Red Flags Rule Clarification Signed into Law
Congress and President Obama narrowly made the Federal Trade Commission’s enforcement deadline for clarifying the definition of “creditor” by signing the Red Flag Program Clarification Act of 2010 (the “Act”) into law on December 18, 2010. The Act clarifies the following points with respect to the definition of “creditor.” A “creditor” includes businesses that regularly:
- “use consumer reports in connection with credit transactions;”
- “furnish information to consumer reporting agencies” in dealing with credit transactions; or
- advance funds to customers on credit to be repaid by the customer or from specific property.
Given this, it appears that a company that simply advances funds to customers on credit may be subject to the rule even if it does not regularly use consumer reports. For example, a company that provides goods to a reseller, allowing payment to be diverted until goods are sold may be considered a creditor under the third prong of the Act. Likewise, a trade association that allows members to defer annual dues may also fall within the definition.
A creditor does not, however, include those persons or businesses that advance funds for costs that are incidental to services that they provide. This is a welcome clarification for businesses that have now escaped the definition. For example, designers that purchase materials and incorporate those expenses into the final cost of their work may fall outside the definition of a creditor because they are not technically extending credit to customers. Meanwhile, many others are still caught by the rule and must wait to see how the FTC excludes and includes businesses based on its interpretation of the Act.
Please see our past update for more information on the Red Flags Rule. Arent Fox will continue to monitor FTC developments and privacy issues. Please contact Anthony V. Lupo, Sarah Bruno, or Eva Pulliam for more information.
Anthony V. Lupo
lupo.anthony@arentfox.com
202.857.6353
Sarah Bruno
bruno.sarah@arentfox.com
202.775.5760
Eva Pulliam
pulliam.eva@arentfox.com
202.857.6323