Lenders Use Identity Scores as a Risk Assessment Tool

by Dawn Handschuh, Personal Finance Writer   

Like credit reports and credit scores, which lenders routinely use to measure the risks that borrowers will default on their loans, banks and other lenders are increasingly checking a new kind of score called an identity score to gauge whether a borrower is who they say they are.

Borrowers with high identity scores (which signal greater risk) may end up being inconvenienced by delays in the processing of their loans or have to answer personally invasive questions to verify their identity. Utility companies, cell phone providers, car dealers and retailers are among those also using identity scores.

According to ID Analytics, which describes itself as "the pioneer in identity scoring," these scores are calculated using a far-reaching collection of consumer data, including billions of basic identity elements, such as Social Security numbers, phone numbers, dates of birth and addresses, harvested from companies across multiple industries. ID Analytics uses analytical models to predict suspicious or unusual relationships between data. (The company also states on its consumer website  that it "may use personal information provided by consumers in our fraud detection and identity verification products and services.")

Like ID Analytics, Experian's Precise ID and FICO's Falcon ID claim to use real-time data from a wide variety of sources to predict the risk of fraud.

Experian, for example, says its data sources include known fraud records, consumer credit records, auto registration records and property ownership records.

Federal law fuels a growing industry

The growing business opportunities in the field of identity scores stems, in part, from the Red Flags rule, a new federal law that requires any business that conducts transactions or extends payment terms to consumers to have a plan in place to identify and address possible incidents of identity theft.

Supporters of this practice claim ID scores are needed to address the billions of dollars lost each year to identity theft. While consumers are legally liable for only the first $50 in losses on promptly-reported instances of credit card identity theft, for example, the credit card companies take the financial hit from any further losses resulting from stolen cards.

Privacy rights advocates, on the other hand, question the necessity of identity scores and worry about the trend toward collecting highly-detailed information on every American consumer. They also worry about the quality of the data being reported since, just as with credit reports, the use of inaccurate data will result in an incorrect score. And credit reports are known to be rife with errors. 

Things that may cause a rise in your score — and in the perceived risk that you're an identity thief — include frequent moves, name changes (including those that may occur due to marriage) or living in an apartment or condo complex with a street address shared by other tenants, says Smart Money. You may also run into trouble if, like many "Juniors," you share the same first name as a parent, or if you use a nickname rather than your legal name on loan applications.

According to Smart Money, if your loan application is red-flagged, you may be required to answer obscure questions like, "What was the street number of the home you lived in seven years ago?" You may even be asked to show up in person at the bank to prove your identity with various documents.

While most identity score providers serve businesses rather than consumers, ID Analytics offers consumers free access to their ID scores. There's a catch, though: To access your ID score, you have to provide various pieces of personal information, including your birth date, thereby helping the company capture more information about you. For those consumers who value what shreds of privacy they still retain in an all-too-connected world, that's more than they wish to share.