How to Fight Fraud and Ramp Up Compliance

“Dealers are really under the gun when it comes to compliance,” says Doug Fusco, founder of Dealer Safeguard Solutions. The company is now known as Informativ, which combined Dealer Safeguard, Credit Bureau Connection and CreditDriver.

Before developing the compliance platform in 2009, Fusco was senior vice president of global field operations for Ounce Labs, a software compliance and security company later acquired by IBM. He earlier held senior leadership positions with Oracle, SAP, Reynolds & Reynolds and Ketera Technologies.

In those positions, he played an active role in compliance. But his wife, a compliance officer for a group of automotive dealerships, had boots-on-the-ground knowledge of requirements and complained of the increasing difficulty of meeting them and getting salespeople to comply.

“Salespeople care about selling cars, not paperwork or compliance, and the busier the showroom gets, the more inconsistencies there is,” he says.

What Compliance Looks Like Now

Car dealerships must navigate many state and federal laws aimed at safeguarding consumers and employees. Non-compliance with these laws can cause financial consequences and harm a dealership's reputation, according to Fusco.

There are a growing number of laws and regulations for dealers to navigate. Here is a snapshot of some of the laws on the books:

Gramm-Leach-Bliley Act: This federal law mandates that dealers safeguard consumers' nonpublic personal information. Under its umbrella, the Privacy Rule is focused on how dealerships share information about customers who apply for credit or leasing products, and the Safeguards Rule addresses how dealerships protect consumer information. The act mandates that dealers establish a comprehensive information-security program. Compliance with GBLA helps dealers avoid costly penalties and fines.

Disposal Rule: Governs how dealerships dispose of consumer reports to safeguard consumer information. Shredding paperwork and erasing digital records is a critical aspect.

Magnuson-Moss Warranty Act: Mandates transparent warranties for consumer products, including vehicles. Clear warranty disclosure is required for new and used vehicles.

Used Car Rule: Mandates written disclosures, including warranty specifics, to protect consumers in used-vehicle sales. Dealerships can face penalties exceeding $40,000 per violation for breaking it.

Truth in Lending Act: Promotes informed decision-making by requiring dealers to disclose credit terms and costs to consumers. Noncompliance can result in fines of up to $5,000 imprisonment for one year.

Dealerships can show compliance by consistently controlling each step of the car-buying process, according to Fusco.

Compliance Concerns Abound

Maintaining compliance is crucial for consumer rights and dealership integrity.  This is where difficulties arise in the vehicle sales process, says Fusco, who explains that most dealers meet minimum requirements by securing vendors to periodically train staff and conduct regular compliance audits.

“They do these things once or twice a year. But between visits, life goes on, and people forget. When salespeople have a high-gross deal that they want to get through as quickly as possible, they may get complacent.”

Consistency is the first thing to go, he says. Dealerships know they have to protect customers' information, verify who they say they are, get consent before they run their credit, and store every dead deal for five years. But they often lack consistent processes that ensure they perform every step with every deal, according to Fusco.

“If they have a stan-dalone compliance tool, and that tool doesn’t enforce a process every time, they might skip a step. And that can really hurt them.”

Fusco recalls a dealership that missed a signature on a single dead-deal jacket. He says that by the end of the investigation, the incident had escalated into a potential class-action lawsuit and ultimately a $172,000 settlement.

Digital retail has also impacted compliance, he says. There has been a substantial shift toward online retail since the pandemic, and in digital transactions, Fusco says salespeople often ask customers to text or email insurance cards or driver’s licenses to the salespeople’s personal accounts.

Jimmy Robinson, CFO of Pohanka Automotive Group, describes information going to personal cellphones or emails as a CFO’s nightmare. “There is no accountability for that information.”

“These actions violate the Privacy Rule,” Fusco adds. “Every one of those incidents is a $50,000 liability.”

Mobile App Improves Processes

Informativ offers a mobile app to put compliance control in dealers' hands, offering a proactive and enforceable process to meet the Federal Trade Commission Safeguards Rule.

“The app has a framework in place that eliminates compliance risk because all information is requested and captured through a secure encrypted portal and dropped directly into their digital deal jacket,” Fusco says. “The fences we put up prevent salespeople from stepping out of bounds [or skipping a step]. Our technology stops that misbehavior before it happens, rather than force dealerships to get the toothpaste back in the tube after the fact.”

First, he says, the app solves the issue of storing sensitive consumer data on personal devices while providing the convenience of a mobile platform. It collects data from each step in the car-buying process, becoming “a virtual electronic copy machine.”

Salespeople might use cellphones or tablets as they perform their jobs. Fusco says the app doesn’t save collected information on the device but rather within the app. “That differs from taking a picture of an insurance card with your personal cellphone and having that photo among your personal photos,” Fusco explains. “That directly violates the Privacy Rule.”

The app also encrypts adata and locks it down by IP address to keep the information safe, he says.

Step by Step

Fusco says the app establishes consistency by creating a framework that salespeople must adhere to in order to progress through the sales process.

When a salesperson logs into the app, they can choose to either start a new folder or add documents to an existing customer folder, such as someone who completed a web application and is now in the store. The salesperson then follows the app's prompts and gathers all necessary documents, which are added to the customer’s digital deal jacket.

The app streamlines sales processes, especially for multiple rooftops, according to Jesse Cordaway, corporate variable operations director for Parks Automotive Group. “The road to the sale is always the same. That salesperson knows whatever store they are at, they must follow the same process, check for compliance and check for fraud.”

The Informativ compliance platform is also intuitive to use, something Chris Zamora, executive vice president at Zamora Auto Group, which has dealerships in California, Arizona and south Texas, appreciates. “What impresses me about Informativ’s compliance platform is how they took something so complicated and made it so simple.”

The app’s simplicity ensures sellers always follow a consistent process, says Mike Brosin, managing partner of Crest Auto Group, a Berkshire Hathaway Company.

He says the app helped Crest achieve record scores in audits at its 89 dealerships. “We are selling around 6,500 cars a year, and we feel like this has not slowed us down,” he says. “In fact, it has probably helped us because we have a process of keeping everything in line and straight for customers. They feel very comfortable because of the way we do it.”

The system also integrates with a dealership’s inventory system, customer relations management system and other systems, Fusco says.

Focused on Fraud

The app also offers a fast way to check for identity fraud, which increased by over 22% in 2023, according to Experian.

“We immediately validate that it’s not a fraudulent ID. When it is, the app automatically alerts the general manager, F&I director and sales managers,” Fusco says. “The app isn’t checking for expired driver’s licenses or for DUIs. It’s just checking that the license is valid, belongs to that individual, and is generated by the Department of Motor Vehicles in that state.”

An extra layer of security is added through Informativ’s QR code-based enriched lead generation. When a car buyer scans a code to get prequalified, the technology verifies and validates with the cellphone carrier that the person completing the form is the owner of the phone. If it’s not, additional questions are required. That information feeds directly into Informativ’s compliance platform and the buyer’s digital deal jacket. And on the back end of the credit report, the app checks for synthetic fraud, when a criminal combines real and fake information to create a new identity.

Parks Automotive is a Chevrolet, Buick, GMC, Ford, Audi, BMW, Acura, Ram, Chrysler, Dodge, Jeep dealer selling new and used cars in Charlotte, N.C. The app helps the  group catch many cases of fraud, according to Cordaway.

“You don’t realize how many fraud issues you have until you have technology in place. Two weeks ago, we had a customer in the dealership who provided a driver’s license. To us, it was a perfect driver’s license. Everything on it was accurate—the driver’s license number, date of birth, address, you name it. Luckily for us, we ran it through Informativ’s compliance app, and it detected the fraud before we delivered a $100,000-plus Dodge Demon.”  

Pohanka Automotive Group reports similar success with the Informativ app. It first used the app in Texas, where it had processed six fraudulent car purchases based on fake IDs. “We wasted a lot of time and money chasing the cars, doing damage control, working with insurance on claims—which is painful,” says CFO Jimmy Robinson. “We put in the Informativ app, and over the next 12 months we had zero incidents. That really makes a difference in the store's efficiency.”

To date, Fusco reports Informativ technology has detected 33% more instances of fraud this year compared to 2022, resulting in over $100 million in savings for dealers and lenders. “We captured 5,300 fraudulent driver’s licenses in 2023 and eliminated potentially 5,300 deliveries to fraudsters,” he says. “Let’s say each car was worth $50,000. That’s a significant saving to a dealership, and it eliminates the headaches of trying to get that car back.”

Ronnie Wendt is an editor at Auto Dealer Today.

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Originally posted on Auto Dealer Today