Just before the November 1, 2008 mandatory deadline for implementation of a Red Flag compliance program by dealerships, the Federal Trade Commission announced an extension of the date for enforcing the Red Flag Rule by six months. Some dealers saw this as a reprieve. We suggest that you look at it differently. If you have implemented your Red Flag program or you were prepared to put it in place by November 1, we suggest that you make sure that it is in place and operating. There are several reasons.
- The Red Flag Rule is already in effect. The only deadline that was extended was the FTC’s date for enforcement activities. That means that the FTC will not enforce its rule against a dealer who does not have it in place before May 1, 2009.
- Even though the FTC enforcement date for the Red Flag Rule was extended, it was not extended with respect to the FTC Address Discrepancy Rule. The FTC’s Address Discrepancy Rule is now in effect, and the FTC may take enforcement action. Dealers generally included compliance with the Address Discrepancy Rule within their Red Flag programs.
- Some of the financial institutions with whom you do business have not had their enforcement deadlines extended. For example, banks are not subject to the jurisdiction of the FTC. Consequently, banks with which you do business should now have their Red Flag programs in effect. When you do a retail installment sale contract that you wish to assign to a bank, you are, in effect, a member of the compliance chain for the bank’s Red Flag program. In other words, your dealership interacts with the customer and your dealership is in the best position to evaluate that customer’s identity. Therefore, banks are sure to insist that dealerships have their Red Flag programs in effect, even though the FTC may not enforce compliance before May 1, 2009.
- Finally, and most importantly, a Red Flag Program should be in place for protection of the dealership. In any identity theft involving delivery of a vehicle, the dealership is the victim. It will deliver a vehicle for which it will not be paid. To the extent a finance source has extended an advance based on assignment of the retail installment sale contract, the finance source will likely demand that the dealer buy the contract back. It is important that the dealership know who it is dealing with when it is spot delivers a vehicle. A Red Flag program provides a formalized method to “Know Your Customer”.