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Legislation to Clarify the Red Flags Rule

By Laura A. Petersen

Healthcare providers and other professionals were frustrated by their inclusion in the Federal Trade Commission’s Red Flags Rule (“the Rule”); a rule designed to prevent identity theft in the credit lending arena.  Fortunately, these professionals are now exempt from the Rule.  New legislation narrows the Rule’s application.  This article provides an overview of the original Rule and the Red Flag Program Clarification Act of 2010.

Red Flags Rule Background

The Federal Trade Commission issued the Rule in November 2007.  The FTC extended the Rule’s enforcement date five times.  Before the new law, the enforcement date was December 31, 2010.  This meant that “creditors” needed identity theft prevention programs in place by year’s end.

The language in the Rule regarding the definition of a creditor included:

  • A creditor is any entity that regularly extends, renews, or continues credit; any entity that regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who is involved in the decision to extend, renew, or continue credit.
  • Accepting credit cards as a form of payment does not in and of itself make an entity a creditor.  Creditors include finance companies, automobile dealers, mortgage brokers, utility companies and telecommunications companies.

According the language of the Rule, healthcare entities are creditors if they render medical services to patients without taking full payment at the time of service (i.e., accepting co-pays and billing insurance for the remainder or offering patients deferred payment).  Patient accounts are covered under the Rule.  

Many professional organizations, including the American Medical Association, filed lawsuits seeking relief for professionals under the Rule.  Several legislators criticized the Rule’s language stating that Congress never contemplated including many businesses that do not operate as creditors in the general understanding of the term, such as healthcare providers, veterinarians, lawyers and accountants.  In light of this, legislators indicated that they recognize they need to be careful that the laws they pass address a problem, and do so in a way that doesn’t adversely and unfairly impact small businesses.

Red Flag Program Clarification Act of 2010

President Obama signed the Act on December 18. The Clarification Act excludes the controversial aspect of the definition of creditor. The Act includes the following language regarding the definition of a creditor as one that regularly and in the ordinary course of business:

  • Obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction;
  • Furnishes information to consumer reporting agencies in connection with a credit transaction;
  • Advances 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 a person.

Creditors do not include those that advance funds on behalf of a person for expenses incidental to a service provided by the creditor to that person.

The measure narrows the applicability of the Rule to cover creditors where identity thieves can do the most harm meaning creditors that use consumer reports, furnish information to consumer reporting agencies and other creditors that loan money such as payday lenders, but do not necessarily use consumer reports.  It also makes it clear that physicians and other healthcare providers, pharmacists, dentists, orthodontists, veterinarians, accountants and attorneys no longer will be classified as creditors simply because they do not receive payment in full from their clients at the time they provide their services. 

FTC Chairman Jon Leibowitz said that he was pleased that Congress addressed the matter.  “We can go forward with less litigation and more consumer protection,” he said in a statement.  Cecil Wilson, M.D., President of the AMA was also pleased with the bill.  He stated, “The AMA is pleased that this legislation supports AMA’s long-standing argument to the FTC that physicians are not creditors.  This bill will help eliminate the current confusion about the Rule’s application to physicians.”

This long-awaited change reflects the initial intent of the Rule.  It will also simplify healthcare providers’ administrative procedures.

Originally published in the Winter 2010 edition of Quinn Quarterly.