The recently disclosed data breach at Equifax has understandably generated widespread concern about the immediate effects of this data theft on the 143 million Americans potentially at risk from the breach.
Longer term, though, the theft of data resulting from this hack into Equifax’s computer systems could have negative macroeconomic effects as banks and other lenders tighten their lending procedures to protect against fraudulent borrowers and as prospective borrowers take steps to prevent the fraudulent use of their stolen credit data.
{mosads}So far, Equifax has provided scant information about the data that was stolen beyond stating: “The information accessed primarily includes names, Social Security numbers, birth dates, addresses and, in some instances, driver’s license numbers.”
That pilfered information, of course, will be sufficient for criminals to create false identities they can then use to obtain credit, such as getting a new credit card, taking out a car loan or home mortgage, or to arrange for household services, such as utilities or cable TV. Government agencies are at risk, too, as the stolen data could be used to request tax refunds or to obtain benefits.
Understandably, lenders and government agencies are taking steps to minimize the losses they will suffer from the fraudulent use of stolen data. That will entail more costly and closer scrutiny of loan applications while placing greater reliance on credit scores and reports from other credit bureaus, such as TransUnion and Experian.
Lenders will lose business, though, when they reject a loan application because the credit record of a prospective borrower has been dinged by negative reports stemming from the fraudulent use of their personal data, such as a Social Security number, stolen from Equifax.
Because people cannot change their name, Social Security number, date and place of birth or mother’s maiden name, prospective borrowers could be plagued for years by the misuse of the stolen data. That will be a long-term and costly consequence of the Equifax breach because of the challenges consumers face in removing erroneous negative reports from credit-bureau records.
Consumers likewise must take steps to protect themselves from their personal data being used by someone else to obtain credit or government benefits. A key way to do that is deny access to their credit reports by placing a “credit-file freeze” with the credit bureaus.
A freeze will deny a lender or credit-card issuer access to an individual’s credit records, FICO score and personal information. However, that freeze will apply equally to legitimate requests for credit information as well as fraudulent requests.
Hence, someone who is seeking credit for themselves in order to obtain a home mortgage or to finance the purchase of a new car will first have to request that the freeze be lifted long enough for the lender to obtain the credit-record information it needs. That person will then need to put the freeze back on.
That freeze-off-and-then-back-on process can be enough of a hassle that some prospective borrowers will find another way to finance their purchases, such as saving money until they can pay cash for a less expensive car or using a debit card instead of a credit card.
Some might argue that making consumers more wary about obtaining credit will lead to a higher savings rate and financially stronger households. But slower economic growth would be the likely consequence, at least over the short term, of greater consumer wariness about taking on new debts.
Perhaps the worst aspect of the Equifax data breach is its irreversible nature. Unlike the aftermath of a hurricane, when utilities can be restored and houses repaired or rebuilt, once critical personal data is stolen, it is gone for good, to be sold and resold by fraudsters for years into the future.
Hopefully, America will never see another consumer-data hack of the magnitude that struck Equifax, but that will be the case only if stronger data-protection safeguards are put in place and enforced.
Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk.