For those of us that have been following the Red Flag Rules adoption for more than a year now, the recent arrival and passing of the November 1 compliance deadline allows us to pause to assess where we are -- and where we are heading.  One question seems to surface regularly these days: How ready or compliant is the market today? Well, I think it’s safe to say that the market is certainly not 100% home when it comes to compliance readiness.  Experian surveys registrants on our Red Flags online resource site.  As of October 31 -- a.k.a. ‘Compliance Eve’ -- nearly half of the registrants (48%) fell into the category of ‘just starting to review the rules and determine a compliance plan’.  Other industry surveys, interviews, and analyst reports suggest an even lower rate of compliance (closer to only one-third of covered institutions) in the market.  The Federal Trade Commission seemed to sense this market condition, and granted a six-month reprieve from Red Flags compliance enforcement – to May 1, 2009.  While this extension is welcome news for those institutions falling under the FTC’s jurisdictional umbrella, other institutions are arguably out of compliance today, and face pending examinations in the coming months.  So, is the market ready today?  The broad answer is a resounding ‘no.’  Much of the market’s effort has gone into the creation of written Identity Theft Prevention Programs as part of the Red Flag Rule requirements.  How well will these written procedures be received by the examining agencies?  How will these written programs translate into effective and (as importantly) manageable operational processes?  The first wave of examinations will help answer some of these questions and concerns….and ongoing cost analysis (associated with: referral volumes; application acceptance rates; manual or automated processes; and, of course, fraud losses) will help paint a clearer picture in the months to come.

We know that financial institutions are tightening their credit standards for lending.  But we don’t necessarily know exactly how financial institutions are addressing portfolio risk management -- how they are going about tightening those standards. As a commercial lender, when the economy was performing well, I found it much easier to get a loan request approved even if it did not meet typical standards.  I just needed to provide an explanation as to why a company’s financial performance was sub-par and what changes the company had made to address that performance -- and my deal was approved. When the economy started to decline, standards were suddenly elevated and it became much more difficult to get deals approved.  For example, in good times, credits with a 1.1:1 debt service coverage could be approved; when times got tough – and that 1.1:1 was no longer acceptable – the coverage had to be 1.25:1 or higher. Let’s consider this logic.  When times are good, we loosen our standards and allow poorer performing businesses’ loan requests to be approved…and when times are bad we require our clients perform at much higher standards.  Does this make sense?  Obviously not.  The reality is that when the economy is performing well, we should hold our borrowers to higher standards.  When times are worse, more leniency in standards may be appropriate, keeping in mind, of course, appropriate risk management measures. As we tighten our credit belts, let’s not choke out our potentially good customers.  In the same respect, once times are good, let’s not get so loose regarding our standards that we let in weak credits that we know will be a problem when the economy goes south.

Experian Experian® is a global leader in providing information, analytical and marketing services to organizations and consumers to help manage the risk and reward of commercial and financial decisions. Combining its unique information tools and deep understanding of individuals, markets and economies, Experian partners with organizations around the world to establish and strengthen customer relationships and provide their businesses with competitive advantage. Experian Decision Analytics assists high-performing organizations all over the world by leveraging information to find, target and acquire new customers and to build, nurture and maximize lasting profitable customer relationships. We provide scoring, analytics, fraud detection, decision support software and consulting at every stage of the Customer Life Cycle to markets such as: Traditional and nontraditional lenders - including banks (from de novo to money center banks), finance companies, credit unions, first-party collections, retail credit, third-party processors and auto finance - from consumer and small-business lending to commercial lendingTelecommunicationsUtilitiesCable and satellite companies