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January 19, 2018 in

Compliance, Call Center

The Red Flags Rule - Identity Theft and Debt Collectors

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 Millions of identities are stolen every year in order to make fraudulent purchases on credit, and many of these incidents end up in the hands of collection agencies. When consumers make an identity theft claim, handling the issue properly is crucial for everyone involved. When legitimate identity theft claims aren't taken seriously, credit reports can get ruined and agency reputations can be tarnished. The Red Flags Rule was designed to help solve this problem.

What Is the Red Flags Rule?

The Red Flags Rule, developed by the Federal Trade Commission (FTC) and Fair Credit Reporting Act, provides written guidelines for detecting, preventing, and mitigating identity theft. The rule helps both lending institutions like banks and the collection agencies that end up with those accounts create their own identity theft programs. These programs should contain four main elements:

  • Identification of identity theft red flags related to the specific business
  • Day-to-day procedures for detecting red flags
  • Guidelines for preventing and mitigating harm upon detection
  • Updating the red flag program through continual education

Data security is also an important component of any identity theft program. Collectors typically have detailed personal information about the debtors they're collecting from, and that information can be an attractive target for thieves.

Red Flag Warnings

In 2016, the Consumer Financial Protection Bureau (CFPB) proposed guidelines for verifying the accuracy of debt held by collectors. While these proposals aren't currently in effect by law, they can be very helpful for collection agencies. Here are signs of identity theft the CFPB recommends collectors look out for:

  • Disputes filed by consumers
  • Lack of underlying documentation for accounts under dispute
  • Large portion of debt in portfolio being disputed

Once a red flag is detected during the course of collections, additional support should be obtained prior to making subsequent claims. If an agency receives a dispute from a consumer, either written or oral, all relevant documentation will likely be required during the course of investigation. This documentation can include: contract agreements, charge off statements, credit applications, billing statements, and even new patient forms.

Responding to Red Flags

During a recent CAC Collection Boot Camp, panel member Kelly Parsons-O’Brien recommended that agencies be prepared to send out different letters in response to red flags. These five form letters can be used to save time in the event of five distinct situations:

  • Deficient letter to consumer informs the consumer who has complained of identity theft that they lack the information needed to support their claim.
  • Consumer return letter tells the consumer that their debt in question is being returned to the original client.
  • Letter notifying client of canceled account lets the clients of collection agencies know when a debt has been canceled. Information regarding relevant red flags can help mitigate disputes.
  • Consumer letter for no documentation lets the consumer know that the collector can't start investigating a claim until they receive the correct documentation.
  • Consumer still liable letter tells the consumer that the investigation into their identity theft claim has been completed and the collector still believes they are liable for the debt.

Maintaining and Updating the Red Flag Policy

Debt collection agencies are responsible for keeping their identity theft programs active and up to date. Many states have unique red flag rules, so agencies should make sure their program complies with all relevant state laws. Written policies should also provide a defense for accusations involving the violation of the Fair Debt Collection Practices Act.