Once again, on the eve of the Federal Trade Commission’s announced October 1, 2009 date for comm
encing enforcement of the Red Flags Rule, the FTC announced an extension of the enforcement date to June 1, 2010. This was the latest in a series of delays of previous enforcement commencement dates scheduled for October 2008, May 2009, and August 2009. According to the FTC press release, the reason for the delay this time is because of requests from members of Congress.
While one can only speculate why members of Congress asked the FTC to delay enforcement, it may have a lot to do with a recent decision of the United States District Court for the District of Columbia that the FTC could not include attorneys within the reach of the rule.
Prior to this decision, the FTC staff tried to utilize a definition of a “creditor” subject to the rule as anyone who defers payment for goods or services until after they are delivered. Since lawyers typically provide services prior to billing for payment, that was the FTC’s rationale for bringing lawyers under the rule. That rationale could easily have been used to also bring under the reach of the rule dry cleaners, plumbers, car repair shops and others who defer payment until after goods or services are delivered.
In a decision issued in late October 2009, the United States District Court for the District of Columbia found this expansive definition to be improper. The court found that the FTC cannot regulate lawyers simply because they defer billing for payment until after services are performed. While limited on its face to lawyers, the decision’s rationale can be applied to many other businesses including dealer service departments where many transactions would have been considered subject to the rule because payment is delayed until after the services are performed.
As we have reported with previous enforcement commencement delays, dealers should not put off implementation of a Red Flags Program for their vehicle sales and F & I operations. Under any enforcement scheme, as the law is presently defined, dealers’ finance and lease deals in sales of vehicles to customers will be subject to the rule.
The Red Flags Rule mandates a “know your customer” program. As we have previously reported, a dealer that sells a car on credit or leases a car to an identity thief will be the real victim of the scam. A Red Flags Program will assist dealers in protecting themselves from wrongdoing.