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Game Time: Implementing Your Red Flags Program

November 2008, F&I and Showroom - Feature

by Tariq Kamal

The Red Flags Rule means both good news and bad news for dealers. The bad news? You may have a lot of work to do. The good news? According to First Advantage CREDCO’s Patrick Colbert, it’s not too late. Special Finance sat down with the Poway, Calif.-based firm’s senior vice president of automotive and specialty markets to learn how dealers can get their stores up to speed.

SF: What exactly was the Nov. 1 deadline supposed to mean for auto dealers?

PC: That’s the date on which financial institutions or creditors were originally mandated to comply with the federal government’s Red Flags Rule. The Federal Trade Commission has decided to extend that deadline to May 1, 2009, but only for enforcement purposes. Yes, it’s another in a long list of compliance regulations; but remember that, according to Javelin Strategy & Research, 8.1 million Americans were victims of identity fraud in 2007. Those are your customers! So it’s time to face facts and implement a compliance program.

SF: What’s the first step for dealers who haven’t already done so?

PC: That depends on the relative sophistication of the fraud- and identity theft-prevention process each dealer already has in place. The rule is somewhat flexible. It allows you to build on existing requirements, including the PATRIOT Act, so it may be just a matter of coordinating and combining existing policies and procedures.

Regardless of where you’re starting from, the same three first steps apply: 1) Organize a Red Flags team, 2) learn and fully understand the Red Flags Rule and 3) conduct a risk assessment of current accounts. It seems like a lot, I know, but there are many reputable vendors out there who have been working hard to develop turnkey solutions to help you satisfy those obligations. We recently hosted a Webinar on this subject with two of the leading providers of process and legal advice in the industry, Compli and Hudson Cook LLP. Your readers can view it online at CREDCOservices.com.

SF: What are the key elements of an effective Red Flags program?

PC: First, it’s important to understand that there’s no single list of Red Flags, which the government defines as a pattern, practice or specific activity that indicates the possible existence of identity theft. Dealers are expected to design and implement an individually tailored identity-theft prevention program based on their unique risk profile. In any case, your written program must contain reasonable policies and procedures to identify, detect and respond to Red Flags, and it must be approved by either your board of directors, an appropriate committee thereof, or a designated employee at the senior management level.

CREDCO’s program includes consumer data tools for finding identity inconsistencies during the front-end sales and financing process. We provide an identity verification score that indicates the possible level of risk associated with that consumer, and screen them against the OFAC list of terrorists, drug traffickers and money launderers. Finally, we offer a reporting solution that summarizes potential fraud activity and related trends on a monthly basis.

SF: What additional advice can you offer to dealers who are just getting started?

PC: Remember that, when putting your Red Flags team together, your program will only be as good as the people who implement it. You’re required to train your staff to effectively implement the program and exercise appropriate and effective oversight of service provider arrangements. It’s a challenge, and meeting that challenge will require the efforts of some of your best people. Don’t delegate that responsibility lightly, and don’t be afraid to seek outside help.

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