Covering your assets: The impact of UCC Article 9 and fraud prevention
by. Glen Fossella
Today, accuracy and transparency dictate how information is stored by financial institutions. As fraudsters evolve and regulations change to keep up, credit unions must stay on top of their game to be in compliance and mitigate risk.
One recent change is the 2010 amendments to Article 9 of the Uniform Commercial Code (UCC). As of May 31, 2013, only eleven states remain to enact Article 9, which covers secured transactions not collateralized by real property. For instance, a credit union lending money to a member will secure the debt with personal property. If the borrower defaults, the property may be seized. One of the key amendments to Article 9 provides for a uniform naming mechanism on UCC financing statements to prevent mistakes and streamline the recording of member information. This perfects the creditor’s security interest so that, in the event of default, the creditor retains priority over other creditors and can seize the property without any unforeseen difficulty. Specifically, the debtor’s name is defined as a “driver license or state personal identification card that has not expired” (Section 503). The implication is that if the credit union does not properly capture the member’s name on a loan document, it could lose its lien position and forfeit collateral to a subsequent creditor.
Similarly, the USA Patriot Act requires financial institutions to verify the identity of individuals wishing to conduct financial transactions. The law was implemented in 2003 requiring financial institutions to develop a Customer Identification Program (CIP). Ten years on, traditional CIPs fail to provide institutions with the necessary tools to effectively combat fraud. New account openings are particularly susceptible to fraud due to fraudsters using fake or altered IDs to gain membership; this in turn becomes a foothold in the credit union, enabling laundering, check cashing, even lending to the fraudsters. Even with CIPs in place, increasing fraud prompted the Federal Trade Commission to lean on financial institutions to implement stronger methods of customer identification. Sure, copying or scanning a member’s ID captures and stores the information – but does it validate the individual for membership or loan purposes?
Fortunately, today technology is available and capable of doing more than photocopying an ID and can catch fraudsters from the start while protecting the credit union. The right combination of hardware and software can streamline ID capture and compliance and also alert tellers of inconsistencies or outright fraudulence on IDs. Also, this ID capture capability can be acquired in multi-function scanners that integrate check capture and other functions at the teller window.
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