FTC Hoists Red Flags Rules

After several deadline extensions, enforcement of the Federal Trade Commission's Red Flags Rule finally is slated to take effect January 1, and non-complying dealers had better look out. That's because FTC enforcers plan to target dealers and others who have delayed taking formal action in adhering to the new safeguards intended to fight identity theft. Failure to comply carries assorted penalties,

After several deadline extensions, enforcement of the Federal Trade Commission's Red Flags Rule finally is slated to take effect January 1, and non-complying dealers had better look out.

That's because FTC enforcers plan to target dealers and others who have delayed taking formal action in adhering to the new safeguards intended to fight identity theft.

Failure to comply carries assorted penalties, says Randy Henrick, associate general counsel for DealerTrack Inc., which links auto dealers to lenders.

Red-Flags fines range from $3,500 to $16,000 per violation. Moreover, non-compliance could result in private lawsuits and class actions in potential negligence claims by consumers, he says.

Here's how the FTC will look for Red-Flags rule flouters:

  • Checking data bases of consumers who have filed identity-theft complaints.
  • Looking for common locations where identities were used or where information may have been compromised.
  • Sending in “mystery shoppers” to test if a dealership is complying.

“This is already happening in the field,” Henrick says at a DealerTrack webinar. “Not having a Red-Flags policy in place or not consistently applying it are violations of the law.”

The congressionally mandated rules require creditors and those involved in lending transactions, including dealers, to take specific steps to combat identity fraud. Dealers are included because they handle credit applications for many of their customers.

“Red flags are patterns, practices and activities that indicate the possibility of identity theft at your dealerships,” Henrick says.

Examples to be on the lookout for include significant changes in credit usage, altered identifications or other documents, fraud and activity duty alerts and discrepancies in addresses and other information.

The law requires that affected parties develop, implement and administer ID-theft prevention programs. Many dealerships already do that as standard operation procedures.

The government's basics of dealership compliance require:

  • Reasonable policies and procedures to spot identity theft. Tip-offs include a piece of identification that looks forged or information on a credit report that conflicts with other information.
  • A program that spells out appropriate actions to take if a red flag has been detected. Actions include contacting the police.
  • Updating programs and staffers, because identity theft is an ever-changing crime.

It is a form of that that has increased dramatically and ranks today as one of the most lucrative crimes, claiming millions of victims.

Henrick cites three main ways for dealerships to detect red flags.

One, study photo IDs and other documentation carefully — front and back.

Two, examine credit reports carefully, looking for address discrepancies, fraud alerts and unusual patterns of activities.

Three, use an ID-verification service that uses software to flush out irregularities, such as non-existent social-security numbers, addresses associated with high-risk activities and phone numbers that do not match those provided by a prospective car buyer.

“Bring any problems to the attention of a senior manager and document everything,” Henrick advises.

Suspicious dealership staffers should seek additional proof of identity — such as utility bills or a passport — and ask questions “only the real consumer can answer,” as opposed to someone who has stolen a wallet or illicitly gleaned information off the Internet.

Other tips from Henrick on how to smoke out an ID thief:

  • Ask for a cash down payment. “ID thieves like credit deals and don't like to part with cash.”
  • Get a banking reference and call the main number of the bank, not the number the customer provides.
  • Even if you don't know the answers, ask personal questions, such as: “Where did you go to school? What is your mother's birthday? What are your current job duties.”

“Listen carefully to tone and substance of answers,” Henrick says. “Just by you asking questions, the thief may think you know, get uncomfortable and walk out or terminate the call.”

TAGS: Dealers Retail
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