FACTA Revisited

We first wrote about FACTA in January 2009.  FACTA stands for The Fair and Accurate Credit Transactions Act (FACTA).  This federal law attempts to stem identity theft. It was originally adopted on November 1, 2008.  Because FACTA was amended in December of 2010, many clients have asked if and how the amendments affect the industry.  The amendments do not change your legal responsibilities.  However, the passing of the amendments is a good reason to revisit your FACTA responsibilities.

FACTA is part of the Fair Credit Reporting Act (FCRA).  FACTA mandates that financial institutions and creditors develop and implement a written identity theft program.  The two key requirements of FACTA are the “Red Flags” section, and the “address discrepancy” section.  Owners and managers (landlords) are not covered by the most onerous portions of the law (Red Flag), but are covered by less burdensome portions of the law (address discrepancy).

The Red Flag section of FACTA (Section 114) requires financial institutions and creditors to be on the alert for Red Flags of identity theft.  The law identifies over twenty Red Flags, from suspicious identifying documentation to unusual use or suspicious activity related to an individual’s account.  If you are subject to Section 114, you have to develop and implement policies to monitor for and to prevent identity theft.  The final rules require each financial institution and creditor that holds any consumer account, or other account for which there is a reasonably foreseeable risk of identity theft, to develop and implement an identity theft prevention program for combating identity theft in connection with new and existing accounts. The program must include reasonable policies and procedures for detecting, preventing, and mitigating identity theft.

Your monitoring program must be able to identify relevant patterns, practices, and specific forms of activity that are “red flags” signaling possible identity theft, and incorporate those red flags into your program.  Your program must be able to detect red flags that have been incorporated into your program.  You must be able to appropriately respond to any red flags that you detect, to prevent and mitigate identity theft.  You must also update your program to reflect changes in risks from identity theft.

Financial institutions and creditors must comply with FACTA’s Red Flag requirements.  As we pointed out in 2009, landlords are not subject to the Red Flag rules because landlords are not creditors.  The June 2008 FTC Business Alert specifically addressed the question of who must comply with the Red Flag rules.  Financial institutions such as banks, savings and loan, and credit unions are covered.  Creditors are covered.  A creditor is any entity that regularly extends, renews, or continues credit.  Accepting credit cards as a form of payment does not in and of itself make an entity a creditor.  Since landlords do not regularly extend credit, landlords are not creditors under FACTA.  The mentioned covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts, and savings accounts.  Landlords and rental accounts, or relationships are not mentioned.

As noted, the December 2010 FACTA amendments have created substantial buzz in the rental industry.  The law creating all of the buzz about FACTA is ‘‘The Red Flag Program Clarification Act of 2010’’ (“Clarification Act”), signed into law by President Obama on December 18, 2010.  The Clarification Act specifically defined a creditor to have the same meaning as creditor does under The Equal Credit Opportunity Act (ECOA).  Because two federal courts have held that “a residential lease is not a “credit transaction” under the ECOA, landlords are still not considered creditors under FACTA, and thus are still not subject to the Red Flag Requirements.

However, landlords must comply with the address discrepancy portion of FACTA (Section 315).  This section addresses users of consumer credit reports.  Landlords are users of consumer credit reports, and are therefore covered.  To comply with Section 315 you must have reasonable policies and procedures that are employed when you receive notice of an address discrepancy from a consumer-reporting agency in connection with an application.  For example, a notice of an address discrepancy means a notice sent to you by Credit Retriever, that informs you of a substantial difference between the address provided by the applying resident and the address in the Credit Retriever’s file for the applicant.

Once a notice of the address discrepancy has been received, you must follow your policies and procedures to verify that the report relates to the applicant.  Reasonable policies and procedures to verify that the consumer report (“credit report”) relates to the applicant include the following procedures.  Comparing the information in the applicant’s credit report with information the applicant provided to you, information that you have in your possession, such as change of address notifications, and information provided to you by third parties, e.g. previous landlords.  Reviewing discrepancies with the applicant, i.e. going over the applicant’s application and asking the applicant questions about the discrepancies between their application and their credit report.  Your policies and procedures must include providing the address that you have reasonably confirmed to be accurate to the consumer-reporting agency.

In short, you must comply with the address discrepancy portion of FACTA, but are not required to comply with the Red Flag portions.  Even though you are not required to comply with Red Flag requirements, you may want to consider adopting a Red Flag policy and procedures for several reasons.  First, identity theft problems are not going away.  It is highly likely that the Red Flag requirements will someday be extended to landlords.  Second, a Red Flag policy and procedures will likely result in tighter screening of applicants, deter fraud, and thus minimize losses, by not allowing criminals and other high risk residents from becoming residents at your community.

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