Red Flags Regulation Compliance and ROI

MBA (7/7/2008 ) Palaparty, Vijay
Meeting FACT Act Red Flags regulation requirements goes beyond compliance alone, presenting opportunities for significant return on investment.

Companies can reduce overall fraud, protect existing revenue and improve business processes while working toward meeting the regulation's Nov. 1 deadline, said Dennis Dixon, president of Zoot Enterprises, Bozeman, Mont.
“Aside from meeting governmental regulations, financial institutions have a lot to gain through compliance with Red Flags rules,” Dixon said. “The ability to automate applications that normally require manual review decreases the cost per booked account. By reducing fraud losses and clearing address mismatch applications, a significant ROI can be achieved.”

The regulation imposes responsibilities on companies to prevent consumer identity theft. It affects a range of companies including banks, credit unions and mortgage lenders.

“This rule is not just about complying but also about protecting reputation, business and generating new business,” said Sai Huda, chairman and CEO of ComplianceCoach, San Diego. “The way you can earn return on investment is if you do it right, take the time to do it right and protect customer information and prevent identity theft. There is a return in the long run—it generates goodwill. You will create competitive advantage; in the long run it affects your profits.”

Zoot, a provider of credit decisioning and loan origination products and services, built its Red Flags suite to offer compliance and saving opportunities by reducing fraud and recovering credit applications.

“As financial institutions work to implement solutions in their Red Flags programs, there are ways to think of red flags in other ways than only compliance,” said Eric Lindeen, director of marketing at Zoot. “On the pre-screen side, manual reviews can be a threat to financial institutions and their ROI. If they get a significant number of red flags, they can’t handle it.”

Lindeen said optimization in workflow automation is vital to reduce costs, keeping overheads low while still offering credit.

“Automation can save institutions 60 percent of the costs incurred with becoming compliant,” Huda said. He added that smaller companies could spend up to $10,000 in becoming compliant. Mid-size companies could spend $25,000 or more and larger companies could spend $50,000 or more.

ComplianceCoach offers web-based software that uses a five-step system to enable compliance in financial institutions. It walks users through questions and produces the required risk assessment, mapping of red flags to appropriate detection and response procedures, the written program, training materials and compliance status report—elements required to pass an audit. The product offers an overall Red Flags program whereas Zoot specializes in credit decisioning and loan origination components.

“We think of red flags are for revenue generation,” Lindeen said. “They not only reduce costs, but should also reduce fraud expenses. Lots of dollars can be recovered if it is not treated as separate.” Zoot offers integration services so its products and services can fit into companies’ existing workflow or decisioning environments.

“Automate everything you can,” Lindeen said. Some financial institutions choose to automate piecemeal but have manual links that tie separate areas together. “If you integrate with automated links, then it’s an end-to-end solution,” he said. “You can better eliminate delays and any associated risk.”

Lindeen agreed that though total automation is ideal, some credit applications still require manual processing due to varying circumstances. “But we should keep that number to a minimum” he said. “Manual processing means four to five times the amount of staff time to review. It’s not feasible in this market. Automated review reduces manual review costs to one-tenth.”

Huda said the mortgage lending environment is currently very focused on credit risk—so much so that it is not aware or only partially aware of the upcoming Red Flags deadline. “It could be that because they don’t understand the rule, they think they can get into compliance in a few days,” he said. “Only a few have started compliance efforts—a majority is putting it off.”

Huda added that additional awareness efforts pushed by regulators as well as trade groups will set more of the industry in motion. “Our advice is not to wait—if you wait even until 30 days prior to the deadline, compliance is difficult because it requires a lot of work.”

Penalties for noncompliance, where institutions would be found in violation of Fair Credit Report Act, range $2,500 per account in addition to any other resulting lawsuits and fines, Huda said.