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So, what is a red flag ?

A red flag is any specific activity, practice or pattern which indicates the possible existence of fraud or identity theft.

A red flag does not always indicate fraud or identity theft. In most instances a customer will have a legitimate reason for the discrepancy.

Some examples of red flags, a suspicious drivers license, an out of state address, multiple credit applications with the same address, multiple accounts opened by the same customer.

The red flag rules apply to all businesses who originate and/or maintain “covered accounts “. These covered accounts include all installment sales and lease transactions, whether they are in house or sold to an outside vendor.

By offering these “covered accounts” to your customer you are required to meet and obey the red flag rules. A procedural audit of all business procedures will determine what red flag rules you will have to address.

The red flag rules have penalties for non-compliance which are severe. Failure to build and analyze your dealer transactions with an Identity Theft Detection Program could result in a civil penalty of $ 2500. per customer.

If you are warned by the FTC and still do not comply the penalty increases to $ 11,000 per customer. This could in a very short time bankrupt any dealership.

The Identity Theft Detection Program must prevent, detect and mitigate all potential identity theft issues in regards to “ covered accounts”.

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RED FLAG COMPLIANCE IS MANDATORY BEFORE JUNE 1, 2010

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Auto Dealer Fraud
Did you know Auto Dealer Fraud is ranked as the number one consumer complaint throughout the nation? Dishonest car dealers are deceitfully swindling average consumers of thousands of dollars. You may be a victim and not know it. For an average consumer it is often difficult to determine whether or not they have been victimized. Since there are so many forms of Dealer Fraud, an average person can easily be defrauded. Auto Dealer Fraud categories include: misrepresentation of title, false advertisement, misrepresentation of vehicle history, financing fraud, packing payments, negative/trade-in equity, contract confusion, and selling prior rental, wrecked, or marked vehicles without disclosure or as new vehicles.

Contract Confusions
Contract fraud is perhaps the most discrete form of auto fraud. Since an average consumer is unaware of the many deceptive tactics that dealers use, they could be bound into paying hundreds of dollars. An average consumer is manipulated through various tricks, including rewriting/backdating contracts; signing more than “one” document in an attempt to charge a higher down payment, higher APR (Annual Percentage Rate), etc.; forging customers’ signatures; failing to provide translations of the completed lease or purchase contract in the applicable language; packing the contract with add-ons such as a service contract, warranty options, and accessories including alarms, GAP insurance, paint/fabric protection, window etching or low jack, items the customers don’t need.

Rewritten Contracts/Backdating: This occurs when a customer does not qualify for financing under initial contract terms. Therefore, the customer may have to consent to increase in down payment, higher APR, etc. in order to qualify for a loan. The dealership deceitfully has the customer sign a second contract with different terms and backdates the second contract with the date of the initial contract, thereby, charging interest for a time period in which the contract is not yet in effect. Not only is the act of backdating illegal, it is also a violation of the Automobile Sales Finance Act (ASFA), which requires that all parties sign one document.

Financing Fraud
Consumers are routinely billed hundreds and sometimes thousands of dollars by fraudulent car dealers. These schemes are designed to extort the highest possible profit from each sale. Dealers use many tactics, including negative equity/trade-ins which a transaction where the consumer is falsely led to believe that the dealership is valuing the trade-in vehicle at the same amount as what is owed. However, in reality the actual cash value of the vehicle in trade-in is less than the amount owed. This difference is added to the cash price of the new vehicle and as a result consumers ends up paying more in taxes and registration. The consumer is also duped when they are told they do not qualify for a loan under the original contract terms and therefore must pay a higher down payment or APR. Often customers end up paying for add-ons (such as alarms, service contracts, GAP insurance, paint/fabric protection, window etching, lo-jack, etc.) that they don’t necessarily need.

Used Car Fraud
Used Car Fraud occurs when the seller fails to disclose prior vehicle history (such as prior accidents, or rentals, etc); misrepresents title (often by selling a “salvage” title); or odometer fraud, where an odometer is illegally rolled back, replaced, or started over.

Negotiating in a Foreign language
California law provides that if a customer negotiates a lease/purchase of a vehicle primarily in Spanish, Chinese, Korean, Tagalog or Vietnamese, the dealer must give consumer a translation of the final contract in the applicable language before the contract is signed.

Odometer Fraud
Odometer fraud is the most prevalent form of auto fraud, resulting in costs of thousands of dollars. Odometer fraud occurs when illegal changes are made to the mileage shown on a used vehicle’s title and odometer. Examples of odometer fraud include roll back, replacement, or having an odometer rolled through all digits and started over.

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Occupational Licensing Industry News OLIN 2009–11

Red Flags Rule Compliance

New Information

Effective June 1, 2010, the Federal Trade Commission (FTC) will begin enforcement of the Red Flags Rule, a regulation issued under the Fair and Accurate Credit Transactions Act (FACTA), which is a federal law designed to enhance protection against identity theft.

Questions and Answers

Q. What is a red flag?

A. A red flag is a warning sign that identifies a suspicious pattern, practice, or activity that indicates the possible existence of identity theft.

Q. Does the Red Flags Rule list the identity theft warning signs?

A. The Red Flags Rule lists the following identity theft warning signs:

1. Alerts and notifications received from credit reporting agencies and third-party providers.

2. The submission of suspicious documents or suspicious identifying information.

3. Unusual or suspicious account activity.

4. A concern shared by a customer, identify theft victim, or law enforcement.

Q. Who must comply with the Red Flags Rule?

A. The FTC requires all creditors who have covered accounts to comply with the Red Flags Rule. A creditor is an entity that regularly grants loans, arranges for loans or the extension of credit, or makes credit decisions. Covered accounts are primarily personal, family, or household accounts requiring multiple payments or transactions, such as an automobile loan or an account which has a foreseeable risk of identity theft.

Q. Does the Red Flags Rule apply to vehicle dealers?

A. If a dealer extends auto credit to consumers or arranges auto credit for consumers, the rule will most likely apply.

Q. What is required?

A. The Red Flags Rule requires the development and maintenance of a written Identity Theft Prevention Program (ITPP) to detect, prevent, and reduce the possibility of identity theft. The ITPP must include the following four elements:

1. Reasonable policies and procedures to address the “red flags” of identity theft you may encounter in the day-to-day operation of your business.

2. A plan to detect the red flags you’ve identified. For example: if you’ve identified fake IDs as a red flag, then you must have procedures in place to detect possible fake, forged, or altered identification, such as training staff.

3. Appropriate actions to take when red flags are detected.

4. Identify the persons responsible for implementing and administering the program and approval of the program by your board of directors. If you don’t have a board, approval of the ITPP is up to an appropriate senior-level employee. Your ITPP must also include plans for training staff and periodic re-evaluation to reflect new identity theft risks.

Q. Will all ITPPs be the same?

A. While some businesses and organizations may need a comprehensive program that addresses a high risk of identity theft, others with a low risk of identity theft could create a more streamlined program.

Q. What if our company outsources or subcontracts some of our work?

A. If you outsource or subcontract parts of your operation that would be covered by the Red Flags Rule, your ITPP must address how you’ll monitor your contractors’ compliance.

Q. When is the deadline for implementation of the Red Flags Rule?

A. The implementation deadline was November 1, 2008, but the FTC is delaying enforcement of the Red Flags Rule until June 1, 2010, to give creditors and financial institutions additional time to develop and implement written identity theft prevention programs. However, this delay does not prevent other federal agencies from enforcing the Red Flags Rule after November 1, 2008, for institutions subject to their oversight.

Q. Who enforces the Red Flags Rule?

A. The FTC, the federal bank regulatory agencies, and the National Credit Union Administration enforce the Red Flags Rule.

Q. Are there any non-compliance consequences?

A. 1. Federal Administrative Action: The FTC can enact penalties up to $2,500 per violation (15 United States Code §1681 (a)(2)(A)).

2. State Enforcement: States can impose up to $1,000 per violation, plus attorneys’ fees.

3. Civil Liability: Customers can also file civil suits to recover actual damages sustained due to a violation.

Q. Where can I obtain a copy of the FTC guidelines?

A. A copy of the guidelines may be obtained at:

http://ftc.gov/bcp/edu/microsites/redflagsrule/more-about-red-flags.shtm

NOTE: This is only a summary of the Red Flags Rule. Please refer to the FTC guidelines for more comprehensive information.

Background The Fair and Accurate Credit Transactions Act of 2003 (FACTA) amended the Fair Credit Reporting Act of 1970 to combat identity theft and requires joint federal agencies to develop and implement regulations. The regulations are intended to protect consumers by requiring businesses to develop a written ITPP plan. These businesses include those that extend credit or maintain consumer accounts allowing multiple payments or transactions or maintain accounts that have a reasonably foreseeable risk of customer identity theft.

Distribution

Notification that this memo is available online at:

dmv.ca.gov/pubs/olin/olin.htm

was made via e-mail alert in June 2009 to the following:

• All E-mail Alert subscribers. Contact For Red Flags Rule concerns or questions contact the FTC, at:

RedFlags@ftc.gov
MARY GARCIA,

California DMV

Chief

Occupational Licensing

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Federal Judge Rules:

FTC Cannot Make Lawyers

Comply With Red Flag Rules

Identity Theft Laws

RED FLAG COMPLIANCE QUIZ

( all correct answers should be ” YES ” )

have you completed your red flag program ??

have you appointed your red flag officer ??

have you trained your staff for red flags ??

have you created your red flag examination form ??

have you created your red flag resolution form ??

have you a red flag wall notice ??

have you a red flag compliance certificate ??

have you time in the next seven ( 7) days to build your red flag compliance program as required by the FTC & the DMV ??

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