Who should comply with the Red Flags Rule?

The Red Flags Rules issued by the Federal Trade Commission (FTC), the federal bank regulatory agencies, and the National Credit Union Administration (NCUA) requires financial institutions and creditors to develop and implement written identity theft prevention programs, as part of the Fair and Accurate Credit Transactions (FACT) Act of 2003. The programs must provide for the identification, detection, and response to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft and should be in place by November 1, 2008.

The Red Flags Rules apply to “financial institutions” and “creditors” with “covered accounts.”

The Rules define a financial institution 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.

Financial institutions under the FTC’s jurisdiction include state-chartered credit unions and certain other entities that hold consumer transaction accounts. A transaction account is a deposit or other account from which the owner makes payments or transfers. It includes checking accounts, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.

A creditor is any entity that regularly extends, renews, or continues credit and regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who is involved in the decision to extend, renew, or continue credit. The term also includes finance companies, automobile dealers, mortgage brokers, utility companies, and telecommunications companies. Where non-profit and government entities defer payment for goods or services, they, too, are to be considered creditors.

A covered account is an account used mostly for personal, family, or household purposes, and that involves multiple payments or transactions. Covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts, and savings accounts.