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ID theft costs banks $1 billion a year

Banks lost at least $1 billion to identity thieves last year, according to one of the first attempts to put a detailed price tag on what has been called the nation’s fastest growing crime.
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Banks lost at least $1 billion to identity thieves last year, according to a report issued Tuesday by TowerGroup Inc. While only an estimate, it is one of the first attempts to put a detailed price tag on what has been called the nation’s fastest growing crime. What’s more, the report asserts, banks have no way of telling whether new customers applying for a loan or credit card are actually who they say they are.

Nearly 10,000 victims had home loans — totaling about $300 million — taken out in their name in 2002 and another 68,000 had new credit cards issued in their name, said Christine Pratt, the author of the report and a senior analyst in TowerGroup’s consumer credit practice. She extrapolated the data from an annual Federal Trade Commission report issued in January. She then computed average losses per crime to arrive at her $1 billion estimate.

“And that number is probably conservative,” she said. While the FTC received 161,000 identity theft complaints last year, the FBI estimates the actual number of victims is probably closer to 500,000 she said.

Financial institutions are a common target for identity thieves looking to turn stolen identities into cash. Criminals take out credit cards in their victims’ names, file for home equity loans, buy cars on credit and even take out mortgages. According to the FTC’s 2001 report, the most recent for which data on auto loans is available, fraudulent car loans were one-fourth of all identity-theft based loans.

But the report’s most disturbing assertion might not be the dollar figures. Pratt said that currently, banks have no way to positively identify new customers.

“In an ideal world, a lender would be able to answer one two-part question: ‘Is this a legitimate identity, and is this individual the right owner of it?’” the report says. But when new customers come in, even if they are fingerprinted, there is no mechanism to verify their identity claims, the report asserts. If their paperwork seems complete, they get the new account.

“Poor bank tellers looking at something that looks like a driver’s license, they don’t have a prayer” against identity thieves, Pratt said.

The problem is exacerbated by intense competition in home mortgage refinancing, said Anthony Hsieh, CEO of Home Loan Center, an online lending firm. Television advertisements encourage consumers to seek out “hassle-free” loan applications for which careful identity verification is anathema.

“The technology is improving so we can get loan approval sometimes in as little as 30 seconds,” he said. “The issue here is not necessarily if the information is inaccurate ... but the issue is making sure the person you’re talking to is the person he or she claims to be.”

However, Hsieh said the problem is hardly epidemic among home mortgages, which represent about a third of the losses cited in Pratt’s report. Nearly $2.5 trillion in home loans were granted last year, and $300 million is a small fraction of that.

“It’s not widespread, it really isn’t,” he said. “But when it does happen, it’s a huge deal.”

Even if a fraudulent loan is approved electronically, mortgage closings are still completed in the traditional, face-to-face way. No bank currently closes loans electronically, he said, severely limiting the potential for identity theft home loans.

Home equity loans — essentially a line of credit — and credit card applications are a better target for identity fraud, Pratt said. Much of her report deals with potential solutions for banks, including a variety of projects that would allow banks to ask more questions about a customer’s background before granting credit.

Still, banks keep quiet about their losses to protect their reputation, and consumers don’t often don’t face steep financial consequences from the crimes, so aggressive measures to curb identity theft probably aren’t in the offing yet.

“Nobody has taken a huge hit yet,” she said. “And there are not a lot of easy ways to tighten up controls without putting yourself at a competitive disadvantage. Almost no one thinks the consumer is willing to give up much of anything to prevent ID theft.”