By Brad Kelso
 
Why should brokers care about Red Flags compliance?

Brokers’ compliance is mandated by Federal laws (The Fair and Accurate Credit Transactions Act – FACTA ) and FCRA.  These laws are enforced by the FTC for brokers. The laws attempt to ensure better consumer protection from identity theft and private information misuse.

More importantly, scrutiny on loan fraud and quality overall (especially any losses due to negligence) make the Red Flags’ requirements to “Detect, Prevent and Mitigate” more than just a “drive-by” procedure.  Compliance success or failure will legitimately influence the viability of any loan originator.

The stated dangers of non-compliance are fines -- up to $3,500 per occurrence – enforced on brokers by the Federal Trade Commission. But your relationship to your lenders will also be impacted as they attempt to push down requirements to their agents.  Banks and Lenders have increased obligations regulated by their respective bank regulatory agencies.

For brokers, the FACTA Red Flags requirements and obligations are, practically speaking, somewhat limited in scope compared to banks or lenders. Still, they will be heavily influenced by the lender’s own origination practices as they act as agents for them.

Brokers DO NOT have a free pass just because they are not the lender of record.  Lenders may vary in their requirements for their service vendors, but all brokers must independently show compliance with the Guidelines.

If my shop is behind on this, what simple best practices can we implement as a foundation for Red Flags compliance?

A solid compliance foundation can be attained in three steps:

Step 1.  Understand the Regulations in Context to your operations and lenders

• Read the FACTA regulations
• Understand the regulations as they apply to your operations
• Focus on the 26 Suggested Red Flags issues, as they apply to the scope of your business.

Step 2.  Identity prioritize the risks that will inform policies and procedures

• Prioritize your potential identity failure points (the practical risks of ID theft/ misuse) for both the consumer AND the entity across each of FACTA’s 26 suggested elements noting what you are doing today to ‘detect, prevent and mitigate’ the risk flag by flag.
• Draft straightforward policies and procedures to address the risks and match those efforts to your assigned prioritization
• Assess automated products and services as a means of addressing 80% of the identity issues, avoiding “generic” identity risk products that create unnecessary false positives or replicate any of your existing mortgage practices.

Step 3.  Integrate, Document and Adopt

• Integrate the automated and manual procedures matched back to the policy.
• Establish a tracking and reporting mechanism
• Get buy-in and approval at the highest level for your shop.

Isn’t there a “fill-in-the-blanks” solution for brokers to meet their obligations?

Unfortunately no.
There is not one exact definition of what the required policies and procedures must say, so a “fill-in-the-blanks” solution isn’t practical. That’s both good and bad news.

Entities are essentially “on their own” to consider the 26 FACTA guidelines and to define their own risk tolerance, not just for their customers, but for themselves.  Since there is no clear “minimum standard” there is also no single solution, despite what vendors may otherwise claim with fraud alerts, consent based social verifications and the like.  Identity products can be a core to your solution but will only get you so far toward compliance.

The good news is, since there is no one “right” path to detect, prevent and mitigate ID fraud, regulatory audits will most likely focus on whether the institution has been “adequate” in considering the guidelines, justifying its response, and executing.  Brokers will generally have to ramp up their efforts to mimic the lenders they serve and make sure they have a proven audit trail enough to evidence those responses.

Final thoughts?

If it hasn’t occurred to you already, today’s ‘new world broker’ survives only if he acts as strongly as his lenders would toward borrowers – essentially a true agent.  A broker’s value is no longer just providing applications and managing docs, but in the leverage they provide and that now includes underwriting and risk compliance.

Brad Kelso is the VP, Director of Marketing and Product Development at Informative Research, with a cumulative 22 years in financial services. Prior to joining Informative Research, Brad led Countrywide’s credit fraud initiatives and system development efforts with credits as a national expert and speaker on Authorized User Score Fraud. He is the primary architect of two products related to identity fraud for the mortgage industry.  Brad can be reached at (800) 473-4633 ext. 150 or e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it .