FEBRUARY 2011

THE RED FLAGS RULE – DOES IT APPLY TO YOU?

Jeff Holt, CPA - Partner, Assurance & Advisory Practice

In our newsletter a few months back, we mentioned that the new Red Flags Rule was going into effect for
financial institutions and creditors during 2010. Just to refresh your memory, these rules were issued by
the Federal Trade Commission (FTC) to help those institutions fight identity theft by requiring businesses
to implement written identity theft programs and implement a type of risk management system to help
prevent identity theft.

The only “unknown” at the time our initial article was released was that, at the request of Congress, the
FTC delayed enforcement of the Red Flags Rule through December 31, 2010 while Congress considered
legislation that would affect the scope of entities covered by the rule.

Well, we now have clarification on the applicability of this new law.

The “Red Flag Program Clarification Act of 2010” as it is called, was signed into law by President Obama
on December 18, 2010. The Act generally exempts lawyers, accountants, health care and other service
providers from being classified as “creditors” for the purposes of the Fair Credit Reporting Act (FCRA).
Furthermore, the legislations state:
 • The term “creditor” refers only to a business “that regularly and in the ordinary course of
business:”
1. Obtains or uses consumer reports, directly or indirectly, 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 the person
to repay the funds or advances funds repayable from specific property pledged
by or on behalf of that person.
4. The law clarifies that #3 above does not include funds advanced on behalf of
a person for expenses incidental to a service provided by the creditor to that
person.

So, while each organization should seek legal advice to determine if the activities of their organization
are affected by this new legislation, the average small business owner such as a doctor, lawyer or CPA
allowing their customer to pay over time after services have been delivered is not deemed a creditor and
not subject to the Red Flags Rule. However, a nonprofit such as a college or university who allows tuition
to be paid in installments over the school semester would be deemed a creditor under the law.
For more information, or if we can be of assistance to you, please do not hesitate contact one of
SingerLewak’s Nonprofit Partners:

Jeff Holt - Los Angeles Lewis Sharpstone - Los Angeles

JHolt@singerlewak.com LSharpstone@singerlewak.com

Stephen P. Carter - Silicon Valley Rob Schlener - Orange County

SCarter@singerlewak.com RSchlener@singerlewak.com