The Red Flag Rules are the layman’s terms for the regulations written by the Federal Trade Commission to enforce the Fair and Accurate Credit Transactions (FACT) Act of 2003. The regulations apply to financial institutions and creditors that manage “covered accounts,” and they were originally supposed to go into effect on November 1, 2008.
I have often thought that the federal government ought to invest in hired marketing guns because they sometimes have real trouble in getting the word out. When the FTC discovered that there was still a lot of confusion in the business community as to which businesses had to comply and what constituted compliance, they pushed back the effective date to May 1, 2009.
Except that now, evidently, there is still enough of all of the above to have caused the FTC to push back the compliance date yet another three months, to August 1,2009. In fact, there has been enough pushback on these regulations that there have been calls to send the whole thing back to Congress to try again.
“Given the ongoing debate about whether Congress wrote this provision too broadly, delaying enforcement of the Red Flags Rule will allow industries and associations to share guidance with their members, provide low-risk entities an opportunity to use the template in developing their programs, and give Congress time to consider the issue further,” FTC Chairman Jon Leibowitz said in a press statement.
So, what is this Red Flag Rule and why does it seem to be giving everybody amnesia?
The law passed by Congress back in 2003 seeks to get firms to implement best practices for noting and dealing with patterns, practices and activities that may indicate possible identity theft (so called “red flags”).
Most small businesses that must comply with the rules will fall under the category of creditor rather than financial institution - although it’s worth noting that the microenterprise development institutions that have gained so much attention for making microloans straight through the banking crisis will have to comply, too.
A creditor is simply any firm that extends credit to its customers, including those who accept installment payment arrangements. Types of firms affected include car dealerships, mortgage brokers, utility companies, telecommunications companies and any other type of business that extends any kind of consumer credit.
In addition, these rules should cover entities that extend trade credit to small businesses and nonemployers (the “self-employed”). And, finally, the rules apply to firms that make use of consumer credit reports: insurers, landlords, employers, mortgage brokers, car dealerships and collection agencies.
Since these rules have been put into place, there has been a certain amount of posturing among various trade organizations. They contact the FTC to assert that the rules do not apply to their members and then, when the FTC informs them that they are mistaken, they yell for more time because their folks aren’t ready.
The additional delay will give the FTC still more time to get the word out, although they still appear to be having trouble with that. It’s too bad, too, because they have put together a very good set of tools to help companies get their compliance ducks in a row.
Many small business owners forget about the FTC and the possibility that there are regulations there that affect them. That can be a mistake; recall that the FTC is the federal agency that regulates trade, which is what we all do, after all. Under the circumstances, the agency web site may be worth a bookmark.
In addition, most small business owners can find help, get necessary contact information and compliance assistance through Business.gov, the federal government’s small business information portal and community.
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About the Author: Dawn Rivers Baker, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the editor and publisher of The MicroEnterprise Journal. She also blogs at The Journal Blog.