Congress Considers Change to 'Red Flags Rule'

The American Bar Association has been battling for more than a year to exempt lawyers from new regulations designed to fight identity theft. Now, Congress has decided to step in.

With no fanfare and no recorded vote late Tuesday, the Senate approved legislation that could accomplish what the ABA was hoping to achieve. The bill would narrow the definition of “creditor” under the Fair and Accurate Credit Transition Act of 2003, likely ensuring that lawyers would not meet the new definition.

An ABA spokeswoman said the group is optimistic about House passage, possibly this week.

The regulations over identity theft were written by the Federal Trade Commission, and they’re popularly known as the “Red Flags Rule.” FTC regulators have interpreted the term “creditor” to include those who perform services and get paid at a later date, as many lawyers do. Other professional groups, including accountants and physicians, have protested their inclusion, too.

The bill, S. 3987, would define a creditor largely as someone who uses credit reports, furnishes information to credit reporting agencies or “advances funds…based on an obligation of the person to repay the funds or repayable from specific property pledges by or on behalf of the person.”

Sen. John Thune (R-S.D.) introduced the bill Tuesday with Sen. Mark Begich (D-Alaska) as a co-sponsor. In a prepared statement, they said the FTC was threatening small businesses.

“Small businesses in South Dakota and across our country are the engines of job growth for America,” Thune said. “Forcing them to comply with misdirected and costly federal regulations included in the FTC Red Flags Rule will hurt their ability to create jobs and continue growing our economy.”

ABA President Stephen Zack said in a prepared statement: “Last night’s Senate vote to clarify the rule so that lawyers are clearly not included was a critical step in ending a bureaucratic effort to solve a non-existent problem with paper-pushing regulations that would have increased legal costs.”

The fight over the Red Flags Rule has also played out in court after the ABA sued the FTC. In October 2009, U.S. District Judge Reggie Walton of the District of Columbia ruled in favor of the ABA. The U.S. Court of Appeals for the D.C. Circuit heard the FTC’s appeal last month.

In a recent interview with The National Law Journal, FTC Chairman Jon Leibowitz said the commission was trying to work with Congress to make the law clear. With the 2003 law, he said, “Congress didn’t give either side a lot to work with here.”

An FTC spokesman had no comment today.

Updated at 3:57 p.m. with Zack's statement.

Comments

[Phineasjwooffee]

Interesting ... and of course disingenuous, that John Thune neglects to mention that it was a Republican Congress that passed the 2003 legislation.

[Aaron Worthing]

This is great news for a little sanity in this area. But the FTC chair is full of crud.

I will give you that the original definition was written badly. But the courts narrowed that definition. And then the FTC decided to unilaterally ignore that narrowing interpretation and assert a definition of "creditor" that was as broad as possible. And rather than doing this reluctantly, they did it enthusiastically, saying it was important to read the term as broadly as the problem exist.

Also, I am extremely gratified that the approach isn't just to exempt lawyers. I am one myself, but many other people and companies not considered crediters were going to be swept in, such as doctors, if they billed on a monthly basis.