What Does the Red Flag Rule Mean?

December 29 2010
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Vickie Brady Ahlers Author page »

After numerous extensions spanning two years held off the FTC’s enforcement of the Red Flags Rule, Congress recently passed legislation intended to exclude certain medical professionals, lawyers and select industries from the definition of “creditor” under the Rule. The Red Flag Clarification Act of 2010 (“Clarification Act”) limits application of the Rule only to a “creditor” that:

  1. uses consumer reports in connection with a credit transaction;
  2. furnishes information to consumer reporting agencies in connection with a credit transaction; or
  3. advances funds to or on behalf of a person based on an obligation of that person to repay the funds from specific property pledged by or on behalf of the person. Creditors that “advance funds on behalf of a person for expenses incidental to a service provided by the creditor to that person” are specifically excluded.

While many are touting that the health care industry as a whole has been exempted from the Rule, we say—not so fast. First, the Clarification Act gives the FTC the authority by rule to expand this new definition of creditor based on a determination that a creditor offers or maintains accounts that are subject to a reasonably foreseeable risk of identity theft which could include health care providers. This would be accomplished through future rule-making subject to a comment period and the FTC has not publicly ruled this out. Further, even without an expansion of the current regulations, health care providers may still fall within the rule based on their “creditor”-type activities. For example, if a patient requests a payment plan for their outstanding charges and, in connection with the negotiation of a payment plan the hospital conducts a credit check, the hospital could fall under the definition of “creditor.”

FTC representatives have stated that particular industries will be judged on whether their business activities are in line with the new definition of creditor. Hospitals and physician offices should evaluate their activities in light of these new definitions to determine if the Red Flags Rule may still apply.