On November 17th, just six weeks before the Red Flags Rule is slated for FTC enforcement, a bipartisan bill (H.R. 6420) seeking to limit the scope of the Red Flags Rule was introduced. The bill, entitled the “Red Flag Program Clarification Act of 2010,” seeks to amend the definition of “creditor” under the Fair Credit Reporting Act and, hopefully, finally put to rest the scope of coverage issue that has been the source of great controversy.
The law establishing the Red Flags Rule was passed in January 2008, with a scheduled effective date of November 1, 2008. For financial institutions, the Rule is operative, but due to confusion and concerns over the scope of the rule – over what entities qualify as covered “creditors” — the FTC has delayed enforcement five times. The current date for FTC enforcement to commence is December 31, 2010. In announcing the most recent enforcement delay, the FTC stated that it was delaying enforcement of the Rule while “Congress considers legislation that would affect the scope of entities covered by the Rule.”
The Red Flags Rule aims to prevent identity theft by ensuring that entities are aware of possible signs of identity theft. The Rule requires “financial institutions” and “creditors” who maintain “covered accounts” to develop written identity theft prevention programs. Under the current Rule, a “creditor” is broadly defined as any person or entity that (a) regularly extends, renews, or continues credit; (b) regularly arranges for the extension, renewal, or continuation of credit; or (c) any assignee of an original creditor who participates in the decision to extend, renew, or continue credit for a covered account. The broad definition of “creditor” adopted under the Rule encompasses a wide variety of organizations, including many health care entities, law firms, and accountants.
H.R. 6420 seeks to narrow the scope of the Rule by exempting from the definition of “creditor” a creditor that “advances funds on behalf of a person for expenses incidental to a service provided by the creditor to that person.” The amended definition of “creditor” would also include any other creditors deemed (through rulemaking) by their appropriate regulating authority to offer or maintain “accounts that are subject to a reasonably foreseeable risk of identity theft.’’
The new legislation comes while the FTC’s application of the Rule is facing several challenges in federal court from organizations such as the American Bar Association (ABA), American Medical Association and the American Institute of Certified Public Accountants. Most recently, on November 15, 2010, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments regarding the ABA’s challenge to the FTC’s application of the Rule to attorneys.