Wow! Government Amends Red Flags Rule to Make it Narrower

by BakerHostetler
Contact

Congress, FTC Restrict Definition of “Creditors” who must Adopt a Formal Plan to Prevent, Detect ID Theft

In journalism, the adage goes, “man bites dog” is news. The regulatory equivalent should be “government amends Rule to make it narrower.” Yet that is what the Congress and the FTC have done to the definition of “creditors” that are required to approve and implement a “Plan” to prevent, or at least detect and ameliorate, incidents of identity theft, one of the most frustrating violations of personal privacy that unlucky consumers must confront.  See 77 F.R. 72715 (December 6, 2012).

And it all makes good sense. Over the last decade, ID theft has become a major problem. In 2007, Congress addressed it by adding to the Fair Credit Reporting Act a section requiring that certain businesses, including “creditors,” adopt a Plan to prevent and detect instances of identity theft. Using federal guidelines, each covered party had to create a plan that was tailored to its unique business and circumstances.

There was a studied effort to avoid “one size fits all” regulatory requirements. In issuing its final Rule and follow-up guidance, the FTC made clear that it would judge plans in a flexible manner, looking to ensure that the business had made a bona fide effort to identify the elements of it process that could increase the risk of ID theft.

In the original Act and, similarly, in the FTC’s implementing Rule, the definition of “creditor” was based on the very broad definition of the term in the Equal Credit Opportunity Act (“ECOA”). Even under the Fair Credit Reporting Act (“FCRA”) that contained the Red Flag requirements, the term “credit” was not defined but had been construed very broadly by courts over a long period of time.

There was a good policy reason for these broad definitions. In determining when discrimination should be prohibited (ECOA) or when consumers should get disclosures to make sure that adverse credit actions were based on accurate facts (FCRA), one should not constrict the scope of those rights. At the same time, those definitions bring into play many creditors for whom the risk of involvement in identity theft is very low. For example, a neighborhood store that takes checks is much less likely than a credit card issuer to run into such problems, but depending on circumstances, both could be covered by the Red Flags Rule.

Congress limited the statutory definition of “creditor” to include 3 tests for Red Flags purposes: “creditors that regularly and in the ordinary course of business engage in at least one of the following three types of conduct:

  1. Obtain or use consumer reports, directly or indirectly, in connection with a credit transaction; or
  2. Furnish information to consumer reporting agencies in connection with a credit transaction; or
  3. Advance funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person.” (Footnotes omitted).

These may not be the only criteria Congress could have chosen, but they do comprise the most likely sources of ID theft issues. To add flexibility, the Congress authorized the FTC to supplement the Rule with other criteria for “creditor” that would serve the same policy purposes.

In announcing the amendments to the Red Flags Rule, the FTC did not first seek public comment, noting that the changes were purely ministerial to conform its Rule to the amended definition in the Act. The FTC announced it was not proposing additional criteria for covered “creditors” at this time.

Even companies that benefit from the streamlined definition should not discontinue their efforts to combat ID theft. Even if they do not want to prepare a formal plan approved by the Board of Directors and implemented at a high level in the company, protecting its customers from ID theft is good business. What responsible company would ignore indicators of possible ID theft (red flags) or not try to halt an incipient breakout, just as they would try to avoid data breaches through improved security?

Such flare-ups can be expensive and lead to legal liability beyond the FTC’s Red Flags Rule. Still, the government’s actions cut back on the need for universal formulaic compliance and are a sensible step in the war against ID theft.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:

BakerHostetler
Contact
more
less

BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.