Wednesday, October 11, 2006

Not My Brother’s Keeper, Or Citibank’s Either

I’ve been fighting the flu for a few days, and I’m at the stage now where I have to make trumpet noises into a handful of tissue paper every thirty seconds. Miserable, yes, but not likely to have any long-term consequences. And yet, as I sit here people thousands of miles away, whom I don’t even know, might be working to financially ruin me.

It’s not just fever-induced paranoia making me say that. Six years ago I became an identity-theft statistic when someone applied for and received a VISA gold card in my name. I learned of this months later, and though I didn’t have to pay anything toward the maxed-out card it took dozens of hours to straighten out the mess. Filing police reports, calling the company, sitting on hold, getting disconnected and calling back to sit on hold again — considering what my hourly wage averaged out to back then, I spent nearly a thousand dollars’ worth of my time.

I bring this up because the Washington Post has a consumer-advocacy article warning against another danger from identity theft: many companies sell protection against it, and damned if a lot of those companies aren’t fraudulent themselves.

But here’s something about identity-fraud protection I’ve never understood: why should it even be necessary? I’ve heard people argue that you should protect yourself from identity theft for the same reason you put locks on the door of your house and car. That analogy doesn’t work, though: I use locks to protect my personal property. In the case of the VISA gold card in my name, from whom did the thief actually steal? The credit-card company.

So how did it become my responsibility to protect the assets of a company I’ve never done a lick of business with? If a multibillion-dollar company is fool enough to loan money to a liar pretending to be me, why should this be my problem?

Bear in mind: when I say “a liar pretending to be me” I’m not talking about a talented actor and master of disguise who dresses as a short, pale redhead and mimics my voice and mannerisms so well even my One True Love would be fooled. No — I’m talking about a guy who sifts through my garbage and pulls out a pre-approved credit-card offer I never asked for in the first place, or breaks into a database somewhere and racks up huge debts with my social security number.

When I suffered from identity theft I merely lost a couple weeks of free time. But some people I’m too lazy to Google now (be nice to me; I’m sick) have had it far worse: turned down for mortgages or even denied jobs because of bad debts they never incurred.

Why are the credit-card companies not held liable for damages in such cases? I suspect it’s because wealthy corporations have far too much influence in the halls of government, but I don’t think libertarians are allowed to say such things without being accused of being anti-free market. So I’ll blame my inability to answer this question on my powerful NyQuil buzz. Do any of you healthy people have insights to share?


Anonymous Brad Warbiany said...

No, you're right. It's because wealthy corporations have far too much money invested in the halls of government. That's not anti-free-market.

The problem is that we don't really have much of a free market. We have government-created and government-protected corporations. The cards are stacked against the little guy, but it's not because the government is too weak to restrain corporations. It's because government is powerful enough to strengthen corporations.

The problem for libertarians today, especially those who vote Republican, is the inability to distinguish between being a friend of business and a friend of freedom. Republicans are friend of business, and will give an upper hand to businesses they favor. Libertarians are friends of freedom, and thus don't actively restrain business. The two positions are similar, but the fact that government has protected some corporations from liability is a problem of government, not business.

7:46 PM  
Blogger rhhardin said...

It used to be that your SS number was printed on your tax return label, and it didn't matter. Why? because banks used the ``know your customer'' route in credit matters.

But the SS number is a really handy unique identifier, and very cheap to use. Credit agencies that use it have a great advantage over credit agencies that don't.

So everybody started using it, displacing ``know your customer.''

The side effect is that they use your SS number as a replacement for knowing you, and that's why it's your problem now.

It's like ``some assembly required'' consumer products.

Cost shedding.

Presumably you also get some advantage from it, since once everybody does it, the savings accrue to the customer, not the business.

Like illegal workers, when everybody uses them, reduce the costs to consumers, and businesses don't get any benefit, but have to use them because the competition does.

A government fix actually involves increased meddling with the markets, rather than reduced intervention.

2:32 AM  
Anonymous Grant Gould said...

Of course, in a reasonable world the remedies for this would be suits for libel (by you against the credit reporter) and fraud (by the lender against the credit reporter). Although the standards vary from state to state, in general one would expect that credit reporting agencies, as they are communicating matters of purely private concern, are guilty of libel if they negligently make false statements (that is, they could have known better, but didn't bother). However, communications between credit agencies and banks have a "qualified privilege" that makes it all but impossible to sue them for libel unless actual malice (or something close) is involved.

The courts would probably eventually have gotten around to correcting this, but in 1970 Congress passed the Fair Credit Reporting Act which set certain (very minimal) requirements and standard (very small) fines for credit agencies. This in effect limits the amount you can recover for willful and negligent acts by credit agencies to $1000 unless you can prove that they set out to screw you from the beginning.

This was done, as usual, for all of the best reasons -- credit reporting was a mess before that point, and sorting it out allowed interest rates to fall dramatically as banks became better risk assessors. The theory was that banks' demands for accuracy in credit reports would serve as an adequate consumer safeguard, and if that failed then the Act's other minimal requirements would be adequate.

If like me you believe that low interest rates are one of the few genuine social justice issues of our time, it's hard to entirely fault Congress' hopes. On the other hand, though, hopes are worthless drivel; they screwed the pooch on this one and that's what matters.

5:22 AM  
Blogger rhhardin said...

SS credit reports work fine one way : a clean report means good credit, on the individual whose report it is.

That, though, makes a clean report valuable to take.

On the other hand, whose property is the clean report? There'd be no clean report at all if they hadn't implemented the system.

The damage actually comes from the uses that others put the report to.

7:41 AM  
Anonymous Anne O'Neimaus said...

The problem is ultimately a governmental one: the laws that allow a corporation to enjoy the powers and privileges of a "natural person", without most of the legal obligations and limitations.

If we just get rid of the concept of corporations, or at least make them required to submit periodic proof that their existence is more beneficial to society than not, things would probably be a lot nicer.

8:07 AM  
Blogger Windypundit said...

As a legal matter, you don't owe the money, which you can prove in court if you have to. (Or, rather, they will be unable to prove you owe money.)

The problem is that credit card companies and the credit reporting agencies can continue to libel you based on that theft with no fear of punishment. I don't know if that's by law or simply because the libertariaverse solution, file a lawsuit, is impractical.

In this case, maybe government is the solution, in the form of a narrowly-focused judicial body to quickly and efficiently handle these situations. With some combination of penalties and fee shifting, you could probably avoid the most obvious abuses.

E.g. You file a complaint with the government, which is forwarded to the company. They either fix it or reject it. If they reject it, you can accept their decision or pay a $50 fee to appeal it. If you appeal, both sides send paperwork to a hearing officer, and then you have a telephone hearing. If the company wins, you're out $50. If you win, the company pays your $50 appeal fee, plus a $250 penalty, and they are ordered to fix the data, with additional oversight and penalties if they don't.

I hesitate to recommend more government, but this is essentially a judicial matter regarding a tort (libel) which is a legitimate function of government.

10:05 AM  
Blogger Jennifer said...

Personally, I think there should be a law holding the comapnies responsible for all damages caused by their foolish lending. As Anne pointed out, corporations get all the benefits of personhood but none of the responsibilities. If Windypundit were denied a mortgage because I told the credit bureaus "Oh, he's a bad risk who hasn't paid back the money I lent him" (though he'd never borrowed a dime from me), I could certainly be sued, to the point where Windy wouldn't need a mortgage because I'd owe him enough money for him to buy the house outright.

I'd like to see the credit-card comapnies held to the same standard. Don't put a debt in my name unless they make damn sure I'm the one actually taking out said debt. And the onus should be on them to make sure the person they're lending to is who he says he is.

Grant Gould--
Maybe the laws as they stand were originally helpful in bringing interest rates down, but here's the irony: the main problems now are caused by credit-card companies, who are not generally known for their low interest rates.

10:48 AM  
Anonymous Sam "The Butcher" Franklin said...

Tort law good. Government limitations on tort law bad.

1:31 PM  
Blogger Timothy said...

You are aware that the credit card companies are required to make you whole and to cover the cost of investigation, right? And that there are very strict legal requirements regarding consumer protection against fraudulent charges?

The credit card company is no more responsible for some fraud than you are, so really the criminal should be held liable for damages.

2:29 PM  
Blogger Timothy said...

Also, let's evaluate what credit card companies actually offer: A pre-approved line-of-credit that could be lost at pretty much any time. In a situation where you need to make an unexpected purchase fast there isn't a substitute for that sort of on-demand credit. You're going to pay a premium for it because it's risky. It's also pretty difficult to turnd people down for loans because of all of the fair lending laws. A lot of the problems in the lending market can be lain at the feet of the government, but not in the way y'all are thinking.

2:34 PM  
Blogger Jennifer said...

You are aware that the credit card companies are required to make you whole and to cover the cost of investigation, right?

But if I lost the chance to buy my dream house because I was denied a mortgage for which I would have qualified if not for the credit card I never paid off because I never had it in the first place, they're not required to compensate me for that loss. And if I'm denied a job over an unjustly low credit rating (admittedly unlikely in my case, since I don't work in finance or money-handling jobs), the companies don't have to compensate me for that loss, either.

Nor was I paid anything for the huge amount of time I wasted clearing out my own ID-theft mess. I'd resent a law which unjustly sentenced innocent people to 30 or 40 hours of community service; an innocent person spending 30 or 40 hours (or more!) clearing up an ID-theft case is just as unjust.

But to clarify: I'm not denying that credit cards can be very useful in a lot of ways. However, they need to have stricter standards when they lend to people. And by that I mean: if they're going to loan $5,000 to someone claiming to be Jennifer Feralgenius, they'd damn well better make certain it's actually me before they start charging me for their services. And they need to stop pretending that typing my social security number and mother's maiden name in an e-mail or on a pre-approved mass mailing constitutes "making certain."

When they screw up and hurt innocent people, they should be just as liable for civil damages as you would be if you cost me a house or a job.

2:56 PM  
Anonymous Sam Franklin said...

To make a law and economics argument, the credit bureaus (and like parties) would have an incentive to minimize transaction costs if they had to reimburse them. In Jennifer's examples, these transaction costs include the compensatory stuff like the victim's time in straightening the mess and opportunity costs (aka consequential damages).

Normally it is not efficient to have a tortfeasor pay consequential damages, but when credit rating agencies are involved, their whole service is quantifying the credit opportunities you should be given. The damages are almost, by their nature, consequential. An odd little puzzle.

3:05 PM  
Anonymous Sam Franklin said...

But if I lost the chance to buy my dream house because I was denied a mortgage for which I would have qualified if not for the credit card I never paid off because I never had it in the first place, they're not required to compensate me for that loss.

If it means that you are buying your dream house later, rather than sooner, the snafu may end up saving you money. Maybe you owe them./faceticious

3:18 PM  
Blogger Karen said...

I used to prosecute car dealers for credit code violations so I know something about this area of the law. The problem with traditional lawsuits is that there's not enough money in the injury and lawyers are too expensive to make that a particularly efficient route. One thing that might work was the suggestion of simple tribunals set up by the government but hearing only credit code disputes. Most states have Lemon Law tribunals for disputes involving new vehicle purchases that work along similar lines. Perhaps someone could work out an efficient system based on Lemon Laws? Actually, I'd love to be one of those judges, so get to work, guys.

Seriously, the credit card companies and credit reporting agencies should bear a lot of the burden here. Credit card lenders do zero diligence on their applicants, even of the type that can be done at a desk with a connection to Google. Thus the stories about infants and pets being issued VISA cards. Making them liable for ruining an innocent party's life doesn't seem to be such a bad thing, and can be done with a minimum of government interference.

7:48 PM  
Anonymous Sam Franklin said...

Good idea. How well do you remember your privity of k law, Karen? Seems like there would be a LOT of those issues at your court!

1:50 PM  

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