LAS VEGAS – Auto dealers want to fight identity fraud as much as any upstanding citizen, but they’re reluctant to become quasi-investigators for the federal government.

So say lawyers trying to limit dealer involvement in proposed “red-flag” regulations mandated by Congress and being developed by various agencies, including the Federal Trade Commission.

The regulations would require creditors to report identity-fraud suspicions from customer-loan information. Dealers are considered creditors because of their auto-financing activities.

“It has caused an uproar,” says Michael Benoit, a Washington-based attorney and partner in Hudson, Cook LLP, a law firm that represents dealers.

Some requirements would be fairly simple, such as making sure a would-be borrower looks like the photo on his or her driver’s license. But others are beyond the detection talents of typical dealership personnel, Benoit says.

“I don’t know many dealers or (dealership) F&I (finance and insurance) offices that can look at credit reports and identify unusual activity,” he tells the 2007 Auto Finance Summit here. “I’m hoping for more flexible standards.”

Benoit says lending institutions already have processes in place to detect identity theft and other frauds. It is superfluous to expect dealers to do the same thing, he says.

Andrew Koblenz, the National Automobile Dealers Assn.’s general counsel, agrees.

If General Motors Acceptance Corp. uses an anti-fraud system to check social security numbers, death lists and the like, a dealer handling a GMAC loan application shouldn’t be legally required to duplicate such efforts, Koblenz tells Ward’s.

“We want to fight identity theft, and dealers have a tremendous self-interest in not selling a car to an identity thief,” he says. “But the real-world impact is that it would burden dealers. One estimate is that it would add five hours to the credit-application process.”

Only dealers who run “buy here, pay here” financing operations – in which dealers are direct lenders – should be expected to take active roles in the red-flag activities, Koblenz says.

Red-flag proposals that NADA considers egregious are “beyond the scope of the statutory mandate, unlikely to achieve the anti-theft goals of the statute, ambiguous and exceedingly burdensome,” Paul Metrey, NADA’s regulatory affairs director, says in a letter to the FTC.

One of the proposed 31 red flags that would trigger government-mandated action is incomplete information on a credit application. But Metrey says that’s common and not indicative of identity theft.

“Identifying such attenuated occurrences as a trigger for additional compliance activity only serves to elevate an already high regulatory burden without producing a corresponding benefit in identity-theft prevention,” he tells the FTC.

“To avoid this unintended result, the agencies should narrow the delineated red flags to those that indicate a reasonable likelihood of identity theft,” he adds.

Metrey says a “more prudent approach” and one more in line with the congressional intent would be for regulated entities to demonstrate how their existing policies and procedures can combat ID theft.

Benoit says that makes more sense than imposing strict government regulations.

“We’re looking to find out if creditors will be allowed to adopt their own processes,” he says.

The red-flag effort is part of a trend that since 2000 has resulted in dozens of government regulations affecting dealers, says NADA Chairman Dale Willey, a Kansas dealer.

“The new regulations come at a steep price,” he says. “Dealers must devote more time to compliance.”

But some regulations offer dealers certain opportunities, he says, citing the adverse-action notification requirements of the Fair Credit Reporting Act and the Equal Credit Opportunity Act.

Those acts require dealers to send formal letters to people who have been denied auto financing.

“An adverse-action notice is an opportunity to educate people about credit awareness 101,” Willey says. “We hope some of our customers will come back to us when their credit is better.”

As for the red-flag proposals, Willey says it is up to trade organizations such as NADA “to help regulators understand the real-world results of their actions.”

The regulators acknowledge dealers have raised legitimate concerns, Willey tells the 2007 F&I Management and Technology conference. “The better information we can provide to people who regulate us, the better they can adopt rules that Congress intends and that we can comply with.”

sfinlay@wardsauto.com