On December 8, 2010, the United States House of Representatives passed Senate Bill 3987, the Red Flag Program Clarification Act of 2010, to exempt lawyers, doctors, accountants, and other professionals from the Red Flags* Rule. Having been approved by both Houses of Congress, the Act requires only President Obama’s signature to become law.
The Act clarifies the meaning of the term “creditor” contained in section 615(e) of the Fair Credit Reporting Act (15 U.S.C. § 1681m(e)). Section 615(e) is part of a 2003 amendment to the Fair Credit Reporting Act directed at protecting consumers against identity theft. It requires certain federal agencies, including the Fair Trade Commission (FTC), to prescribe regulations requiring financial institutions and “creditors” to establish policies and procedures to identify risks of identity theft to their customers. Efforts by the federal agencies to issue the regulations – known as the “Red Flags Rule” – have run into controversy due to the FTC’s broad interpretation of the term “creditor” and, consequently, the broad range of entities that would be covered by the Red Flags Rule. The FTC interpreted the term “creditor” to include all entities that defer payment for goods or services they provide. Several professional organizations representing professionals in legal, medical, and other fields have filed lawsuits to prevent the FTC from extending the reach of the Red Flags Rule over their members’ activities, and the FTC has delayed enforcement several times, most recently until December 31, 2010.
The Red Flag Program Clarification Act restricts the definition of “creditor” to those entities that use credit reports in connection with credit transactions, furnish information to consumer reporting agencies in connection with a credit transaction, or advance funds based on an obligation of the debtor to repay the funds. It excludes entities that advance funds for expenses incidental to a service that the entity is providing to the person on whose behalf the funds are advanced. In a colloquy supporting the Act, Senator Christopher Dodd, D.-Conn., stated that the Act clarifies that attorneys, doctors, accountants, and other professionals will not be classified as “creditors” for purposes of the Red Flags Rule.
*We note that while the Act uses the phrase “Red Flag,” the regulations promulgated by the Federal Trade Commission and other agencies are known as the “Red Flags Rule.”