Texas Motorcycle Dealers Association
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Regulatory & Legislative Update Red Flags Alert: The FTC’s Identity Theft Texas motorcycle dealers should be aware of the new federal “Red Flags Rule” which will be enforced beginning August 1, 2009. Almost all dealers will be subject to the new rule, because it applies to practically any business that provides credit. You must adopt a program complying with the rule by August 1, 2009. The “Red Flags Rule” requires businesses to help prevent identity theft by adopting procedures to identify “red flags” that indicate when a customer might be fraudulently using another person’s identity to make a purchase. The rule requires businesses to develop and implement a written “Identity Theft Prevention Program” that is “designed to detect, prevent, and mitigate identity theft.” The Program must focus on identity theft “Red Flags,” which are patterns, practices, or specific activities that indicate the possible existence of identity theft. Helpful resources for understanding and complying with the Red Flags Rule are available on the FTC’s website at: Below is a link to a sample policy that some dealers may be able to use as a starting point in developing and adopting a Program before August 1, 2009. The sample policy is for the Association and is not legal advice to specific members of TMDA. The sample policy cannot and is not intended to cover every situation. For instance, while some smaller dealers may be able to use a sample policy or the FTC’s template, some larger, more complex operations likely will need a more detailed program to comply with the law and avoid possible enforcement penalties. Individual members should consult with an attorney for specific advice regarding the Red Flags Rule and the development of a Program. Sample Theft Prevention Policy A more comprehensive explanation of the Red Flags Rule is set out below. If you need assistance, feel free to contact Carl R. Galant with McGinnis, Lochridge, & Kilgore, LLP in Austin, Texas at 512-495-6083. BACKGROUND In late 2007, the Federal Trade Commission (“FTC”) and other federal agencies issued regulations entitled “Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003.”[1] The regulations impose duties on certain entities regarding (i) the detection, prevention, and mitigation of identity theft (the “Red Flags Rule”), and (ii) responding to discrepancies in addresses for consumers on consumer reports (the “Address Discrepancy Rule”). The regulations became effective January 1, 2008, with compliance initially required by November 1, 2008. Because numerous entities expressed confusion and uncertainty about the applicability of the Red Flags Rule, the FTC suspended enforcement of the rule until May 1, 2009, and has now extended that suspension until August 1, 2009. The FTC has specifically stated the Red Flags Rule applies to retailers that defer payment for goods or services or assist customers in completing credit applications. Thus, if you provide credit or payment plans to your customers, or assist customers in obtaining credit or payment plans, then you must comply with the Red Flags Rule. Similarly, if you use consumer credit reports, you must comply with the Address Discrepancy Rule. Before August 1, 2009, all dealers must assess their risk of identity theft, and develop and implement a written identity theft prevention program to meet that risk. RED FLAGS RULE Applicability of the Red Flags Rule Every dealer must review its billing and payment procedures to determine if it is covered by the Red Flags Rule. Most dealers will be covered by the rule. Dealers are subject to the requirements of the Red Flags Rule if they meet a two-part test. First, the dealer must be a “creditor.” Second, the dealer must offer “covered accounts.” A dealer is a “creditor” if it regularly extends, renews, or continues credit. For example, you are a creditor if you regularly allow customers to set up payment plans for the purchase of products or after repair services have been rendered. Dealers are also considered creditors if they help customers get credit from other sources—for example, if they distribute and process applications for credit accounts tailored to the vehicle industry. On the other hand, dealers who require payment before or at the time of purchase or service are not creditors under the Red Flags Rule. Simply accepting credit cards as a form of payment at the time of purchase or service does not make you a creditor under the Red Flags Rule. The second key term—“covered account”—is defined as a consumer account that allows multiple payments or transactions or any other account with a reasonably foreseeable risk of identity theft. The accounts you open and maintain for customers are generally “covered accounts” under the law. Duties Under the Red Flags Rule Dealers that are covered by the Red Flags Rule are required to develop and implement a written “Identity Theft Prevention Program” (“Program”) that is “designed to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account.” The Program must focus on identity theft “Red Flags,” which are patterns, practices, or specific activities that indicate the possible existence of identity theft. The required elements of each Program include reasonable policies and procedures to:
Each creditor required to implement a Program must use the Interagency Guidelines on Identity Theft, Prevention, and Mitigation (the “Guidelines”) in developing its Program. These Guidelines lay out categories and examples of Red Flags that creditors must consider including in their Programs. The categories of Red Flags, which are intended to assist dealers in the development of their Programs, include:
The Red Flags Rule allows for discretion and flexibility in the construction of the Program, and state that a Program should be appropriate to the size, complexity, nature and scope of the entity. Thus, a Program for a large dealership could be substantially different from that of a small dealership. A dealer covered by the Red Flags Rule could incorporate appropriate existing safeguards against identity theft, as part of its Program and thus avoid duplicative processes. Consequences for Failure to Comply Violators are subject to financial penalties, ranging from up to $1000 dollar fines to actual and punitive damages resulting from injury to a consumer. More importantly, however, establishing a Program provides reassurances for customers. ADDRESS DISCREPANCY RULE Applicability of the Address Discrepancy Rule The Address Discrepancy Rule imposes certain requirements on users of consumer reports. Dealers may use consumer reports, for example, to make decisions about credit for customers or as part of background checks on employees. Some dealers may be subject to the Address Discrepancy Rule without being subject to the Red Flags Rule requirements outlined above. Requirements of the Address Discrepancy Rule The Act and Address Discrepancy Rule require consumer reporting agencies (“CRAs”) to notify users of consumer reports (such as motorcycle dealers) (“Users”), of substantial discrepancies between the address provided by the User and the address on file with the CRA. Once a User receives a notice of address discrepancy, the User must have policies and procedures in place to enable the User to form a reasonable belief that the consumer report relates to the consumer about whom information was requested by the User from the CRA. Such policies and procedures could include, for example, (i) comparing the information in the consumer report provided by the CRA with other information obtained by the User about the consumer, and (ii) verifying the information in the consumer report with the consumer. The User must also have certain policies and procedures in place for furnishing what it reasonably determines to be the correct address of the consumer back to the CRA that initially provided the notice of address discrepancy. CONCLUSION Covered dealers now have until August 1, 2009 to comply with the Red Flags Rule. Their Programs should be based on the risks of customers purchasing products or services in the name of another without the other person’s consent. The structure of these Programs is very flexible and in many cases could incorporate already existing policies and procedures. Some dealers may be able to utilize the FTC’s template in creating their own Program; other dealers should consult with legal counsel to adopt a Program specifically suited for their business. If you need assistance, feel free to contact Carl Galant at 512-495-6083. 2009 Legislative Summary In this difficult legislative environment, TMDA still managed to have a very successful legislative session, positively impacting proposed legislation to protect and promote the interests of TMDA members. This session, TMDA engaged the services of Royce Poinsett, a government relations attorney with the Austin firm of McGinnis, Lochridge & Kilgore, LLP. Royce joined the firm after a long public service career in state and federal government, included serving as an advisor to the Texas Governor and the Texas House Speaker. Royce worked in conjunction with the dedicated and hard-working TMDA Legislative Committee. As a result, TMDA continued to raise its “legislative profile” with legislators and staff, maintaining a constant presence in the House and Senate, at committee hearings, and at legislative drafting sessions. As discussed below, TMDA was “at the table” when important legislation affecting dealers was considered, and TMDA was able to amend bills to protect and promote dealer interests. TMDA also established new relationships with leading legislators, relationships which will benefit TMDA in sessions to come. Introduction: Overview of the The session began in the House with an exciting Speaker’s race, resulting in a new House Speaker and dozens of new committee chairmen. In the Senate, the session began with a heated partisan debate over a controversial “Voter ID” proposal, resulting in an “amendment” to long-standing Senate rules of procedure. These two factors of the wholesale change in House management and the “Voter ID” debate set the stage for a slow and difficult session, which would culminate in a 5-day House filibuster and a final-day Senate meltdown. The House stage was set in the November 2008 elections, when voters elected a Texas House with an almost even 76-74 split. This bare 2-vote Republican margin is the narrowest political divide the Texas House has ever seen. The closest previous divide was a six-vote Democratic majority in the 2001 and 2003 sessions. This even split severely weakened the coalition supporting conservative Republican Speaker Tom Craddick, who had come to the office three sessions ago when the Republicans enjoyed a 16-vote advantage. At the beginning of the session in January, 65 Democrats joined with a dozen Republicans to replace Craddick with Republican Joe Straus of San Antonio. Straus promised a more moderate style as Speaker, in which power would be more evenly shared between Republicans and Democrats, and in which the Speaker would “let the House run itself” instead of setting and pushing a particular legislative agenda. After the election of the new Speaker, the session took on a slow and sluggish feel as Speaker Straus took a few weeks to hire his own new staff and to select his own new committee chairs. Straus appointed 18 Republican chairs and 16 Democratic chairs. Only a third of these appointees had been chairs the previous session, and only four of them were returning to chair the same committee as in the previous session. Therefore a full 30 committees had new chairs at the helm, and most of these new chairs selected their own new committee staff. This widespread overhaul left the House lagging several weeks behind the typical schedule, with committees taking longer than usual to organize and begin holding hearings on legislation, and with few bills making it to the floor for debate by the full House. Quickly, the prevailing fear in both chambers of the Legislature was of a legislative logjam in the House. This fear became reality in the waning days of session when House Democrats sought to prevent debate on the controversial “Voter ID” election law bill by engaging in a 5-day “filibuster” on the House floor. As a result, hundreds of bills died without being debated. Finally, on the last 2 days of session when the Voter ID legislation could no longer be brought up for debate, the House Democrats ended the filibuster and the House rushed to complete critical legislation which had been delayed. The Legislature did manage to complete most of its critical work: passing a state budget for 2010-2011-2011, raising the tax exemption for small businesses under the new state business tax, and bolstering funding for the state’s vulnerable windstorm insurance program. However, on the last day of the session, as a result of the general frustration and confusion in the House, the Legislature failed to reauthorize two of the most important state agencies, the Department of Insurance and Department of Transportation. Without reauthorization, these state agencies will have to begin “winding down” and going out of business. The Legislature also failed to authorize $5 billion in needed transportation bonds without which many "shovel-ready" transportation projects could be delayed canceled. This final-day breakdown will result in the Governor calling a short special session this summer in order to reauthorize the two agencies and authorize the transportation bonds.
These pieces of legislation received the most intense attention and advocacy from the TMDA Legislative Committee and the TMDA lobbyist, because they most directly affected the interests of TMDA members. Moving Off-Road Vehicles from New Dealer Protections within the Manufacturer/Dealer Franchise Laws Increased Fees for Inspectors and Stations Training Requirements for “High-Performance Motorcycles” New Texas Department of Motor Vehicles Recreational Off-Highway Vehicles Other Legislation Passed by the Legislature this Session These pieces of legislation also received attention and advocacy from the TMDA Legislative Committee and the TMDA lobbyist, because they also affected the interests of TMDA members and their customers. These bills were passed and signed into law. Purchaser Protections Three-Wheeled Passenger Vehicles Perfection of Lienholders/Assignees Temporary Tags Safe Operation of Motorcycles; Child Motorcycle Passengers TMDA also spent considerable time and energy monitoring and advocating on the following pieces of legislation, which were not passed by the Legislature. However, it is likely that some if not all of these bills will be re-filed and reconsidered during the next legislation session beginning January 2011. During the interim, the TMDA Legislative Committee and lobbyist will carefully follow these issues and make TMDA’s positions know to relevant legislators. Moving Off-Road Vehicles from Sales Tax to Motor Vehicle Tax Training Requirements for “High-Performance Motorcycles” Motorcyclist Protections Lane-Splitting by Motorcyclists Duties in Repairs/Inspections Transfer of Vehicle Disposal Motorcyclist Non-Discrimination California Emissions Standards Local Option Transportation Funding TxDOT “Vision 21”
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Texas Motorcycle Dealers Association
