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Red Flags Rule compliance date creeps nearer

November 17, 2010
CATA to host Oct. 3 seminar

Every U.S. auto dealership must adopt a formal program by Nov. 1 to prevent and respond to efforts to buy vehicles by customers using false identities.

The Federal Trade Commission, which is enforcing the "Red Flags Rules," can fine a dealership as much as $2,500 for selling a car or truck to a buyer who uses a false identity. Each subsequent violation carries a fine of as much as $11,000.

An attorney of the National Automobile Dealers Association will conduct a free seminar at the CATA on Oct. 3 about compliance with the new regulation. See the flier in this newsletter to register to attend.

The Red Flags Rules — named after the symbol of a warning of possible trouble — are a sequel to the Safeguards Rule, issued by the FTC in 1999.

The older regulation aims to prevent the theft of customers’ credit data from businesses such as dealerships. Paul Metrey, director of regulatory affairs at the NADA, said dealerships can comply with the regulation by working with their lawyers. An NADA guide to help dealers with Red Flags compliance is available The cost of obeying the rule will depend on a dealership’s size and complexity, Metrey told Automotive News. "This is not a one-size-fits-all requirement," he said.

However, there are bright spots to consider for dealers who feel overwhelmed or annoyed by yet another compliance burden:

• Having a written Identity Theft Prevention Program can increase the likelihood that employees will more consistently follow policies and procedures the dealership already has in place to help ward off identity theft and fraud; and

• Although dealers must carefully analyze their operations and prepare an ITPP that is specifically tailored to their respective businesses, "the task is not insurmountable and dealers should not automatically conclude that they must expend significant sums of money to achieve compliance," said Metrey.

The Oct. 3 presentation at the CATA will review what dealers must do to comply with the new regulation, such as:

• Conducting a preliminary risk assessment
• Constructing a written ITPP
• Knowing the indicators of identity theft (Red Flags) and how to respond to them
• Training requirements
• Obtaining service provider oversight
• Involving a dealership’s board of directors

The Red Flags Rule requires a "senior management" Compliance Director and allows for a mid-level Program Coordinator as well, so dealerships should consider sending both of these individuals to the seminar.