A COMMON SENSE APPROACH TO RED FLAGS FOR SMALL BUSINESSES
How the New Rules Effect You and What You Can Do to Make Complying Easy
According to the FBI, 9.91 million Americans were identity theft victims in 2007 alone. That's 24,658 per day, 1027 per hour, and 17.1 per minute. Furthermore, these 2007 identity theft victims experienced losses totaling $52.6 billion. At a time when many small businesses are running on fumes, a single loan granted to an Identity Thief can make an already difficult financial situation devastating. In response to what has been labeled by some as an Identity Theft Crisis, the Federal Trade Commission (FTC) will require businesses to create programs that "provide for the identification, detection, and response to patterns, practices, or specific activities - known as 'red flags' - that could indicate identity theft."
The Red Flags Rules will affect over 11 million businesses that extend credit or loans to their customers. Yet many of the people who own and manage those businesses don't know much about the rules. If you're one of those people, don't fret, the team at {SEE} magazine has gathered all you'll need to know to be sure that the road to compliance is a smooth one.
First, let's {SEE} if the rules apply to you. The Red Flags Rules apply to financial institutions and creditors with covered accounts. Essentially, if you defer payment until after your product or service is delivered the rules apply. The rules are the same for everyone, all businesses must have a written program to red flag potential identity theft, but how this program is applied depends on your type of business. Thus we have taken a more in depth look at the different types of businesses that will be affected to help you determine the right course of action for compliance.
Listed below are some examples of how the Red Flags Rules will effect specific industries.
Big Ticket Retailers
Identity thieves often use stolen credit information to purchase big-ticket items such as electronic equipment and jewelry. These items can be quickly resold for cash making them harder to track. Essentially they are using big-ticket retailers to launder money. This activity not only makes them more difficult to catch, but has the added affect of putting your products on the black market where thieves resell merchandise. This can lead to bigger problems as others see your products as having black market value.
To put a stop to this, big-ticket retailers must pay special attention to their credit originations. A good Red Flags Program for your business should emphasize verifying identification documents during originations with multiple sources
Further, even if your business is relatively small, it makes sense to automate your identity verification process. You may not need a complex decisioning platform, but a straightforward identity verification program insures that you'll get objective third party verification regardless of your staff's experience and judgment.
Credit Unions and Small Banks
Identity thieves rely on confusion and oversights in the banking industry to steal and they pose a threat to every business in the banking industry, large and small. Because identity thieves prey on financial institutions and their data, many of you already do some level of red flag detection and response. In that case, complying with Red Flags Rules will serve as a backup to ensure that your program for dealing with Red Flags is working and up to date.
Banks and Credit Unions must pay particular attention to address related issues when creating a Red Flags Program. The most common issues are:
- Address discrepancies on new accounts
- Repeated returned mail as undeliverable while account activity continues.
- You are notified that the customer is not receiving paper account statements.
While these red flags are common, financial institutions must be aware of a litany of red flags. In addition, their programs should include comprehensive training of all staff members.
Automotive Dealers
Auto dealers must pay special attention to identity verification for a number of reasons. First, identity thieves target auto dealers because stolen cars can be sold for cash. Buying a car with a stolen identity and then quickly reselling it to a "chop-shop" is one of the easiest ways for thieves to throw law enforcement off of their trail. Secondly, since auto dealers allow customers the opportunity to try out the product in test drives, you must be more vigilant prior to the test drive to ensure that the car comes back to the lot.
In developing your Red Flags Program it is crucial that you not just pay lip-service to identity verification, but that you train your staff on the correct procedures. Turning down a potentially large sale can be difficult. However, selling a vehicle to an identity thief on credit can be catastrophic. So be sure to convey the importance of identity verification and that it is not just a hoop that they must jump through. One way to do this is to spread the word, early on, that the Red Flags Program is board approved and legally binding. The earlier people understand your commitment to Red Flags the easier it will be to craft a successful program that protects your dealership.
Property Owners and Managers
Real estate can be affected by Red Flags in different ways. Whether you are receiving applications for a home equity loan or a lease on an apartment, you'll need to be sure to have a Red Flags program in place. Address and other discrepancies are significant Red Flags of direct fraud of lenders. Since an apartment can provide a fraudster with a new address as part of stealing an identity, Landlords need to see themselves as part of the larger Identity Theft picture. A complete Red Flags Identity Theft program is essential getting the right information from and about each new applicant.
It can be tempting to look at things like Red Flags as an impediment, which is why it is crucial that the word come from the top that implementing a Red Flags Program is an important and valuable part of the way you do business. With strong leadership and a full understanding of the program you can avoid staff members feeling like the program is a burden.
Collections Staff
Although Red Flags Rules leave reporting suspicious activity up to the discretion of the business owners, just the fact that the rules will be in effect will almost certainly result in a rise of the number of those reports. This is good news for the collections industry. It means that there will be more data available to mine and determine if someone is using multiple identities to avoid collections, specifically more data on superstitious or "high risk" individuals.
Ideally the Red Flags rules will call attention to the identity theft crisis and businesses will take implementing the rules seriously enough to have an impact. After May 1st 2009, extending credit without a Red Flags Program in place may be construed as negligence. One common concern for collection departments is the liability of reporting inaccurate delinquencies to the credit bureaus on the credit file of an identity theft victim. Can you put a dollar value on good credit? If that victim of ID Theft is in the middle of procuring a mortgage when inaccurate delinquencies hit his/her credit file, it may be possible to determine damage. What interest rate was offered before the negative marks began hitting the credit file and what interest rate is available now? Once the Red Flags Rules set the industry standard, we may find out the penalties to businesses that do not meet that standard. As a collections person, you can do your part by encouraging your company (if you are in-house) or your clients (if you're with an agency) to share knowledge and information with other similar companies about designing and implementing their Red Flags Program.
For questions about the Red Flags Rules you can always visit the MicroBilt website's Red Flags Questions Hotline and submit your question online.
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