Red Flags Rule

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Not to be confused with Red Flag Act

This article uses first-person (“I”; “we”) or second-person (“you”) inappropriately. Please rewrite it to use a more formal, encyclopedic tone. (September 2011)

The Red Flags Rule was created by the Federal Trade Commission (FTC), along with other government agencies such as the National Credit Union Administration (NCUA), to help preventidentity theft. The rule was passed in January 2008, and was to be in place by November 1, 2008. But due to push-backs by opposition, the FTC has delayed enforcement (five times); the current deadline is December 31, 2010.^{[1][dated info]}

Contents [hide] 1 How the Red Flags Rule was Created 2 Who This Rule Applies To 3 What the Red Flags Rule States 4 Ways that a business can comply 5 The Red Flag Rule as a cause of Identity Theft 6 References

How the Red Flags Rule was Created

The Red Flags Rule was based on section 114 and 315 of the Fair and Accurate Credit Transactions Act of 2003.^[2] FACTA was put in place to help Identity Theft Prevention and Credit History Restoration, Improvements in Use of and Consumer Access to Credit Information, Enhancing the Accuracy of Consumer Report Information, Limiting the Use and Sharing of Medical Information in the Financial System, Financial Literacy and Education Improvement, Protecting Employee Misconduct Investigations, and Relation to State Laws.^[3]

Who This Rule Applies To

There are two different groups that this rule applies to: Financial Institutions and Creditors.^[4] Financial institution is defined as a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or any other entity that holds a “transaction account” belonging to a consumer.^[5] FACTA’s definition of “creditor” applies to any entity that regularly extends or renews credit – or arranges for others to do so – and includes all entities that regularly permit deferred payments for goods or services ^[6]

Just because you don’t think you are a creditor, does not mean that the rule doesn’t apply. For example, law firms and accounting firms that receive payment after a service is completed are considered creditors. Another example is if you are a utility company. You provide the utilities and receive payment for your services rendered at the end of the month, rendering you a creditor.

There are many different companies that this rule applies to: this list includes, but is not limited to finance companies, automobile dealers, mortgage brokers, utility companies, telecommunications companies, medical practices, hospitals, and law firms; or any other company that performs a service, then receives payment once the work is complete.

What the Red Flags Rule States

The Red Flags Rule sets out how certain businesses and organizations must develop, implement, and administer their Identity Theft Prevention Programs. Your Program must include four basic elements, which together create a framework to address the threat of identity theft.^[7][8]

The four basic elements to the program are:

1) Identify Relevant Red Flags

• Identify the red flags of identity theft you’re likely to come across in your business

2) Detect Red Flags

• Set up procedures to detect those red flags in your day-to-day operations

3) Prevent and Mitigate Identity Theft

• If you spot the red flags you’ve identified, respond appropriately to prevent and mitigate the harm done

4) Update your Program

• The risks of identity theft can change rapidly, so it’s important to keep your Program current and educate your staff

The Red Flags Rules provide all financial institutions and creditors the opportunity to design and implement a program that is appropriate to their size and complexity, as well as the nature of their operations.^[5]

The red flags fall into five categories:

• alerts, notifications, or warnings from a consumer reporting agency^[5]
• suspicious documents^[5]
• suspicious kk identifying information, such as a suspicious address^[5]
• unusual use of – or suspicious activity relating to – a covered account^[5]
• notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts^[5]

Ways that a business can comply

The FTC has a created a template for your business that can be populated to meet your companies needs. The template can be found on the FTC website. This template however is for small, very low risk businesses. There are also a number of other companies that will create a Program for your business to follow for a fee.

The Red Flag Rule as a cause of Identity Theft

As the Red Flag rule widely defines creditors, many businesses (such as utilities)^[9] }are not required to collect personal information (such as SSN and Driver’s License Numbers) that they do not need and have no use for. This policy is precisely contrary to the FTC’s advice to consumers that they should disclose their social security number to others only when absolutely necessary.^[10] This aspect of the Red Flag rule has the unintended consequences of increasing the number of business that hold consumers’ Social Security numbers thereby putting consumers at greater risk for identity theft through data theft.

References

1. ^http://ftc.gov/opa/2010/05/redflags.shtm
2. ^http://ftc.gov/opa/2007/10/redflag.shtm
3. ^FAIR AND ACCURATE CREDIT TRANSACTIONS ACT OF 2003, Public, Law 108-159, 108th Congress, retrieved 2009-02-02
4. ^http://www.ftc.gov/opa/2008/07/redflagsfyi.shtm
5. ^ ^abcdefghttp://www.ftc.gov/bcp/edu/pubs/business/alerts/alt050.shtm
6. ^http://www.ftc.gov/opa/2009/04/redflagsrule.shtm
7. ^http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus23.pdf
8. ^ “Identity theft” means a fraud committed or attempted using the identifying information of another person without authority. See 16 C.F.R. § 603.2(a). “Identifying information” means “any name or number that may be used, alone or in conjunction with any other information, to identify a specific person, including any – (1) Name, Social Security number, date of birth, official State or government issued driver’s license or identification number, alien registration number, government passport number, employer or taxpayer identification number; (2) Unique biometric data, such as fingerprint, voice print, retina or iris image, or other unique physical representation; (3) Unique electronic identification number, address, or routing code; or (4) Telecommunication identifying information or access device (as defined in 18 U.S.C. 1029(e)).” See 16 C.F.R. § 603.2(b).
9. ^“Start or Install Service”.
10. ^ ftc.gov. “Deter Minimize Your Risk”.

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Red Flag Rules Program

Are you complying with the Red Flags Rule?

The Red Flags Rule requires many businesses and organizations to implement a written Identity Theft Prevention Program designed to detect the warning signs — or “red flags” — of identity theft in their day-to-day operations. By identifying red flags in advance, businesses will be better equipped to spot suspicious patterns that may arise — and take steps to prevent a red flag from escalating into a costly episode of identity theft.

Resources on this site can help business people educate their staff and colleagues about complying with the Red Flags Rule.

What Compliance Looks Like

Your Identity Theft Prevention Program is a “playbook” that must include reasonable policies and procedures for detecting, preventing, and mitigating identity theft. Your Program should enable your organization to:

1. identify relevant patterns, practices, and specific forms of activity — the “red flags” — that signal possible identity theft;
2. incorporate business practices to detect red flags;
3. detail your appropriate response to any red flags you detect to prevent and mitigate identity theft; and
4. be updated periodically to reflect changes in risks from identity theft.

The Red Flags Rule also includes guidelines to help financial institutions and creditors develop and implement a Program, including a supplement that offers examples of red flags.

The FTC and the federal financial agencies have issued Frequently Asked Questions and answers to help businesses comply with the Rule.

Who Must Comply with the Red Flags Rule?

The Rule requires “financial institutions” and “creditors” that hold consumer accounts designed to permit multiple payments or transactions — or any other account for which there is a reasonably foreseeable risk of identity theft — to develop and implement an Identity Theft Prevention Program for new and existing accounts. The definition of “financial institution” includes:

• all banks, savings associations, and credit unions, regardless of whether they hold a transaction account belonging to a consumer; and
• anyone else who directly or indirectly holds a transaction account belonging to a consumer.

A change in the law on December 18, 2010 amended the the definition of “creditor,” and limits the circumstances under which creditors are covered. The new law covers creditors who regularly, and in the ordinary course of business, meet one of three general criteria. They must:

• obtain or use consumer reports in connection with a credit transaction;
• furnish information to consumer reporting agencies in connection with a credit transaction; or
• advance funds to — or on behalf of — someone, except for funds for expenses incidental to a service provided by the creditor to that person.

Bookmark this site and check it often for revisions that reflect changes in the law.

Related Topics

Protecting Personal Information: A Guide for Business

Are you taking steps to protect personal information? Safeguarding sensitive data in your files and on your computers is just plain good business. After all, if that information falls into the wrong hands, it can lead to fraud or identity theft.

Avoid ID Theft: Deter, Detect, Defend

A one-stop national resource to learn about the crime of identity theft. It provides detailed information to help you deter, detect, and defend against identity theft.

OnGuard Online

Provides practical tips from the federal government and the technology industry to help computer users be on guard against Internet fraud, secure their computers, and protect their personal information.

Privacy Initiatives

Educates consumers and businesses about the importance of personal information privacy, including the security of personal information.

Please complete the following form to receive our Free Catalog.
We will ship it to you as soon as we get your information.

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Glossary of Definitions

Amount Financed
The dollar amount of the credit that is provided to the buyer.

Agreed-Upon Selling Price
The dollar amount the buyer agrees to pay the dealer for the vehicle.

Amount Financed
The dollar amount of the credit that is provided to the buyer.

Annual Percentage Rate (APR)
The cost of credit for one year expressed as a percentage.

Assignee
The bank, finance company, credit union, or other financial institution that purchases the finance contract from a dealer.

Bank or Credit Union Financing
(also Off-Site Financing)
The financing a buyer gets from his or her bank, credit union, or other financial institution to pay for a new or used auto.

Budget
A tool commonly used to measure expenses against income, to help people prioritize their spending and manage their money.

Buy Rate
The wholesale rate offered to a dealership at which the “assignee” (finance company, bank or credit union) will purchase the contract.

Co-Buyer
An individual who assumes equal responsibility for the contract. The account history will be reflected on the co-buyer’s credit history as well as the buyer’s. For this reason, consumers should exercise caution if asked to be a co-buyer for someone else. Since some co- buyers are eventually asked to repay the obligation, individuals need to be sure that they can afford to do so before agreeing to be a co-buyer.

Collateral
An asset pledged to the creditor until the financing is paid off. For example: If you own your home, it may be used as collateral to secure automobile financing.

Credit Application
The information that a buyer submits when applying for credit. It typically requires such items as name, Social Security number, date of birth, current and previous addresses and length of stay, current and previous employers and length of employment, occupation, sources of income, total gross monthly income, and financial information on existing credit accounts. This can be done in person, over the phone, or electronically via the Internet.

Credit Insurance
There are two common types of credit insurance. Credit life insurance is optional insurance that pays the scheduled unpaid balance if the buyer dies. Credit disability insurance (sometimes called credit accident and health insurance) is optional insurance that pays the scheduled monthly payments if the buyer becomes disabled. As with most contract terms, the cost of optional credit insurance must be disclosed in writing, and if the buyer wants it, the buyer must agree to it and sign for it.

Credit Report
A report containing information about the buyer’s current and past credit obligations, payment record, and data from public records (e.g., a bankruptcy filing obtained from court documents). For each account, the credit report shows the applicant’s account number, type and terms of the account, credit limit, most recent balance, and most recent payment. The comments section describes the current status of the applicant’s account, including the creditor’s summary of past-due information and any legal steps that may have been taken to collect.

Credit Reporting Agency
A firm that collects, sorts, maintains, and sells information about an individual’s credit history.

Credit Score
A numerical score that reflects the credit risk you present based on information contained in your credit file. The better your history of credit, the higher your score.

Creditor
A person or organization that regularly extends credit, subject to a finance charge.

Creditworthiness
The ability of a consumer to satisfy a credit obligation.

Dealer Financing
(also On-Site Financing)
Financing that a consumer obtains from the dealership rather than directly from a bank, credit union, or other financial institution to buy a new or used auto. The consumer enters into a contract with the dealership agreeing to pay the amount financed, at an agreed-upon finance rate, over a specified period of time.

Dealer Finance Income
A portion of the finance charge that is paid to or retained by the dealer as compensation for the dealer’s participation in providing financing to the buyer.

Delinquent Accounts
Credit accounts that are past due. They usually are classified as 30, 60, 90 and 120 days past due.

Depreciation
The amount by which a vehicle is expected to decrease in value over a specific period of time.

Down Payment
An amount paid at time of purchase that reduces the amount financed. This includes any combination of cash, trade-in value of a previously-owned vehicle, rebates, and other non-cash credits.

Extended Service Contract
Optional protection on specified mechanical and electrical components of the vehicle. It is available for purchase to extend and/or supplement the warranty coverage provided when purchasing or leasing a new, or in some cases, a used vehicle.

Finance Charge
The dollar amount that the credit will cost the buyer.

Fixed Rate Financing
An annual percentage rate that remains the same over the life of the finance contract.

Guaranteed Auto Protection (GAP)
Optional protection that pays the difference between the amount the buyer owes on the auto and the amount the buyer receives from his insurance company if the auto is stolen or destroyed before the buyer has satisfied the credit obligation. In some cases, the buyer may be responsible for the insurance deductible.

Installment Sale
A contract with a dealership to buy a vehicle by paying the amount financed, plus an agreed upon finance charge, over a certain period of time in installments, which are typically monthly payments.

Length of Contract
The total number of months the borrower has to pay his or her credit obligation.

Lien
A legal claim on ownership of the vehicle stemming from a debt. If the buyer does not make the payments, the lienholder can repossess and sell the vehicle as full or partial payment of the debt.

Off-Site Financing
(also Bank or Credit Union Financing) The financing a buyer gets a from his or her bank, credit union or other financial institution to pay for a new or used auto.

On-Site Financing
(also Dealer Financing)
Financing that a consumer obtains from the dealership rather than directly from a bank, credit union, or other financial institution to buy a new or used auto The consumer enters into a contract with the dealership agreeing to pay the amount financed, at an agreed-upon finance rate, over a specified period of time.

Repossession
In the event that a credit obligation is not satisfied, the legal right a creditor has to take the asset pledged as collateral (typically the automobile) and sell it to pay off the credit obligation. Depending on state laws, this process is typically subject to rights to redeem (pay off the entire balance and get your vehicle back) or reinstate (pay any delinquent payments and get your vehicle back to start the contract again).

Secured Credit
Financing for which some form of acceptable collateral, such as a house or automobile, has been pledged.

Trade-in Allowance: The amount the dealer agrees to pay for a trade-in vehicle, which consumers often apply towards the purchase of a new vehicle.

Unsecured Credit
Credit for which no collateral has been pledged.

Variable Rate Financing 
With a variable financing rate, the annual percentage range may change over the life of the contract.

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2-Part Buyers Guides – SPANISH

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CAR DEALER FORMS STARTER KIT

1. Sign up for our 6 hour Car Dealer Pre-Licensing Class. Follow the steps that you are taught, and then get approved by the California DMV as a wholesale dealer.
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2. Utilize the Web. Did you know that most wholesale dealers search the internet prior to purchasing a vehicle? A good wholesaler will recognize a low priced car at auction buy it and resell it a week later at the same auction.
3. Keep in mind that delivery of the vehicle to the buyer must occur at the sellers licensed location. Some wholesalers will buy seasoned stock ( vehicles which are front line ready on a retailers lot but approaching 60 days in inventory ) and swap them out for vehicles freshly obtained. This allows the used car sales manager to restart the clock on that seasoned stock. These deals are often done book for book, the wholesaler ends up with added value. In a front line ready car the wholesaler can sell to another dealer, but it will often take a series of these book for book trades before you can actually see profits. Many small used car lots do not have the time to go to auction. A good wholesaler can stock these smaller lots and make a small profit on each car.
4. Don’t ever consign a vehicle to another dealer. The wholesale license is a good starting place for the beginner; lesser bond, easier zoning and access to the market. Dealer plates and insurance are included in the wholesale package but as a wholesaler one can only buy and sell within the industry. That means as a wholesaler you can sell only to other dealers, there is no buying off the street. If and when a wholesaler has a vehicle to sell to the public he/she may draft that sale through a licensed retailer, this is call this a drafted sale.
5. Remember the drafted sale creates liability for the retailer. Typical draft fee is $ 500. We advise the following: no loss selling ( wholesaler must sell higher than acquisition cost ), smog safety and verification provided by wholesaler, wholesaler as contact person on the buyers guide, statement from wholesaler assuming all liability if customer is not happy. Then the retailer collects and pays all taxes and fees, and sends the documents to DMV for processing.

Tips

Related wikiHows

Sources and Citations

• “How to Get Your Wholesale Dealer License”
• http://www.howtobecomeacardealer.com
• http://www.gotplates.com

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