5/6/08

Colleen Belmont Compliance Analyst, Wolters Kluwer Financial Services

Introduction

As of January 1, 2008, the Federal Trade Commission’s (FTC) “Identity Theft Red Flags and Notices of Address Discrepancy” provisions, more commonly known as the “Red Flag Rules,” became effective.  The Rules are designed to help organizations recognize “red flags” of identity theft that may arise during the indirect lending process.  Towards this end, the rules require dealerships and financial institutions alike to establish formal identity theft detection and response programs within their respective businesses. 

Essentials of the Regulation:

• A red flag is a pattern, practice, or specific activity that indicates the possible existence of identity theft. The FTC has published guidelines on recognizing identity theft and established 26 red flags that financial institutions should consider when creating their Identity Theft Program.
• The Red Flag Rules apply to financial institutions, creditors, and lenders, including automobile dealers and tax preparers who provide Refund Anticipation Loans (RALs).

While some may look at this rule as burdensome to automobile dealers or duplicative for lenders who provide auto financing, it is important to know that implementing an effective Identity Theft Program at your institution can be dramatically simplified by gaining knowledge of the Red Flag Rules requirements and selecting a vendor that fits within your established program.

Responsibilities of the Dealer

Both automobile dealers and lending institutions are now charged with broader responsibilities under the new regulation. While lending institutions had previously been required to have Customer Identification Programs, auto dealers have not historically been held to such stringent standards by federal regulators. However, as “credit criminals” continue to come up with new and innovative methods of identity theft, creditors and dealerships must come up with new and innovative ways to stop them from illegally gaining access to credit.

Are federal regulators asking automobile dealers to act as statutory-imposed detectives? Yes and no. Automobile dealers do have a responsibility to have a program in place to detect identity theft red flags that pop up during the indirect lending process.  However, the FTC leaves it up to the individual dealership on how to proceed when identity theft is suspected. 

In the end though, each automobile dealership has a responsibility to the funding lender and must take the necessary steps to accurately verify a customer’s identity.  Identity validation should occur before submitting the customer’s application. Because the majority of auto finance transactions are originated at the dealership, the dealership is most commonly the front line of defense against identity theft in the industry.

Establishing an Effective Identity Theft Program

Full compliance with the Red Flag Rules will be required by November 1, 2008. Requirements of an Identity Theft Program are that it is written, that dealerships adopt policies regarding how the dealership responds to red flags, ongoing and appropriate updating of the program, the designation of responsibility for the program, and oversight of service provider arrangements

Dealerships that select AppOne®, a Wolters Kluwer Financial Services business, to process loan applications, can simplify many aspects of Red Flag Rules compliance for their organization. AppOne is a technology and risk mitigation company that connects independent dealers with lenders and applies compliant and proprietary practices to the loan application and funding process.  Each loan package processed by AppOne and submitted for lender funding is evaluated prior to submission to the lender. AppOne’s identity theft prevention processes include:

• A proprietary alerting system that automates the process of fraud alerts and addresses discrepancies, and includes proprietary alert rules that look for patterns for possible fraud and identity theft.
• Reconciliation of all finance-related documents including identity documents with information provided on customer credit applications.
• A customer interview process to verify both the identity of the customer and the type of vehicle that the customer has purchased.

Conclusion

Establishment of an Identity Theft Program within your dealership will be mandatory as of November 1, 2008. Compliance with the regulation is important to automobile dealers not only because it helps guard dealerships against regulatory penalties but can also help strengthen lender confidence in dealer business practices. Utilizing a vendor who knows your business and has built-in Red Flag Rules-compliant processes can save you time and money.

AppOne can help your dealership comply with the ID Theft Red Flag Rules.