District Court Bars FTC’s Application of Red Flag Rules to Attorneys

Do you think of yourself as a “creditor” because you render legal services and then collect after the services are rendered?  I don’t! In fact, most of my clients would not like the idea of me saying “paid on the front” it’s the rule of the FTC.

When in April 2009 the FTC declared that because lawyers “permit deferred payment for goods and services” lawyers are a creditor and therefore must create plans to protect against “identity theft” I was just amazed at their over-reaching.    The Rules would require lawyers to  identify, detect and respond to relevant patterns, practices, and specific forms of activity that are “red flags,” signaling possible identify theft.  The Plan would have to be periodically updated to reflect changes in the  risks “identified” or “detected.”

The  declaration should be seen for what it is:  a grab for more Federal governmental power over another industry.  No doubt, lawyers could have complied.  We are certainly smart enough.  However, who pays the cost of compliance?  You’re right,the consumer of legal services.

The impact fof this clearly erroneous application would have been to increase legal fess while providing only nominal benefit to the consumer.  In effect, it was another hidden “tax” that the consumer would have to pay.

In addition to lobbying efforts, the American Bar Association filed a lawsuit seeking a declaration that the Red Flag Rules do not apply to lawyers.  The  U.S. District Court for the District of Columbia has now entered an order in response to the complaint ruling that the Red Flag Rules do not apply to lawyers.  That’s good.

If you want to see the FTC’s guide to the Red Flag Rules go to their site. You’ll find that they have now postponed application of the rules until June 1, 2010.

Additionally, the House has passed a bill exempting attorneys from application of the Fair and Accurate Credit Transactions Act of 2003 (FACTA) (the law the FTC was “enforcing” when it promulgated the Red Flag Rules).  It will be good if the Senate passes the bill and President Obama signs it