A new bill was signed into law at the end of 2010, providing
clarification to the controversial Red Flags Rule. The Red Flag
Program Clarification Act of 2010 was adopted on December 18, 2010,
in order to clarify the application of the law and eliminate
confusion over the types of businesses that are subject to it. The
Red Flags Rule is regulated by the Federal Trade Commission, which
has previously announced that enforcement of the law was to begin
on December 31, 2010.
The Red Flags Rule generally applies to businesses that fall under
the definition of a "creditor." The Red Flag Program
Clarification Act of 2010 limits the definition of a
"creditor" under the law to those entities that use
consumer reports, furnish information to consumer reporting
agencies, or advance funds to or on behalf of a person, based on an
obligation of that person to repay the funds. In addition, the new
law exempts creditors that advance funds on behalf of a person for
expenses incidental to a service provided by the creditor to that
person.
The effect of this clarifying act is that professionals and
businesses that provide products and services in advance and
require payment at a later time are not required to comply with the
Red Flags Rule. Franchisors that provide services to franchisees
and then bill later for these services would also not fall under
the definition of a "creditor" solely because of that
practice.
However, franchisors that provide or arrange for financing on
behalf of franchisees may still be subject to the Red Flags Rule.
In addition, language in the new law retains the right of the FTC
to find application of the law to a creditor if it determines there
is a "reasonably foreseeable risk" of identity theft. For
that reason, franchisors should be aware of the law and its
requirements to determine whether it might apply to their business.
Contact a member of Larkin Hoffman's
Franchise and Distribution Practice Group with questions about
the Red Flags Rule.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
