Five years in the pipeline, 'red-flag' guidelines require financial institutions to watch for fraud. Small businesses with few resources do not welcome the 'burdensome' procedures.

By Bankrate.com

Identity thieves face tough going this year if they think pilfering your personal information will be a stroll through the park. Or at least that's what regulators hope.

This is because new "red-flag" rules aimed at impeding identity thieves are being phased in.

You've never heard of them? Join the crowd.

"There hasn't been a big consumer-education push," says Chris Hoofnagle, a senior fellow with the Berkeley Center for Law & Technology in California. "These rules are not well-known, even among consumer advocates."

Hoofnagle says the information is relatively scarce because the rules stem from a 2003 law that took five years to implement.

"There's been a lot of waiting," he says.

What are red-flag rules?

The rules push financial institutions to make sure people are who they say they are. Authenticating identities will be the name of the game. Red-flag rules stipulate that financial institutions and creditors establish a written program to "detect, prevent and mitigate identity theft in connection with the opening of certain accounts or existing accounts," according to a Federal Trade Commission report (.pdf file).

The rules offer more than two dozen examples of suspicious behavior that financial institutions and creditors should consider warnings.

The presentation of altered documents, a suspicious address change, a fraud alert on a credit report and other unusual account activities are among the red flags.

The idea is to prompt banks and creditors to go into "authentication mode" and determine whether fraudsters are trying to apply for credit in someone else's name or hijack someone else's accounts.

• Talk back: What's your identity-theft nightmare?

The rules stem from the Fair and Accurate Credit Transactions Act of 2003. Relevant financial institutions have until November to come into full compliance or be subject to penalties.

Proponents say the rules will standardize how credit-issuing entities respond to suspicious activities regarding your accounts.

"These rules for the first time provide a uniform road map for protecting customer information and preventing identity theft," says Sai Huda, the CEO of Compliance Coach, a San Diego company that provides red-flag-compliance software. "Before the rule, there was only an implied obligation on business to protect information."

Now financial institutions and creditors must update their programs periodically to handle new threats as they emerge.

To whom do the rules apply?

The Federal Trade Commission says financial institutions and creditors who "offer or maintain covered accounts" must implement a red-flag program.

So what exactly is a covered account?

"Red-flag rules apply to financial institutions and creditors like banks, credit unions, auto dealers, mortgage brokers, utility companies and telecommunications companies," says Pavneet Singh, an FTC spokeswoman.

Compliance Coach's Huda says you don't necessarily have to be an account holder for the rules to apply to you.

Credit reporting agencies are exempt from the red-flag rules, but at least one, Experian, is getting involved at some level. In February, Experian hosted a Web seminar on the rules and attracted more than 700 clients.

"We tried to make sure that all our existing and prospective clients understood what these red-flag rules meant," says Keir Breitenfeld, a senior product manager with Experian's Fraud & Identity Solutions. "We tried to do that educationally."

How will red-flag rules benefit you?

Red-flag advocates say that banks and creditors with sloppy fraud-prevention programs will eventually be exposed by litigation and negative publicity.

"The public disclosure of identity theft will create more of an onus for these companies to be up to par," Huda says. "Consumers will eventually benefit because of the higher standards."

Hoofnagle says the prospects of the agencies, such as the FTC and the Federal Deposit Insurance Corp., enforcing the rules combined with possible litigation "will involve some transparency of procedures."

Another added benefit is that employees may be more vigilant in spotting identity fraud.

Anita Marchion, the assistant vice president of regulatory compliance at Navy Federal Credit Union in Virginia, says the training of new recruits has been beefed up to include more focus on identity theft.

She says that the nation's largest credit union will be in compliance by the November deadline and that "members should have a comfort level knowing that we are taking extra steps to protect them from identity fraud."

Hoofnagle has been pushing for a ratings system for banks like the ones that measure vehicle safety. His 2006 study of ID thefts among financial institutions reveals a wide variance in frequency of customer complaints.

"You can go online and look at the crash test of your car and the rollover rating, and all this is available to consumers now," he says. "It wasn't available 40 years ago, but I think we will have a similar situation with banks."

Hoofnagle says the red-flag process is not foolproof. For example, financial institutions need to keep an eye on sales where affiliate marketing agreements come into play. When consumers apply for a credit card or cell phone contract, often the agreement's privacy policy will provide for the company's right to share your information with third-party affiliates that sell products. Hoofnagle believes some commissioned salespeople may have strong incentives to override the red flags.

He is also concerned that some banks may find ways to simply override authentication procedures.

"There has to be some counterweight to that problem," he says.

Heather Grover, a director of product management with Experian's Fraud & Identity Solutions, says there has to be some balance between the consumer's best interest and an organization's need to keep its defenses opaque to thieves.

"Fraudsters are students of their craft, and they'll really game the system as soon as they find the hole," she says.

Who opposes the rules?

The rules give businesses the flexibility to design programs that work best with their respective business models and available resources.

However, some creditors and financial institutions aren't too happy about what they see as the added financial and bureaucratic burden of being required to comply with the rules.

Some smaller institutions have complained that the rules place an unnecessary financial and operational burden on them that they cannot afford. Many may have to hire a third-party company to ensure compliance.

While financial giants may have legions of in-house staffers dedicated to fraud prevention, your local community bank may opt to use a third-party vendor.

The National Automobile Dealers Association supports the government's goal of trying to protect consumers from identity theft, but it also believes the red-flag rules will hurt smaller dealers with limited financial resources.

"We anticipate most dealers will find it challenging to develop and implement a comprehensive identity theft program as required by the red-flag rules," says Paul Metrey, the director of regulatory affairs for the auto dealers group.

Metrey says the program will demand significant time and attention from managers and service providers. He says many provisions of the rules have already been addressed in prior laws, such as the FTC Safeguards Rule and the FTC Privacy Rule.

Not surprisingly, lobbyists for the banking industry also rejected the rules as heavy-handed.

The Illinois Bankers Association, in a statement to the FDIC, called the rules "excessive and overly burdensome."

There may be some reluctance to accept red-flag rules as a best-practice measure, Grover says, but she adds that many businesses will eventually come around when they see the benefits of protecting their customers, as well as a decrease in fraud losses.

The red-flag triggers

The rules are designed to fill the cracks in the system through which identity thieves could fraudulently pilfer the identities of other people for their personal gain.

Six agencies were involved in drafting the rules: the Treasury Department's Office of Thrift Supervision, the Office of Comptroller of the Currency, the FDIC, the FTC, the National Credit Union Administration and the Federal Reserve System. They came up with the following guidelines as examples of red flags. These were gleaned from the Identity Theft Red Flags and Address Discrepancies under the Fair and Accurate Credit Transactions Act of 2003:

• A fraud alert included with a consumer report.

• A notice of a credit freeze in response to a request for a consumer report.

• A consumer reporting agency providing a notice of address discrepancy.

• Unusual credit activity, such as an increased number of accounts or inquiries.

• Documents provided for identification appearing altered or forged.

• A photograph on ID inconsistent with appearance of customer.

• Information on ID inconsistent with information provided by person opening account.

• Information on ID, such as signature, inconsistent with information on file at financial institution.

• An application appearing forged or altered or destroyed and reassembled.

Do your kids know the difference between wants and needs? Think they're too young to learn about taxes? Or saving for retirement? Oh, you have so much to teach them.

By Bankrate.com

When it comes to financial literacy, today's graduates fail to make the grade.

Asked about basic financial concepts, high school seniors correctly answered only 48% of the questions, on average, down from 52% in 2006, according to the Jump$tart Coalition's recent survey on financial literacy.

College students didn't fare much better, with seniors scoring an average of 65% on a separate survey that was administered for the first time in 2008.

Why do so many miss the mark? It starts in the home. Whether parents lack confidence in their own money-management skills or assume their children's schools will cover it, many parents don't talk about money with their kids, and those who do often miss the fundamentals.

"A lot of the basic stuff is overlooked by parents just because they assume that their kids know it, and they don't," says Janet Bodnar, the author of "Raising Money Smart Kids."

"Why would they? Unless you tell them, there is no reason they would know that your family insurance bill is going up by $1,000 a year just because they start to drive."

Before your kids the nest, boost their financial literacy with these 10 money-management lessons:

Balance a checkbook

Of the high school seniors surveyed, only 45% had a checking account, while 25% had no bank account. Once they leave home and set up accounts on their own, those without parental training often make costly mistakes. About 30% of college students said they had bounced a check.

As soon as a teenager starts earning money from a job, it's time to open a checking account, even if it's a joint account with a parent, says consumer adviser Clark Howard, the author of "Clark Smart Parents, Clark Smart Kids." Teach your teen how to write checks, use a register and reconcile the account with bank statements.

• Raising a millionaire: Can you teach your kids to be rich?

Mistakes will happen, so look for kid-friendly options, such as accounts that charge teens lower overdraft fees. And though Howard refers to them as "piece-of-trash fake Visas" on his radio show, debit cards are a good choice for teenagers, he concedes. Because there's a finite amount of money they can tap, debit cards are like training wheels for credit cards.

Budget money

More than a third of the college students surveyed had paid a credit card bill late, and though some just forgot to pay, others put off writing a check because they ran out of money.

Start teaching your kids how to budget their money as soon as they bring home their first paychecks. With no value judgments, sit down with your children and ask them what they plan to do with their money. Once you know their goals, whether it's buying a car or an iPod, you can talk about what they will need to do to get there.

"Priorities are good because you teach the concept of finiteness," Howard says. "There's only so much money."

Before your children go away to school, have them set up a budget for expenses. It will increase their awareness about money flows, incoming and outgoing. After graduation, show your children how to make a household budget. Using the starting salary of their chosen profession as a guide, have them calculate their after-tax income and then figure out how much they can afford to pay for the basics, such as rent, food, utilities, insurance and transportation, as well as vacations and entertainment.

Finance college

Don't forget to factor student loan payments into the monthly budget. Of the college students surveyed, two-thirds carry some student loan debt, with 70% of those students shouldering $10,000 or more. (See "An insider's guide to student loans.")

To keep your teens from getting in too deep, work the numbers together. Tell them how much you will kick in toward their college expenses, and then help them figure out a plan for covering the rest. If their answer is "student loans," Bankrate's calculator shows the true cost of a loan, which may help your children understand that this is not easy money. FinAid offers a more extensive set of calculators for student loans with varying terms.

Seeing that they'll be on the hook for $575 a month for 10 years if they take out $50,000 in loans may give your children an incentive to look for ways to cut costs. They might consider commuting or attending a state school. (See "How much college debt is too much?")

Establish credit

College loans make up only part of the debt load that students carry after graduation. Because two-thirds of college students surveyed have one or more credit cards and 83% got their first one by the end of their freshman year, it's easy to graduate owing thousands more.

"They hand them out like candy on college campuses," Howard says. "I look at it as part of the freshman-year survival kit: Don't flunk out, don't get arrested, and don't take on debt." (See "Confessions of a credit card pusher.")

Identify wants versus needs

Some teenagers think of credit cards as free money, so remind them that when they charge something, they're taking out a loan that must be repaid. They should use credit cards only to meet their needs, not their wants. Some 11% of high schoolers surveyed said it's OK to borrow against future income to go on vacation or buy sale-priced clothing. (See "Needs vs. wants? Listen closely to your elders.")

"Kids need to understand the many factors you consider when you make a financial decision," says Brette McWhorter Sember, the author of "The Everything Kids' Money Book."

"It just looks too easy to a child when you make the purchase. They don't see all the thinking you've done to get you to the point where you do whip out the plastic," Sember says. (See "Taking charge of your credit cards.")

Although Howard advises against freshmen or sophomores having credit cards, he does encourage college students to apply for two cards during their junior or senior year. "It's the only time in your life that someone will give you credit with no proof of income and no credit history," Howard says.

Deal with debt

Whether college students racked up debt buying pizza and beer or charging car repairs, a third of those surveyed had an outstanding balance of $1,000 or more on their credit cards, and half said they carried a balance some or all of the time.

• Raising a millionaire: Can prep school make your kid rich?

Though paying the minimum looks like the easy way out, you might be surprised to learn the true cost of debt. It could take more than 20 years and more than $4,000 in interest to pay off a $3,000 credit card balance with an 18% interest rate if a debtor paid only the minimum.

"It's a real eye-opener," says Bodnar, who is also the author of Kiplinger's Money-Smart Kids column. "It does a lot more than even lecturing kids on credit, because they might forget the lecture, but they will remember this."

Pay taxes

Of the college students surveyed, only a third had prepared their own taxes, leaving the vast majority ignorant of the basics. A mere 39% knew that interest earned from a savings account is taxable, while fewer than half understood that when your salary doubles, your taxes also double, at least.

Starting with the first paycheck, sit down with teens and explain what's on the stub, showing them where their money goes. To estimate withholding on a higher salary, use the 25% rule: 10% for federal taxes, 10% for Social Security and Medicare, and 5% for state taxes.

When it's time to file a tax return, don't do it for them. Teach them the ins and outs of the system by making them an active part of the process, from tracking down receipts and W-2s to doing the calculations. (See "Your 15-point tax-return checklist.")

Consider all costs

For many teens, buying a car is their first major investment. But few understand the true cost of ownership, and they often leave expenses such as maintenance, repairs, gas and insurance out of their savings plans.

Even if you're planning to cover most of the costs so that they can focus on school (see "Should you buy your kid a car?"), break down all of the expenses, from how much the family's insurance premium increases when they're added to the policy as drivers to the cost of new tires. And make them responsible for paying a portion of the expenses, especially gas.

"It's a great budgeting tool," says Bodnar, whose son, a college student, has bought his own gas since high school. "It's an incentive for him to get his summer job, and it's an incentive to hold down the cost as much as he can."

While kids who rely on the family gas card don't blink twice when it costs $80 to fill up the tank, Bodnar's son is keenly aware of the price of a gallon, and he buys his gas from a station that offers a discount to people paying with cash.

Save for the future

Teens see the value in saving for a car, but few have the ability to see 30 years down the road. Although 80% of college students surveyed had savings accounts, most said they lacked adequate savings, with 60% saying they had slightly less or much less set aside than they should at this phase in life. Only 7% had any form of retirement account.

To motivate kids to save for the future, use a compound interest calculator to show them the "miracle of compounding," says Neale Godfrey, the author of "Money Doesn't Grow on Trees." "The miracle works to your detriment with debt but in your favor if you're saving money."

Once your teens start working, have them open Roth individual retirement accounts. As an added incentive, Howard matches his daughter's contributions dollar for dollar. To add even more diversity to the portfolio, Godfrey advises young adults to buy and hold stock in the companies that make the products they use every day.

Stretch a dollar

Even young children can learn the value of a dollar.

"Don't make money the biggest secret in the household," Godfrey says. "Get them engaged in the process."

Give young kids an allowance and make them responsible for some of their expenses so they learn how to set priorities and manage their money. Interactive Web sites like Kablinga specialize in teaching youngsters the value of money in a fun way. Teens with part-time jobs should pitch in, too, saving money for college or for senior-year expenses such as a prom outfit and a class ring.

When it's time for back-to-school shopping, set a realistic budget and involve your kids in the buying process. Teach them how to shop the sales and find deals on trendy clothes at consignment shops. If they come in under budget, let them keep 100% of the difference.

"Kids will spend unlimited amounts of money as long as it is yours," Bodnar says, "but when their money is on the line, it is a whole new ballgame."

This article was reported and written by Jennifer Maciejewski for Bankrate.com.