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FTC New Rule And The Implications For Law Firms And Their Clients

by Sardar N. Durrani, Esq.,and Andrea L. Sumpter, Esq.

The Federal Trade Commission (FTC), the federal bank regulatory agencies, and the National Credit Union Administration (NCUA) have issued regulations (the Red Flags Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs, as part of the Fair and Accurate Credit Transactions (FACT) Act of 2003. The program will be implemented August 1, 2009, and must provide for the identification, detection, and response to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft.

The Red Flags Rules apply to “financial institutions” and “creditors” with “covered accounts.” Under the Rules, a financial institution is defined as a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or any other entity that holds a “transaction account” belonging to a consumer. Most of these institutions are regulated by the Federal bank regulatory agencies and the NCUA. Financial institutions under the FTC’s jurisdiction include state-chartered credit unions and certain other entities that hold consumer transaction accounts.

A transaction account is a deposit or other account from which the owner makes payments or transfers. Transaction accounts include checking accounts, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.

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. Where non-profit and government entities defer payment for goods or services, they, too, are to be considered creditors. Most creditors, except for those regulated by the Federal bank regulatory agencies and the NCUA, come under the jurisdiction of the FTC.

A covered account is an account used mostly for personal, family, or household purposes, and that involves multiple payments or transactions. Covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts, and savings accounts. A covered account is also an account for which there is a foreseeable risk of identity theft – for example, small business or sole proprietorship accounts.

Under the Red Flags Rules, financial institutions and creditors must develop a written program that identifies and detects the relevant warning signs – or “red flags” – of identity theft. These may include, for example, unusual account activity, fraud alerts on a consumer report, or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the financial institution or creditor, include appropriate staff training, and provide for oversight of any service providers.

The Red Flags Rules encourage all financial institutions and creditors to use the following five categories as starting points:

  • alerts, notifications, or warnings from a consumer reporting agency;
  • suspicious documents;
  • suspicious personally identifying information, such as a suspicious address;
  • unusual use of – or suspicious activity relating to – a covered account; and notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts.

Law firms are included under the “creditor” section because Lawyers, by law, are required to “defer payment for goods or services.” New York, Arkansas, Colorado, Illinois, Ohio, Virginia, Oregon and Wisconsin State Bar Association oppose the implementation of the Red Flag Rules on Law firms. The rules, which are slated to take effect on Aug. 1, implement a 2003 statute aimed at curbing identity theft.

ABA President, H. Thomas Wells, denounces the rules as imposing "an undue burden on law firms, especially solo practitioners," while accomplishing "very little." New York County Lawyers delivered a report to the FTC objecting that the rules have "the potential to intrude on the profoundly confidential nature of the lawyer-client relationship that is now regulated by the states through the Rules of Professional Conduct."

Other reasons cited by legal associations for opposing the rules include the rules being "unnecessary and beyond the intent of Congress, and "the new rule "chills the lawyer client relationship" because it "requires lawyers to grill their own clients" for any indication that "they are engaged in suspicious activity involving identity theft."

Wells contends that Congress did not intend to apply the 2003 law's definition of "creditors" to lawyers who "merely bill for services after they are rendered."

"Regardless of the specifics of billing arrangements," Wells stated, "lawyers cannot ethically charge for legal services until they are rendered." The FTC has not identified "a single case of identity theft in the legal services context, suggesting that such a scenario is far-fetched, if not impossible," he added.

Moreover, Wells contended that the 2nd U.S. Circuit Court of Appeals in Shaumyan v. Sidetex Co., 900 F. 2d 16 (1990), has already ruled that legal fees are not "credit transactions."

Broder, of the FTC, countered that the "plain language" of the definition of creditor referenced in the 2003 act "very broadly defines" creditors as any business that "regularly allows its customers to defer payment."

About The Author

Sardar N. Durrani, Esq. works and is the Supervising Attorney of Durrani Law Firm and Centro Legal De Immigration. He Practices exclusively in immigration law. The law firms provide strategic counseling to Individuals and corporations from a wide array of professions and industries. He is a member of the American Immigration Lawyers Association. Mr. Durrani is married, has four beautiful kids and spends his free time flying.

Andrea Love Sumpter is a recent graduate of UW Law School practicing in the area of Immigration Law.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.