On December 18, 2010, President Obama signed S.3987 into law. As we noted in our December 14th blog posting, the purpose of the legislation is to limit the types of businesses and entities defined as “creditors” which are required to comply with the Red Flags Rule (“Rule”).
As we have noted, prior to S.3987 being signed into law, we believed that community associations which enter into payment plans or stipulations for payment of past due assessments likely fell under the definition of “creditor” and were required to comply with the Rule. Likewise, associations which bill-back charges for services after they had been rendered likely fell under the Rule.
The question now is whether the legislative fix exempts community associations from the definition of “creditor.” S.3987 defines in part that a “creditor” for purposes falling under the Rule: “. . . regularly and in the ordinary course of business – (i) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction; (ii) furnishes information to consumer reporting agencies, . . ., in connection with a credit transaction; or (iii) advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person. . .”
The bill specifically excludes from the definition of “creditor” an entity that “advances funds on behalf of a person for expenses incidental to a service provided by the creditor to that person. . .”
While we don’t know at this time how the Federal Trade Commission (“FTC”) is ultimately going to interpret the new definition of “creditor” – it seems reasonable to conclude that a community association that pulls credit reports of delinquent homeowners as part of the process of granting payment plans or stipulations will fall within the definition of “creditor” and must comply with the Rule. Likewise, an association will fall under the Rule if the association utilizes a law firm or collections agency to handle collections and that firm or agency pulls collection reports of delinquent homeowners as part of the payment plan or stipulation process. Community associations that report – or use an agent to report – delinquent homeowners to consumer reporting agencies may also fall under the Rule.
The FTC has not yet interpreted the new definition of “creditor” or delayed implementation of the Rule. We will provide you with updated and more definitive information as it becomes available.