In the latest twist in the ever-growing problem of identity theft, homeowners are finding out that thieves not only have stolen their personal information, but have also used it to take out loans against their homes. Identity thieves, no longer satisfied with the small amounts of money gained from stealing someone’s identity to open credit card accounts, now have their eyes on a much larger source of cash … a person’s home. Senior FBI officials recently told Congress that identity theft in mortgage fraud cases is becoming increasingly common.

Mortgage fraud through identity theft occurs in a number of ways. A thief will apply for a home equity loan using the homeowners’ personal and financial information. The loan is most often on the house that they are residing in. When a thief has the knowledge of an individual’s Social Security Number, date of birth, as well as their address, it makes it easy for the hapless homeowner to become a victim.

Mortgage fraud may also occur through a fake sale of a home. One thief will assume an individual homeowners’ identity and sell the property to another thief. With mortgage loan money in hand, both thieves get away and no real sale ever occurs. However, there have been many instances where the homeowner’s identity was stolen and the home was sold to a legitimate buyer. The thief gets away with the money, the buyers have no new home and the original homeowner is left with the very tricky mess of re-establishing their identity. Many hours and quite a bit of money may be required to fix the credit problems that result. This is particularly true when the theft results in large amounts of money being stolen.

Fortunately for the homeowner, because the money is actually stolen from the lender, identity theft victims are not generally liable to repay the lost funds. In most cases, it’s the lender who is most damaged by these types of crimes. Fortunately for the lenders, thanks to the federal government, there is now a way lenders can help slow this crime down.

Seven agencies of the federal government, including the Federal Trade Commission (FTC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the Office of Thrift Supervision (OTS) and the Department of the Treasury (DOT), recently enacted the Red Flag Identity Theft Rule as part of the Fair Accurate Credit Transaction Act (FACTA). Unfortunately, many in the broker community are either still unaware of the compliance requirements this rule imposes or are simply ignoring it.

The rule requires mortgage brokers/bankers to formulate a written information security policy. Additionally, they must integrate that policy into their daily operations by initiating a system to help identify Red Flags, which may indicate identity theft or mortgage fraud when the broker is creating a new customer file. The rule also states that any third-party you share sensitive customer information with, where there is a reasonable chance that the information can be lost or stolen, must also be in compliance with the rule. In just the last few years, there have been numerous incidents of large amounts of sensitive customer information being stolen from major lenders. In a recent incident, one very large lender discovered that they might have lost as many as two million customer records.

Under the Red Flag Rule, the broker can be considered a vendor of the lender since they share sensitive customer information back and forth. This is the perfect opportunity for lenders to require their brokers to be compliant to the rule and require them to include a “Red Flag Checklist” with each submission, indicating they have verified the borrower’s identity. Some lenders have already informed their brokers that compliance to the rule will be a prerequisite to continue doing business with them.

If that trend continues and lenders decide to withhold funding unless this critical step has been taken, the mortgage community will have no choice but to take this responsibility seriously. Since the mortgage professional has direct contact with the potential borrower, they will always remain the first line of defense for the lender. Instituting these procedures will, at the very least, help cut down the number of fraudulent loans caused by identity thefts.

There is a much more compelling reason why lenders, as well as brokers, should take to the forefront on the issue of identity theft. The Red Flag Rule indicates a larger trend that we are seeing in both legislation and in court decisions. Businesses are being held to higher standards. They are entrusted with safeguarding a customer’s sensitive information. Compliance aside, protecting our customer’s personal information should automatically be a part of every one’s “best business practices.” This needs to be done not because it’s required, but because it’s the right thing to do.

Jim De Geronimo Sr. is with Concord, Ohio-based Majestic Security LLC, a National Association of Mortgage Brokers preferred provider of Red Flag solutions. He may be reached by phone at (888) 331-2332.