In response to the serious and growing problem of identity theft, the Federal Trade Commission (FTC) issued in November 2007 the so-called “Red Flags Rule,” requiring “creditors” to develop and implement programs targeted to identifying, detecting, and responding to the warning signs of identity theft in the operation of their businesses. The Red Flags Rule attracted the attention of the ABA and other professional associations when the FTC, before the Rule was scheduled to take effect, indicated for the first time in the spring of 2009 that attorneys and certain other professionals are subject to the Rule. Faced with the specter of intrusive and potentially expensive federal regulation as to the business activities of lawyers, the ABA challenged the Rule in the U.S. District Court for the District of Columbia—a challenge that has, at least for now, derailed the FTC’s planned implementation of the Rule as to attorneys.
Evolution of the Red Flags Rule
Congress tackled the identity theft issue in 2003 when it passed the Fair and Accurate Credit Transaction Act of 2003 (the FACT Act). The purpose of the FACT Act is “to prevent identity theft, improve resolution of consumer disputes, improve the accuracy of consumer records, [and] make improvements in the use of, and consumer access to, credit information.” To achieve its stated purpose, the FACT Act requires several agencies, including the FTC (i) to establish and maintain guidelines for use by each financial institution and creditor regarding identity theft with respect to account holders at, or customers of, such entities, with such guidelines to be updated as often as necessary, and (ii) to prescribe regulations requiring financial institutions and creditors to develop reasonable policies and procedures for implementing the guidelines established. The specific charge given to the agencies in prescribing regulations was “to identify possible risks to account holders or customers or to the safety and soundness of the institution or customers. . . .”
Agencies were given authority to enforce any regulations adopted under the FACT Act, including the right to obtain injunctive relief and impose civil monetary penalties where a violation has been found.
Congress incorporated by reference into the FACT Act the definitions of “creditor” and “credit” found in the Equal Credit Opportunity Act of 1974 (the ECO Act), a statute directed to discrimination by creditors against credit applicants on the basis of sex or marital status. The term “creditor” is defined as “any person who regularly extends, renews or continues credit; any person who regularly arranges for the extension, renewal or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” And the definition of “credit” borrowed from the ECO Act is “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer services therefor.”
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