Ask the dealer principal or GM about this, and invariably their stock answer is that it’s being taken care of. However when pressed for honesty, the finance director and desking manager usually paint a different picture. Internet sales departments, in particular, are prone to compliance mismanagement in this area.

In this FTC link, a subsidiary of Equifax settled with the FTC for $350,000 on charges that it failed to provide adequate disclosures.

Under the Fair Credit Reporting Act, the company allegedly failed to provide, “ ‘Notice to Users of Consumer Reports: Obligations of Users Under the FCRA,’ which notifies users of consumer reports of their statutory obligations, including notifying individuals if the user takes adverse action against them based on their consumer report,” as well as other related disclosures.

One scam I’ve seen involves grifters with incredibly bad scores going around to dealerships filling out apps knowing in advance that the special finance department can’t help them. Their app is a dead deal (or DOA), and a disgusted desking manager throws the signed privacy notice into a cardboard box. The frustrated sales person may likewise do something foolish with the deal jacket.

The grifter then returns in about six to eight months and claims he never authorized the dealership to pull his or her credit report. Since it was a dead deal, the dealership may or may not be able to find the signed privacy notice or application or a Xerox copy of the driver’s license- thereby being unable to provide evidence that the grifter had indeed been at the store and authorized the pull; and the store management is left with the open question as to what the grifter wants and what it will take to get rid of him or her.

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)

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”.

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.

__________

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.

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)

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.

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.

For example, say a young college student is named John Doe, and his father is John Doe Sr. Junior’s driver’s license reflects his permanent home address, which is also his father’s address. Junior has bad or no credit history, so he uses his father’s social security on the credit application.

Junior would pass most of the standard Red Flags checks. His appearance would match his photo ID. His name would match the name associated with his father’s SSN on the credit report. The address on his license and credit application would match the address on the credit report, so there would be no “address discrepancy” flag on the credit report.

Even if Junior fully intends to pay for the vehicle himself, using someone else’s social security number turns his questionable scruples into identity theft. Remember, using even one piece of someone else’s identifying information to commit fraud constitutes identity theft.

Also, an automated Red Flags check in a lender-portal, OFAC, or bureau-portal may not turn up any significant alerts either. (They’re really spider software modules.) If the date of birth is flagged, in most instances the fraudulent applicant would be familiar enough with the “real” social security person to answer any security questions posed by the software; and F&I would jot the discrepancy down to either a software glitch or credit report error.

I have found this compliance misstep often in dealerships that Red Flags Made Easy has consulted with, especially in markets where common Hispanic surnames exist. That is why we advise that F&I or the Desk check that the birth date on the credit report matches the birth date on the driver’s license, and also that the credit report history is consistent with the age and demographic appearance of the applicant. (For example, the customer’s drivers license lists his birth date as 1985, yet the credit report shows he bought a house in 1990.)

An examination of the complete credit history is crucial to determine where the desking or F&I manager is going to “shop” the deal anyway (especially as lender banks announce changes almost monthly on their paper), so adding this scrutiny to the store’s Red Flags Check List does not really encumber or delay the sales process.

Failure to catch this common misrepresentation can lead the dealership having to buy the vehicle back from the bank, and or civil litigation from an unappreciative “Uncle” or similar relation. Either way, it’s a costly mistake that could have been avoided through appropriate compliance.

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.