The Federal Trade Commission has delayed enforcement of the Red Flags Rule for a fifth time, extending the deadline to Dec. 31, 2010. According to the FTC’s Website, the extension was made at the request of Congress, which is considering legislation that could affect the scope of entities covered by the rule.

“Congress needs to fix the unintended consequences of the legislation establishing the Red Flags Rule — and to fix this problem quickly. We appreciate the efforts of Congressmen Barney Frank and John Adler for getting a clarifying measure passed in the House, and hope action in the Senate will be swift,” FTC Chairman Jon Leibowitz said. “As an agency we’re charged with enforcing the law, and endless extensions delay enforcement.”

The Red Flags Rule was developed under the Fair and Accurate Credit Transactions Act, in which Congress directed the FTC and other agencies to develop regulations requiring “creditors” and “financial institutions” to address the risk of identity theft. The resulting Red Flags Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect, and respond to patterns, practices, or specific activities — known as “red flags” — that could indicate identity theft.

The Rule became effective on Jan. 1, 2008. Full compliance for all covered entities was originally required by Nov. 1, 2008. Most recently, the FTC announced in October 2009 that at the request of certain members of Congress, it was delaying enforcement of the Rule until June 1, 2010, to allow Congress time to finalize legislation that would limit the scope of business covered by the Rule. Since then, the Commission has received another request from Members of Congress for another delay in enforcement of the Rule beyond June 1, 2010.

The commission has urged Congress to act quickly to pass legislation that will resolve any questions as to which entities are covered by the rule and obviate the need for further enforcement delays. If Congress passes legislation limiting the scope of the Red Flags Rule with an effective date earlier than Dec. 31, 2010, the Commission will begin enforcement as of that effective date.

In what is expected to have a big impact on the special-finance marketplace, the Federal Trade Commission (FTC) and the Federal Reserve Board (FRB) issued in late December finalized rules that will require creditors, including dealers, to alert consumers when derogatory credit data causes them to receive less than optimal terms. The rule is expected to take effect Jan. 1, 2011.

The finalized rules implement Section 311 of the Fair and Accurate Credit Transactions Act of 2003. Among other reforms, the act introduced the concept of providing consumers with one free credit report per year to ensure their accuracy and directed the FTC and FRB to develop a Risk-Based Pricing Notice (RBPN) for credit applicants whenever their credit scores triggered higher interest rates or other adverse terms.

According to the FTC’s Manas Mohapatra, the rule also fills a gap created by the advent of risk-based pricing, a practice of setting or adjusting the price and other terms of credit provided to a consumer based on his or her credit worthiness. “With the adverse action requirement, people are told that things in their credit report probably caused their denial of credit,” Mohapatra told F&I. “However, what had been occurring was that people were not getting denied credit, but were getting much worse material terms and weren’t being informed of that fact. This rule is supposed to fill that gap.”

The two agencies had published proposed regulations that would implement these risk-based pricing provisions in May 2008, which was followed by a three-month public comment period. The agencies received more than 80 responses to the proposed rules from banks and other creditors, industry associations such as the National Automobile Dealers Association (NADA), consumer groups, and more.

The rule lays out several scenarios in which the rules may apply. However, because of the difficulty in determining which consumers fit in this category, the NADA recommended — and the agencies adopted — an exception notice that dealers and other creditors may issue in lieu of the RBPN.

Called the credit score disclosure notice, which is based on an existing requirement that applies to dealers in California, the notice must be provided to all customers who apply for credit. It must contain, among other things, the consumer’s credit score, the date the score was created and the source of the score. The notice must also provide consumers with a range of scores and information on how lenders use their scores. The notice must also include a written description or graphic representation of how the applicant ranks against other consumers. An example of the form can be found on page 198 of the rules.

WASHINGTON, D.C. – At the request of Members of Congress, the Federal Trade Commission is delaying enforcement of the “Red Flags” Rule until June 1, 2010, for financial institutions and creditors subject to enforcement by the FTC.

The Rule was promulgated under the Fair and Accurate Credit Transactions Act, in which Congress directed the Commission and other agencies to develop regulations requiring “creditors” and “financial institutions” to address the risk of identity theft. The resulting Red Flags Rule requires all such entities that have “covered accounts” to develop and implement written identity theft prevention programs to help identify, detect and respond to patterns, practices or specific activities – known as “red flags” – that could indicate identity theft.

The Commission previously delayed the enforcement of the Rule for entities under its jurisdiction until November 1, 2009. The Commission staff has continued to provide guidance to entities within its jurisdiction, both through materials posted on the dedicated Red Flags Rule Website, and in speeches and participation in seminars, conferences and other training events to numerous groups. The Commission also published a compliance guide for business, and created a template that enables low-risk entities to create an identity theft program with an easy-to-use online form. FTC staff has published numerous general and industry-specific articles, released a video explaining the Rule and continues to respond to inquiries from the public. To assist further with compliance, FTC staff has worked with a number of trade associations that have chosen to develop model policies or specialized guidance for their members.

On October 30, 2009, the U.S. District Court for the District of Columbia ruled that the FTC may not apply the Red Flags Rule to attorneys. Today’s announcement that the Commission will delay enforcement of the Rule until June 1, 2010, does not affect the separate timeline of that proceeding and any possible appeals. Nor does it affect other federal agencies’ ongoing enforcement for financial institutions and creditors subject to their oversight.