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At the request of Congress, the FTC is delaying enforcement of the Red Flags Rule until June 2010.

The Milwaukee Journal Sentinal reports that a couple fraudulently inflated their available credit using convenience checks from other credit cards in order to purchase two new BMW SUVs:

Sergey Mikayelyan, 49, and Rita Grigoryan, 47, fraudulently raised the balances on credit cards in their names by sending to their accounts payment using convenience checks from other credit card accounts, checks that exceeded the available balances on those credit cards, a scam known as a bust-out scheme, according to a criminal complaint…The couple bought two BMW X3s from Autosource Motors in Cudahy late last month for a total of about $32,000, using seven credit cards, and made other large purchases not described in the complaint.

(Hat tip: F&I Magazine Forum)

The Red Flags Rule specifies that your Red Flags Program must be updated in response to changes in risk of identity theft, or in response to an actual occurrence of identity theft.  Employee turnover in the retail automobile industry is very high, and partly because of that, many dealers have experienced identity theft that was committed or facilitated by an employee.  (We’ve blogged about both high turnover and employee fraud previously).

A reasonable response to that risk might be to conduct background checks on potential employees.  But be careful.  From the FTC:

Two companies that fired workers and rejected job applicants based on background checks without informing them of their rights under the Fair Credit Reporting Act (FCRA) have agreed to settle Federal Trade Commission charges that they violated federal law. The settlements require the defendants to pay $77,000 in civil penalties…

According to the FTC’s two complaints, both defendants contracted with a CRA to conduct background checks including criminal record reviews for employees and job applicants, and made hiring and firing decisions based on those background checks. The companies allegedly failed to provide the employees and applicants with pre-adverse action notices and adverse action notices as required by the FCRA.

If you are considering doing background checks on your employees or applicants, be sure to check out the FTC’s guide, “Using Consumer Reports: What Employers Need to Know”.

First, some interesting feedback from reader Ernest Ferro about my Cash for Clunkers analysis on whether the CARS program will cause domestic automobile manufacturers to lose market share to foreign competitors:

Consider that this has nothing to do with brand (domestic or foreign). I believe that people are not being swayed one way or another. People are staying or changing loyalties based upon their prior experience in the market. Net:  this program is really a stimulus package for dealerships, which all happen to be domestic.

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Second, there has been a lot chatter about dealers being unable to get their deals approved.  AutoNews.com reported yesterday (link requires registration) that out of 219,000 applications for reimbursement, only 1,600 reimbursements have been made, and 14,000 have been approved.  Because I’m feeling very graphical this week, here is a pretty chart to illustrate those numbers (click on image for larger version):

Dealer Reimbursement Statistics - Cash for Clunkers

Less quantitative, but still interesting, data points can be found on F&I Magazine’s online forums. A user posted a question asking if anyone had received reimbursement yet, and all the responses were negative as of this writing.

No doubt much of the backlog is because the NHTSA is overwhelmed.  But also, the National Automobile Dealer’s Association posted a pdf document, “Cash for Clunkers Update and Tips”, which says, “NHTSA informed NADA this morning: “The vast majority of transactions we are receiving are being rejected due to obvious omissions or poor quality documents that are illegible.”  I’m not sure whether NHTSA meant to say “The vast majority of transactions that we are rejecting are due to…” instead, because what they are saying is that they’re rejecting most applications.

Either way, if you are having problems getting your employees to follow procedures and fill out documentation correctly, that is our bread and butter - we can help!  Contact us at sales@redflagsmadeeasy.com or call 512-436-0031

Update 08/18/09:  This still seems to be an issue.  Automotive News reports, “Dealers Shun Clunkers Amid Growing Ire over Slow Payments” (link requires registration).  From the article:

More than 70 dealers out of about 580 responding to an Automotive News survey today said they also had suspended clunker sales because of repayment concerns and other headaches they’ve had managing the program.

Update 08/20/09: The National Automobile Dealers Association has asked the Dept. of Transportation to suspend the program, and warned its members that they may not be reimbursed if they continue to accept CARS deals.

In Part I, I wondered if the “Cash for Clunkers” Program steered existing domestic car customers to the Big Three’s foreign competitors.  Starting with this post, I’ll show the results of my research.

Two disclaimers:  first, I am a big believer in free trade.  If the CARS program had limited new purchases to domestic vehicles only, the U.S. would be violating our agreements with our trading partners.  As President Obama found out earlier this year in attempting to keep stimulus spending to US vendors, the government can’t discriminate like that without repercussions from our allies, or even from foreign competitors who have direct investments such as manufacturing plants in the US .

Second - the data I have to work with is imperfect.  What I would like to see is the number of domestic vehicles have been destroyed vs. the number of new domestic vehicles purchased under the program.  The Dept. of Transportation is not releasing much data yet, so we’ll work with what we can get from outside sources.

My data is based on Edmund’s list as it was on August 3rd.  It is not a complete list because Edmunds assumes, reasonably, that if the vehicle has a book value of over $4500 the owner will sell or do a trade-in rather than use the CARS program.  Also, Edmunds counts different trim options as different models; I don’t.  In other words, I count a 95 Chevy Blazer with rear wheel drive as the same model as a 95 Chevy Blazer with all wheel drive.  Edmunds also does not list most vehicles manufactured before 1989.  Finally, I ignore minority fractional ownership when listing OEMs and brands (for example Ford owns a small percentage of Mazda).

Let’s look at the number of models eligible for “clunker” status, by manufacturer (click the graphic for a bigger view):

Eligible Clunkers

Now let’s look at the number of eligible new models.  This is also based on a list from Edmunds, and again I do not count different trim packages as different models:

Eligible New Models

Here’s a visual representation of the geographic source of the clunker models:

Clunkers by Country

And here’s the home countries of new models eligible for the CARS program:

New Car Models by Country

Does this prove that GM car owners are moving en masse to overseas competitors because of the CARS program?  No.  I don’t know how many vehicles per model are out there to use the program.  There could be two million ‘99 Toyota Tacoma owners out there ready to buy brand new ‘09 Chevy Silverados, and only one ‘99 Silverado owner waiting to buy a new ‘09 Tacoma.  I do think it is a good indication that car owners are being at least partially incented to buy from manufacturers who are traditionally strong in small, high-milage vehicles, i.e. Japanese manufacturers.

Why does it matter, given global manufacturing and the fact that foreign car companies manufacture vehicles in the US?  Because the US government just spent about $80 BN on GM and Chrysler, and by skewing the incentive towards smaller vehicles, they’re undermining their own rescue efforts.

There is absolutely no question that CARS has provided a desperately needed boost to dealerships.  It’s also provided an enormouse opportunity for Toyota, et al to take market share away from the Big Three.  Had I designed the “Cash for Clunkers” program, I would have applied it across the board rather than to select models; it’s not like environmentalists are happy with the Program as it is anyway.  This would have given the Big Three more of a chance to retain their core customers while they retool.

UPDATE 08/06/09:  Edmunds’ auto industry site has an article with some additional quantitative data; they collected a sample of actual Cash for Clunkers transactions.  From the article:

Edmunds.com’s data shows vehicles traded in under the Cash for Clunkers program are not at all different from the vehicles traded in before Cash for Clunkers…

…the data shows the vehicles purchased to replace the clunkers turned in under the government’s CARS program were different from those that would have been purchased without the clunker reimbursement. Most notably, they were more apt to be cars and they were vehicles that delivered much better fuel economy.

In other words people are trading in the same vehicles as before (Ford Explorers and F-150s hold the top two spots) but they are purchasing more fuel efficient cars than they normally would. That would seem to support my theory, but Edmunds list the Focus and Escape as the top two new models, and their top ten list does not show movement away from domestic vehicles. On the other hand, the press release from the National Highway Transportation Safety Administration on the CARS Program shows Detroit claiming only four of the top ten new vehicles spots.

UPDATE 08/18/09:  MarketingCharts.com has some interesting charts and data:

Data released by the National Highway Traffic Safety Administation revealed that the #1 vehicle being traded in under the program is the Ford Explorer, and all of the top 10 trade-ins are American-made vehicles…only four of the top 10 [new] models are manufactured by GM, Chrysler or Ford.

And the Financial Times, in “Cash-for-clunkers boost Japanese Car Sales”, reports that

Toyota has an 18.9 per cent share of vehicles bought so far, putting it ahead of General Motors with 17.6 per cent and Ford with 15.4 per cent. Chrysler is in fifth place, after Honda.

(hat tip: Sari Signorelli)

We visited a Volkswagen dealership on Saturday.  I’ve always loved Audi - a dealer friend of ours once tried to sell us a used Mercedes by saying, “Think of Mercedes as Audi with ONE circle instead of four” - and we wondered what their bigger but more affordable brother was offering.  Besides moving the Volkswagen CC VR6 to the top of my Want list, a couple of things came out of that visit:

First, business:  the sales rep was professional, personable, and very knowledgeable; the kind of  guy that you would feel good about buying a car from.  Likewise the dealership was new, clean, and all the employees from the receptionist on up were professional and responsive even on on a busy weekend day.

And yet, the dealership process for securing the customer driver’s license during the test drive was, “make a copy, and leave the copy face up on an otherwise empty desk right next to the showroom floor”.    When my husband commented on it, the sales rep moved the copy to a less visible area but it was clear that protecting customer data was not a big priority; I doubt the sales rep had ever heard of the Red Flags Rule.  Under the Rule, car dealerships have a responsibility to protect themselves and their customers from “reasonably foreseeable risks of identity theft” and safeguarding customer non-public information is certainly part of that.  We’ve said it before: treat customer data like cash.  If you wouldn’t leave cash lying around, don’t leave a driver’s license or credit app lying around.  The solution can be as simple as having the receptionist or tower guard those documents so long as they lock them up when they leave their desk.

Second:  in conversing with the sales rep, he mentioned that business was good; the start of a new model year is usually busy for dealers, but this year he was seeing “a lot of people we don’t usually see” because of the CARS (car allowance rebate system).  This started me thinking about “Cash for Clunkers” and its long term impact on domestic auto manufacturers.

US manufacturers have dominated the large car/truck/SUV market for years, whereas non-US manufacturers have dominated the small/fuel efficient market.  Since CARS encourages customers to buy fuel efficient vehicles, does it essentially encourage exising GM, Ford, and Chrysler customers to become Toyota and Honda customers?  I decided to do some research.  Stay Tuned for Part II.

For the third time, the FTC is delaying enforcement of the Red Flags Rule in order to give businesses time to learn about and become compliant with the Rule.  The FTC is also stepping up their outreach and education efforts.  Enforcement is slated to begin on Nov 1st, 2009, fully one year after the original deadline.

From the FTC’s press release:

To assist small businesses and other entities, the Federal Trade Commission staff will redouble its efforts to educate them about compliance with the “Red Flags” Rule and ease compliance by providing additional resources and guidance to clarify whether businesses are covered by the Rule and what they must do to comply. To give creditors and financial institutions more time to review this guidance and develop and implement written Identity Theft Prevention Programs, the FTC will further delay enforcement of the Rule until November 1, 2009.

The release specifically mentions health care providers and a request from Congress, so it seems that the AMA has had more luck lobbying Congress directly than it did going straight to the FTC.

That said, the FTC is correct when they state that their hands are effectively tied on this matter; Congress defined “creditor” almost to the point where it means “every business, non-profit, or any other organization that ever comes in contact with money” (exaggerating a bit) and it is up to Congress to revise it. In mandating that organizations facing very little risk from or of identity theft follow the Red Flags Rule, they diminish the impact of the Rule, and harm organizations like car dealerships, which really are at risk.

UPDATE:  The Wall Street Journal has a story on the delay (subscriber article):

Implementation of an identity-theft program entails certain research and training expenses. Failure to comply may subject a company to penalties of up to $3,500 per violation. But Nicholas Economidis, an underwriter for Beazley Group, said that “failure to comply will increase a company’s exposure to negligence claims.” Beazley, based in London, provides companies with identity-theft and data-theft insurance.

American Bar Association President Thomas Wells Jr. plans to file suit against the FTC by the end of the week if the FTC does not drop its plan to enforce the Red Flags Rule starting August 1st. The ABA contends that the FTC has no right to regulate the legal profession (and in fact the ABA won a lawsuit to that effect in 2005) and that lawyers should not be subject to the Red Flags Rule:

The ABA’s current beef with the FTC is defining lawyers as creditors.

In June, Wells issued a statement urging the FTC to exclude lawyers from the regulations, known as the “Red Flags Rule,” which require businesses and organizations that act as creditors to establish programs for preventing identity theft.

“The FTC has taken the position that professionals like lawyers, who regularly bill their clients for services after those services are rendered, are creditors under the ECOA,” Wells says.

That is almost identical to the AMA’s main argument - that doctors who bill after services rendered are not creditors - which we covered here. It will be interesting to see how this plays out.

For car dealers, there is no question as to whether they are subject to the Red Flags Rule since they are specifically mentioned in FACTA. There may be another delay in enforcement, though, as the FTC sorts out requests from Congress, which, predictably, is under pressure from lobbyists such as the ABA and AMA.

I admire them for not wanting to waste so much paper, but maybe recycling isn’t always the answer.  A Boulder, CO Kia dealership that went out of business threw their customer records in recycling bins resulting in police involvment and possible criminal charges.

This has happened before, resulting in huge fines for the offender.  The FTC has numerous resources for protecting and disposing of customer data; learn more here.

Via:  datalossdb.org

Texas auto dealerships should be on the lookout for these two men, who have stolen 19 cars worth $750 thousand from three Houston dealers:

Benigno “Benny” Diaz, 49, and Jorge Demichelli, 59, sought employment at the dealerships and used false information to obtain credit and/or property from the dealerships.

We’re familiar with this scam since a similar incident happened to one of our customers before they hired us.  The thief was hired as a salesperson at the dealership.  His accomplices came to the store and provided data from stolen identities.  The “salesman” would fill out the credit app for them, get a blurry photocopy of the stolen ID, and generally run interference for the “customer” so nobody else at the dealership would look too closely at the customer or the ID data.  The dealership had no indication anything was amiss until they received notification from the banks that the first payments had not been made.  When the dealership started to connect the dots, the “salesman” disappeared.

Adding insult to injury, not only did the dealership lose the inventory, but they paid the thief commissions on the “sales”.

When you create your Red Flags Program, you must take into account any previous experiences your dealership has had with identity theft.  Also, if you experience identity theft afterward, you must update the Program to reduce the likelihood of the same incident happening again.   For our customer, we recommended that they add a second ID check at closing, where F&I would examine the ID (not a copy) before handing over the keys.  We also recommended that they restrict spot deliveries and prohibit remote sales; the customer must show up at the dealership in person to complete the deal.

Finally, in the case of Diaz and Demichelli, the identity data they used was stolen from people in Puerto Rico.  Dealerships are obligated by the Address Discrepancy rule to have policies and procedures “to enable them to form a reasonable belief that the consumer report they’ve received relates to the consumer on whom they requested the report”.  In other words, when you pull a credit report, if the address the customer provides doesn’t match the address the credit bureau has on record, you should investigate further.

If the thieves gave Houston area addresses, the credit bureau would have flagged that to the dealership as an address discrepancy and the dealership should have requested  utility bills or other address data to verify the customer’s identity.  If the thieves gave the Puerto Rico addresses of their victims, the situation is a bit trickier; there is nothing wrong with selling cars to out of state customers, however F&I should have done a double take and investigated a bit further, especially if there were a sudden glut of “customers” from Puerto Rico.