verifying and safeguarding a customer's identity

Customers sometimes attempt to use identity fraud on a landlord or finance company. For example, last summer I attempted to rent out a condominium over the internet. I am not a realtor. I received an inquiry from “Ed” on behalf of his friend. At the showing, I was surprised to meet not only Ed and his female friend but also two big guys tagging along. They split-up and started to open all the doors inside the place. Ed said that his friend was interested. She wanted to move forward with the lease ASAP. Later, I e-mailed him for her full name, which he gave. When I looked her up online, I discovered a previous landlord had evicted her and obtained a money judgment for unpaid rent. I also found a criminal conviction. When I told Ed that I did not want to rent to her, the woman called me. I called her back, and she surprisingly answered the phone as “Shako.” When I confronted her about her use of this alias, she said that she worked for a debt collection company and that was standard procedure. She didn’t get the lease! Sometimes even the attempt to verify identity can lead to clues to avoid a problem customer.

This principle applies equally to consumer credit transactions. Verifying the identity of the customer is the foundation of the successful sale made on credit or where the customer is to be invoiced after receiving the product or service. Verifying the customer’ identity also confirms his credibility. In major consumer transactions like homes and vehicles, some combination of government-issued photo identification, credit applications, credit reports and answering questions about personal information are used to verify personal identity.

Multiple Customers: Sales involving more than one purchaser require special attention and training of sales staff to insure that the identity and approval of each co-signer is properly confirmed and that one of the co-purchasers is not fraudulently abusing the credit of another. For example, someone with bad credit may want to have a more responsible relative co-sign on the purchase.

FTC Red Flags Rule: The “Red Flags Rule” generally applies to accounts established by financial institutions or creditors for consumers. The Rule applies to a wide range of entities that are in the business of lending, refinancing, extending credit, or acting as a broker in credit transactions, including mortgage brokers, automobile dealerships, finance companies and other businesses that use consumer credit reports in connection with a loan transaction. It requires the business to establish and implement a written program designed to prevent and mitigate identity theft. The Federal Trade Commission adopted the Red Flags Rule to implement provisions of the Fair and Accurate Credit Transactions Act intended to protect consumers and creditors from identity theft and abuse. What constitutes an acceptable Red Flags Rule program varies from business to business. For creditors and financial institutions regulated by the Red Flags Rule, failure to comply may result in enforcement action by the FTC. If the Red Flag Rule applies, then the business should certainly develop and adopt a program to comply with the Rule.

Practical Challenges: Business procedures adopted to verify the identity of the customer provide safeguards to the company that accomplish more than regulatory compliance. For example, failure to document the identity of a customer may render a contract partially or entirely unenforceable. In November 2013, a Richmond judge denied a monetary award for the balance of a consumer loan following the repossession of a motor vehicle. (VLW subscribers see http://valawyersweekly.com/2014/01/02/lender-cant-collect-deficiency-for-repo/) The dealer believed they sold a car to Ms. Lowe. She denied ever signing the contract. Her daughter and daughter’s boyfriend possessed the vehicle and made the payments. No sales associate testified that they saw the mother sign. The Court was unsure about the forgery. The woman delayed raising any objection to the debt until it went to collection. In the end, C&F Finance successfully repossessed the car. However, because C&F could not prove the authenticity of the signature, the Court refused to award a money judgment. Had the dealer and C&F Finance taken simple steps to verify identity, this troubled loan could have been avoided.

Verifying and safeguarding the identity of the customer is more than a regulatory compliance issue: it solidifies each transaction for the future. The integrity of consumer real estate transactions depend on this as a foundation.

This post is Part Two in a series on Business Identity Fraud. Part One is already posted. Part Three will discuss leadership and management techniques.

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