon property size and location, range from $472,030 to $3,142,800.

I am looking forward to this new year and excited about what 2023 may bring. Be sure to stay connected with WBA through our various releases and publications, and through our social media channels.

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Legal Q&A: Name and Signature Inconsistency in Documentation

Banks should consider document type, purpose, relevant issues

By Scott Birrenkott

Q: What Name Should Banks Use for Customers When Completing Documents?

A: The name that should appear, and be signed, on documents depends on a few things. Primarily, the type of documents being signed, the purpose for which the customer’s name is appearing, and any relevant rules.

Typically, a customer has a single, consistent name which will appear on documents, disclosures, and other communications and match their signature. However, there are scenarios where this is not the case. A customer might use inconsistent capitalization, or go by different names, such as a “nickname,” or perhaps use their middle initial in some situations, or a “Jr.” or “Sr.” designation. There may also be situations where a customer changes their name, either because of a marriage, or other situation — such as a change in identity or gender transition — and a change from an individual’s “deadname.”

Banks should consider how various types of documentation can be affected. For example, if opening a checking account, the specimen signature is important to verifying transactions on the account. If a customer provides a specimen signature which does not match the signature they intend to use on checks, that can result in a question as to whether certain items are authorized. For this reason, the signature card should match the name the customer intends to use when authorizing transactions and should be updated if a change occurs.

When entering into a contract, best practice would be using the customer’s legal name, as provided by customer. The customer should sign in a manner by which they intend to be bound. There are no specific standards for a signature, other than that it reflects the party’s intent to be bound. For example, a customer might sign in a manner different from the way their name otherwise appears on documentation, such as whether they use a middle initial in their signature or not. Or how they capitalize their signature, or whether they are able to sign their name at all and perhaps can only make a mark or symbol such as a checkmark or “X.”

Banks must consider whether the documents properly identify its customer, and whether the signature affixed to the document reflects a valid contract. In this regard, it is ultimately a matter of policy and preference, but a best practice recommendation would be for the bank to be consistent in how the name appears throughout all the documentation, and the signature itself.

However, when it comes to Uniform Commercial Code (UCC) financing statements, there are specific rules which must be followed. This article does not delve into the specifics, but banks should consider that for filing UCC financing statements, the filing should reflect the debtor’s exact name as required by Wis. Stat. section 409.503.

For any questions regarding customer names, accuracy of UCC financing statements, or other topics, contact WBA legal. Additional compliance resources can be found at wisbank.com/resources/compliance.

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Executive Letter: Technical Amendment Lowers Closed-End Mortgage Loan HMDA Reporting Threshold

Rose Oswald PoelsBy Rose Oswald Poels

As I first reported in the November 1 Executive Letter, a recent court case resulted in the lowering of the reporting threshold for close-end mortgage loans under HMDA. I wanted to alert you to a technical amendment recently issued by CFPB to Regulation C. The technical amendment followed a previously issued blog post by CFPB. The amendment is effective December 21, 2022.

Summary

In April 2020, CFPB issued a final rule (2020 HMDA Rule) to amend Regulation C to increase the threshold for reporting data about closed-end mortgage loans. The 2020 HMDA Rule increased the closed-end mortgage loan reporting threshold from 25 loans to 100 loans in each of the two preceding calendar years, effective July 1, 2020.

On September 23, 2022, the United States District Court for the District of Columbia vacated the 2020 HMDA Rule as to the increased loan-volume reporting threshold for closed-end mortgage loans. As a result of the September 23, 2022 order, the threshold for reporting data about closed-end mortgage loans is 25, the threshold established by the 2015 HMDA Rule. Accordingly, the technical amendment updates the Code of Federal Regulations to reflect the closed-end mortgage loan reporting threshold of 25 mortgage loans in each of the two preceding calendar years.

Background

HMDA requires certain banks, savings associations, credit unions, and for-profit non-depository institutions to collect, report, and disclose data about originations and purchases of mortgage loans, as well as mortgage loan applications that do not result in originations (for example, applications that are denied or withdrawn). CFPB’s Regulation C, 12 CFR part 1003, implements HMDA, 12 U.S.C. 2801 through 2810.

In October 2015, CFPB issued a final rule (2015 HMDA Rule) that, among other things, established institutional and transactional loan-volume coverage thresholds in Regulation C that determine whether financial institutions are required to report certain HMDA data on closed-end mortgage loans or open-end lines of credit. The thresholds apply uniformly to covered depository and non-depository institutions; they took effect for depository institutions on January 1, 2017, and for non-depository institutions on January 1, 2018. The loan-volume thresholds in the 2015 HMDA Rule required an institution that originated at least 25 closed-end mortgage loans or at least 100 open-end lines of credit in each of the two preceding calendar years to report HMDA data, provided that the institution meets all other criteria for institutional coverage.

In April 2020, CFPB issued a final rule (2020 HMDA Rule) to amend Regulation C to increase the thresholds for reporting data on both closed-end mortgage loans and open-end lines of credit. In particular, the 2020 HMDA Rule set the closed-end mortgage loan reporting threshold at 100 in each of the two preceding calendar years, effective July 1, 2020, and the open-end line of credit reporting threshold at 200 in each of the two preceding calendar years, effective January 1, 2022.

On July 30, 2020, five nonprofit organizations and the City of Toledo, Ohio, initiated a lawsuit challenging the 2020 HMDA Rule. On September 23, 2022, the United States District Court for the District of Columbia concluded that the 2020 HMDA Rule’s increased reporting threshold for closed-end mortgage loans was arbitrary and capricious. The court issued an order vacating and remanding the loan-volume reporting threshold for closed-end mortgage loans under the 2020 HMDA Rule. Accordingly, the threshold for reporting data about closed-end mortgage loans is 25 in each of the two preceding calendar years, which is the threshold set by the 2015 HMDA Rule.

The technical amendment reflects the vacatur in the Code of Federal Regulations by replacing the closed-end reporting threshold numbers in Regulation C sections 1003.2(g)(1)(v)(A), (2)(ii)(A), and 1003.3(c)(11) as well as comments 2(g)–5 and 3(c)(11)–2 which became effective on June 30, 2020; and replacing in their entirety, comments 2(g)–1 and 3(c)(11)–1 with the versions in effect on June 30, 2020.

Separate CFPB Statement

On December 6, 2022, a blog post appeared on CFPB’s website regarding the change to HMDA’s closed-end reporting threshold as a result of the court case. In that post, CFPB stated:

“The CFPB recognizes that financial institutions affected by this change may need time to implement or adjust policies, procedures, systems, and operations to come into compliance with their reporting obligations. In these limited circumstances, in allocating the CFPB’s enforcement and supervisory resources, the CFPB does not view action regarding these institutions’ HMDA data as a priority. Thus, the CFPB does not intend to initiate enforcement actions or cite HMDA violations for failures to report closed-end mortgage loan data collected in 2022, 2021, or 2020 for institutions subject to the CFPB’s enforcement or supervisory jurisdiction that meet Regulation C’s other coverage requirements and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years.”

Unfortunately, the blog post did not offer further guidance to first assist small banks with how best to proceed given the new lower threshold. No other banking regulator has issued guidance as a result of the court case or CFPB’s releases. Given the impact of the court case and technical amendment to Regulation C, I recommend that banks which meet the 25 closed-end mortgage loan threshold for 2021 and 2022 should look to collect and report closed-end mortgage loan HMDA data for 2023. The exemption threshold for open-end lines of credit remains untouched at 200 open-end lines of credit originated in each of the prior two years.

View the Technical Amendments View the Blog Post
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Executive Letter: Reflecting on WBA’s 130th Year

Rose Oswald PoelsBy Rose Oswald Poels

In March, WBA marked its 130th anniversary — a monumental accomplishment and result of the indispensable support of and engagement in our Association every day. As another busy holiday season quickly approaches and many of us pause to reflect upon all we are grateful for, I am continually reminded not only of the gratitude I hold for our membership and their active involvement in making our industry healthy and prosperous, but of the WBA staff who work each day to uphold our mission to advocate, educate, and support bankers across Wisconsin.

Since inception, advocacy and professional development have remained fundamental values of WBA, and I am pleased each day to work alongside individuals who take extensive pride in promoting Wisconsin’s banking industry and the financial success of communities across the state.

This year, the WBA Government Relations team, alongside several banker volunteers, stayed busy advocating at the state capitol in Madison as well as in D.C on topics ranging from the expansion of credit union powers to credit card swipe fees. In addition, our team was incredibly active in this year’s election, supporting pro-banking candidates, and informing others of the key issues Wisconsin bankers face.

In addition to staffing the legal call program and assisting members with questions, WBA’s Legal team has played a critical role in keeping our members informed of regulatory and judicial issues important to the banking industry. In the last calendar year, the Legal team has created a variety of new resources including a video series and toolkits that provide bankers with a variety of mediums to receive timely compliance information.

As always, members of our Education department have spent the last year offering a wide range of relevant and high-quality conferences, events, and training opportunities at WBA’s engagement center in Madison and around the state. Our flexible offerings have provided thousands of bankers with invaluable knowledge to further their banking careers as well as opportunities to connect with banking peers. Additionally, WBA continued to offer free DEI-focused member webinars and develop resources including a membership-wide employee resource group (ERG) as part of the Association’s DEI Plan to foster a culture of diversity.

In the last year, the Communications team has continued to improve, update, and polish our new website that launched in October 2021. It is a priority of our Association that resources such as our Best Practice Library and Associate Member Directory are not only easy to navigate but provide relevant and useful information to all bankers. At the request of our members, the team has also developed a range of consumer resources which banks are encouraged to utilize in their own outreach and education of consumers.

Of course, the success of our Association does not stop at the efforts of our team. As a member-driven association, WBA is wholly dependent on the support and engagement of our members and our accomplishments this calendar year would not be without the direct involvement of you!

In the last year, banks across the state have individually demonstrated many achievements. However, I am quite proud that many bankers, in addition to the work they do in their own organization, have volunteered their time and talents in several key ways with WBA. This year, over 100 bankers attended WBA’s annual Capitol Day, around 140 bankers participated in a WBA committee or section, and 130 bankers reported taking part in financial education programming.

Once again, thank you for your continued involvement and support of the WBA. This year’s accomplishments would not have been possible without the valuable input and engagement from each of our members. I wish you all Happy Holidays and look forward to working together with you in the new year!

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Legal Q&A: Managing Online Stop Payment Orders

Ensuring satisfactory written instruction for electronic payments

By Scott Birrenkott

Q: Can a Stop Payment Order for a Check Be Made Electronically?

A: Yes. An electronic stop payment order can be given for a check electronically and would be effective for six months.

Wisconsin Statute section 404.403 provides that a stop payment may be given by an order to the bank describing the item with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on the stop payment request. This order may be made orally or in writing. The statute provides that if the order is oral and not confirmed in writing, it is valid for 14 days. A written order is valid for six months, and the oral order must be confirmed in writing (before the end of the 14-day period) for it to be extended to six months.

The rule does not discuss online stop payment orders, nor have the courts yet interpreted whether an electronic stop payment is oral or in writing. For example, a stop payment made online, through bank’s website platform, or mobile application. However, it is WBA’s understanding that such an electronic stop payment would be considered “in writing” and thus, effective for six months.

As stated, the statute provides that a stop payment may be given by an “order.” The Uniform Commercial Code (UCC) defines an order as “a written instruction to pay money signed by the person giving the instruction,” establishing that an order must be written and must be signed. The UCC further provides that a writing “includes printing, typewriting, or any other intentional reduction to tangible form.” Although the UCC’s definition does not include “electronic,” or other such means, WBA believes that a valid argument exists that an electronic file can be reduced to a tangible form by printing the document. For example, electronic writings have been held to satisfy the writing requirement of the statute of frauds. Furthermore, The UCC defines “signed” as “any symbol executed or adopted with present intention to adopt or accept a writing.”

For the above reasons, it is WBA’s understanding that an electronic stop payment order would satisfy the writing requirement of the UCC. Banks offering the ability to issue an electronic stop payment should confirm the methods for doing so in accordance with the discussion above, to determine whether it aligns with this rationale.

For any questions regarding stop payments, or other topics, please contact WBA legal. Additional compliance resources can be found on the WBA website: wisbank.com/resources/compliance.

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The New Face of Identity Theft

The rapid growth of synthetic identity fraud

By Hannah Flanders

Like many aspects of our day-to-day lives, the expansion of technology has both enhanced and complicated the ways in which we operate. As more and more of our information lives online, identity theft — once more likely to occur because of a stolen wallet — has also assumed a digital appearance: synthetic identity theft.

What is Synthetic Identity Fraud?

Synthetic identity fraud is defined as the use of a combination of pieces of personally identifiable information (PII) to fabricate a person or entity in order to commit a dishonest act for personal or financial gain.

This form of identity theft has allowed bad actors to combine a stolen Social Security Number (SSN) and other false information — such as a fake name, address, date of birth, or phone number — to create a counterfeit identity to steal funds, escape prosecution, or any other number of criminal and fraudulent activities.

An Alarming Trend

In 2020, the Federal Bureau of Investigation (FBI) named synthetic identity theft as the fastest growing financial crime in the United States. Fraud targets are often those who do not typically use credit or are less likely to monitor their credit activity — including children, homeless individuals, and the elderly. These victims may find themselves blindsided as fraudsters create a new identity, apply for credit, and after years of building good credit by making payments for a time, abandon the account without paying anything back to the financial institution.

While this type of fraud is already difficult to detect due to its elusive or “normal” nature, many bad actors go to incredible lengths to appear as such, states Forbes. In addition to establishing good credit by making payments quickly and on time, some create digital profiles or use P.O. boxes for addresses.

Not only has technology and access to the dark web made PII more accessible to fraudsters, in 2011 the Social Security Administration (SSA) began randomizing the nine-digit social security codes rather than assigning them to individuals based on their geographical location and group number. No longer do social security numbers raise red flags when enrolling or opening accounts “out of state.”

As online banking grows in popularity, so too do concerns for synthetic identity theft. Between prevalent phishing schemes and heightened risks for data breaches — accessing PII and conducting synthetic identity fraud has become much easier than in years prior.

How to be Proactive Against Bad Actors

Inconsistent categorization and reporting make it difficult to identify and mitigate this type of fraud — as far as banks and credit bureaus can tell, these individuals are just like anyone else. . . until they “bust out” or abandon the maxed-out account with no intention of repayment.

After abandoning the false identity’s account, a fragmented file is created. This additional file not only becomes associated with the original SSN but also holds the additional credit report information and other fabricated PII. Unfortunately, this information could negatively impact the credit rating of the real individual.

When working with customers, bankers should advise frequent credit report checks or freezing unused credit at credit bureaus throughout the U.S. as to deter criminals or catch them early.

In addition, customers may take additional steps to protect themselves and their family against synthetic identity theft. One way parents can protect their children from fraudsters is by requesting their child be added to their credit profile. By adding a child to an adult’s credit profile, not only does the child’s own credit profile become established in his or her name and SSN, but the child is also able to begin building their credit.

The Cost of Synthetic Fraud

While victims of identity theft typically are not liable for fraudulent purchases or accounts, as long as they can prove they are the real SSN holder and not the thief, banks and other financial institutions are left to absorb the cost. This scheme is not only incredibly costly to banks across the country — with losses estimated at $20 billion in 2020, according to the Federal Reserve Bank of Boston — but gaps in the U.S. Fair Credit Reporting Act may have also increased the likelihood of repeat offenders.

The Federal Reserve has reported that bad actors are able to ‘flood the financial institution with an overwhelming number of claims’ on their fake accounts, and when creditors are unable to fulfill the investigation in the allotted timeframes, the disputed item is removed from the false credit report and time and time again, fraudsters get away with the act.

“Synthetic IDs are a struggle for community banks to identify,” states Lenore Breit, vice president – compliance manager at Wausau’s Prevail Bank. “Based on a recent presentation, [community banks] most likely have synthetic ID fraud in their deposit and loan accounts that remains undetected with traditional third-party ID verification programs that most community banks use.”

“There are other, more robust ID verification programs available to detect synthetic ID fraud,” adds Breit. “But they are costly and may not interface with legacy software.”

One such software program, the electronic Consent Based SSN Verification service, was created in part by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The electronic service offered by the SSA was created in 2018 to aid financial institutions in combating synthetic identity fraud and verify an authorizing individual’s name, date of birth, and SSN against the SSA records. Services are based on the annual transaction volume and can cost thousands or even millions of dollars.

Common Signs of Synthetic Identification Theft

While difficult to trace, there are a few significant ways bankers can remain attentive to PII and other key indicators of synthetic identity fraud.

Most obvious is ensuring all SSNs match to the PII given. Do not assume a name change or relocation; ask questions or require verification for the sake of your bank and the security and privacy of all customers. This extra step could make all the difference in protecting the personal information of every customer.

If an account is already open, bankers should note applicants who have the same contact information or SSN as well as those with multiple authorized users.

As synthetic identity fraud becomes increasingly prevalent throughout the U.S., it is critical, for the safety of customers and security of all financial institutions, that Wisconsin bankers are prepared to combat this emerging fraudulent activity, caution community members against sharing unnecessary personal information with others, and assist individuals in regaining their rightful identity if necessary.

If you are interested in learning more about synthetic identity fraud, how these schemes can impact your bank or customers, or more ways you can take a stand against bad actors, please contact WBA’s Legal Team at wbalegal@wisbank.com or 608-441-1200.

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608-441-1200

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Madison, WI 53718

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