Why Lenders Overlook Warning Signs of ID Theft

Hugh Pickens writes "Despite all the new fraud alert tools and increased awareness of the perils of identity theft, incidence of the crime remains at 2003 levels, with about 10 million Americans falling victim every year. Now the NY Times reports that there may be a simple reason for the persistence of ID theft: lenders are too willing to extend credit to just about anybody, even when there are big red flags that indicate fraud. Chris Jay Hoofnagle at UC Berkeley worked with a small sample of six ID theft victims and delved into how they were defrauded. Of 16 applications presented by imposters to obtain credit or medical services, almost all were rife with errors that should have suggested fraud — yet in all 16 cases, credit or services were granted anyway. 'Identity theft remains so prevalent because it is less costly to tolerate fraud,' writes Hoofnagle. 'Adopting more aggressive and expensive anti-fraud measures is extremely costly and jeopardizes customer acquisition efforts.' Hoofnagle says business decisions leave individuals and merchants with some of the externalities of identity theft as victims spend their own money, and more often, valuable personal time dealing with the problem. Hoofnagle suggests that lenders contribute to a fund that will compensate victims for the loss of their time in resolving their ID theft problems."

Comments

Its not "ID Theft" its FRAUD

[AnnoyaMooseCowherd]

What annoys me is that by coming up with the spin incantation "ID Theft", banks have been able to make what is actually their problem your problem

Its not "ID Theft" its FRAUD

Before "ID Theft" existed, con artists would regularly pretend to be someone they weren't in order to steal things. If I pretend to be an engineer from the local telephone company in order to con my way into an old ladies house and steal her purse, no one would even think for a minute that the telephone company should foot the bill, but when someone pretends to be me and convinces a bank to give them some money on that basis, apparently it is ok for the bank to turn round and try to get me to pay for the result of their gullibility.

Re:One slight problem

[david_thornley]

If it's the bank's decision to lend or not, then the bank should take responsibility for fraud. Suppose Joe borrows money under my name fraudulently, from a bank I don't personally do business with. I have had no opportunity to influence the security of the bank's system, except politically. I have had no market influence, not being a customer. The decision of what level of fraud to accept is the bank's.

Any cost pushed off on me is an externality for the bank, since they don't have to pay, and they aren't even losing a customer. Therefore, market forces will not create incentives for banks to reduce fraud below what is best for their balance sheets. In the situation where I can be forced to repay the loan, there is no incentive for the bank to avoid fraudulent loans, and the amount of fraudulent loans increase until everybody's doing it as a matter of self-defense.

In general, the cost of a loss is best assigned to those with the ability to avoid the loss. That way, the market pushes them to the correct balance of preventing and accepting the loss.