Phone: 630-495-2282 Fax: 630-495-2260 Map/Directions

‘Red Flag’ changes could be onerous for dealers

November 18, 2010

Proposed changes to "Red Flag" guidelines required by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), could create compliance burdens for financial institutions, which under the Act includes automobile dealers. 

The changes would require dealers to establish a written, risk-based identify theft program designed to quell the risk of identity theft of customers. Some estimates peg the percentage of Americans affected by identity theft at

close to 25 percent.


Red Flag Program 

To comply with the proposed rule, every customer would have to be compared against a list of 31 potential red flags before taking delivery of a vehicle. A dealer’s Red Flag Program would have to address financial, operational, compliance, and reputation and litigation risks, including policies and procedures to:


1. Identity red flags

2. Verify the identity of persons opening accounts

3. Detect red flags

4. Assess whether a red flag evidences a risk of identity theft

5. Mitigate the risk of identity theft using a risk-based approach

6. Train staff to implement the Program

7. Oversee service provider arrangements including an independent assessment of any third-party fraud or identity theft detection programs that are used by the institution to determine if the programs meet the requirements of the Red Flag Regulations and Red Flag Guidelines. 

For instance, sales and F&I managers would have to examine a consumer report recent for significant increases in inquiries, an unusual number of recently established credit relationships, or an account that was closed for cause or identified for abuse of account privileges by a creditor.


The changes are under review by the Federal Trade Commission, the policeman on the beat when it comes to enforcement of federal laws and regulations. But while there is reason for concern by the dealer community, the proposed rules are not final, so it is a little early for blind panic.