The Rule applies to “financial institutions” and “creditors.” It’s important to look closely at how the Rule defines those terms because they apply to groups that might not typically use those words to describe themselves. Whether your business or organization is a financial institution or creditor isn’t based on the line of work you’re in, but rather on whether your activities fall within the definitions in the law. The Red Flags Rule gives examples of businesses and organizations that probably are covered, but the list isn’t exhaustive.
The Rule defines a “financial institution” as: 1) a state or national bank, 2) a state or federal savings and loan association, 3) a mutual savings bank, 4) a state or federal credit union, or 5) any other entity that directly or indirectly holds a “transaction account” belonging to a consumer. “Transaction accounts” are deposits or accounts from which a consumer can make payments or transfers to third parties.3 Banks, federally chartered credit unions, and savings and loans come under the jurisdiction of the federal bank regulatory agencies or the National Credit Union Administration and should check with them for guidance. The FTC’s jurisdiction extends to state chartered credit unions and other institutions that hold transaction accounts — for example, mutual funds that offer accounts with check writing or debit card privileges or other businesses that offer accounts where consumers can make payments or transfers to third parties.
Under the Rule, the definition of “creditor” is broad, and includes businesses or organizations that regularly provide goods or services first and allow customers to pay later. Examples of groups that may fall within this definition are utilities, health care providers, lawyers, accountants, and other professionals, and telecommunications companies. The definition also covers businesses or organizations that regularly grant loans, arrange for loans or the extension of credit, or make credit decisions. Examples include finance companies, mortgage brokers, and automobile dealers or retailers that offer financing or collect or process credit applications for third party lenders. In addition, the definition includes anyone who regularly participates in the decision to extend, renew, or continue credit, including setting the terms of credit. For example, a third-party debt collector who regularly renegotiates the terms of a debt would be a creditor under the Rule.
Once you’ve determined you’re a creditor or financial institution under the Red Flags Rule, the next step is to figure out if you have any covered accounts. The Rule defines that term as either: 1) consumer accounts designed to permit multiple payments or transactions, or 2) any other account that presents a reasonably foreseeable risk from identity theft.
If you have covered accounts, you must develop and implement a written Program to detect and respond to the red flags of identity theft — taking into consideration the nature of your business and the risks you face — and update your Program periodically. If you don’t have any covered accounts, you don’t need a written Program, but you still need to conduct periodic risk assessments to determine if you’ve acquired any covered accounts through changes to your business.