Condo Media - January 2010 - 46

FINANCE Warning Signs A Summary of the FTC Red Flag Rule he FTC has announced a delay in implementing new regulations, which would require organizations to implement, so called “Red Flag” rules. The new regulations will be implemented on June 1, 2010. CAI will continue to monitor and communicate our concerns to the FTC on this issue. Under the initial proposal, a covered organization must put in place procedures for addressing any “red flags” related to a consumer account when there are indications that the security of a consumer’s identity has been compromised. This article analyzes the pending proposal. As this rule will impact some CAI members, this summary information is being provided to assist you with understanding its scope and application. CAI’s membership represents a diverse set of individuals and entities, ranging from community association boards to managers, management companies and community associationrelated business. As such, creating compliance information that meets every contingency is not practical. Thus, this information is not legal advice, but rather it is designed to help you work with your counsel to understand the rule’s broad application, to determine the best course of action for your community association or business and to provide you with a sample compliance policy if needed. T delayed would be required to comply with the requirements of the regulations. While we do not believe that community associations were the target of these provisions, given the broad language and the broad manner in which courts and regulators interpret such language, we believe the FTC could find that such rules apply to some associations. As such, one response to ensure an association is protected from FTC enforcement would be to put in place a program that complies with the requirements issued by the FTC. Specifically, the following factors are indications that your community would be required to implement a program to comply with the Red Flag rule: • The association accepts installment payments for assessments, special assessments, capital assessments, reserve assessments or other required payments. • There is a reasonable risk of identity theft of consumer data, which may be gauged by, but not limited to, such factors as the size of the association, number of employees with access to association member financial records and frequency of financial transaction with residents. Again, a reading of the language related to the applicability of this rule and the factors above, it is possible that the FTC would find at least some community associations would fall under the scope of the regulations. Even so, community associations are likely to be considered at low risk for identity theft and, therefore, would only be required to adopt a minimal Red Flag policy. Regardless of the legal analysis, adopting a program to address issues of identity theft is the best option to ensure your community meets its obligations to its members. While there are no private rights to sue under the rule and the risk of FTC enforcement might be somewhat low for community associations, adopting a Red Flag policy will ensure compliance, as well as implement a best practice for resident financial data. Based on FTC guidance, CAI has worked to develop a policy template that can be adapted to the needs and practices of specific community associations in consultation with advice of local counsel. That template may be found on pages 48 and 49. A full analysis of the rule follows. Analysis The Red Flag rule requires that “financial institutions and creditors” develop, implement and administer a written identity theft prevention program to identify and flag potential theft of consumer data related to certain covered accounts. For a CAI member, understanding if the rule applies basically requires a determination of whether the association would be considered a “creditor” by the FTC. First, the rule defines 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. Transaction accounts are accounts or deposits from which a consumer can make payments or transfers to third parties. Banks, credit unions and mutual Application to Community Associations The regulations issued by the FTC provide that any entity that is engaged in providing installment plans where the payment for goods and services is CONDO MEDIA • JANUARY 2010

Condo Media - January 2010

Table of Contents for the Digital Edition of Condo Media - January 2010