Why You Shouldn't Delay Your Red Flags Program

February 2009, Auto Dealer Today - WebXclusive

by Thomas B. Hudson, Esq. - Also by this author

The Red Flags Rule, announced by the Federal Trade Commission (FTC) in November of 2007, had a mandatory effective date of November 1, 2008. On October 22, 2008, the FTC announced that it would suspend enforcement of the Rule until May 1, 2009. The October 22 announcement gives financial institutions and creditors subject to the FTC's jurisdiction (that means car dealers) an additional six months to get their Red Flags programs in place without incurring FTC sanctions.

“Hooray!” you say. It’s hard to disagree with the additional breathing room, but the additional time won’t do you any good unless you get to work on your program now.

From our vantage point, the vast majority of dealers would not have had a complying Red Flags program in place by November 1, and that was after they had been given nearly a year to put the program in place.

We are urging dealers to move with urgency to get their Red Flags programs in place quickly—long before the end of this 6-month enforcement grace period granted by the FTC. Why? Three reasons, and they may apply to you.

If you procrastinated before, you’ll do it again. If your dealership didn’t have a program in place with a year’s notice of the mandatory effective date, what is going to change? We think it’s likely those dealers with a bad case of procrastination aren’t going to be magically cured by the FTC’s medicine of additional time.

There may still be risk in not having a program. The FTC has announced that it won’t prosecute violators for six months, but there’s an argument that the Rule is mandatorily effective now, notwithstanding the FTC’s statement that it will forego enforcement. Think about it like this – your town lowers the speed limit on the main drag, but the cops announce they won’t hand out speeding tickets for less than the old limit for a couple of months, so people can adjust to the new limit. The announcement by the cops about how they will enforce the new limit won’t stop a plaintiffs’ lawyer from suing if someone exceeds the new limit and causes injuries or damages.

Look for those lawyers who make their livings suing dealerships to argue that the federal requirement is in force notwithstanding the FTC’s enforcement policy, and that the dealer’s failure to comply with the federal requirement constitutes an unfair or deceptive act or practice under state law. Lest you think such a “bootstrapping” attack is far-fetched, we’ve seen just this argument in connection with federal odometer law claims.

It’s good for you! Finally, the Red Flags Rule is a bit unusual, in that its principal effect will be to benefit the dealer by making identity theft more difficult. If an identity thief strikes your dealership, it’s hard to imagine a situation in which the dealer doesn’t end up with the resulting loss. That being the case, why wouldn’t you rush to get your program in place?

There you are, three reasons. Get to work!

Vol 5, Issue 12

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