Red Flags Rule Interpretation Raises Red Flags
We noted in an earlier post that the FTC determined that the Red Flags Rule applies to retailers who pass credit card applications on to lenders. However, there appears to be strong arguments against this interpretation.
The Red Flags Rule relies on the Equal Credit Opportunity Act’s definition of “creditor,” which is codified at 12 C.F.R. § 202.2(l):
Creditor means a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit. The term creditor includes a creditor's assignee, transferee, or subrogee who so participates. For purposes of Sec. 202.4(a) and (b), the term creditor also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made. A person is not a creditor regarding any violation of the Act or this regulation committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction. The term does not include a person whose only participation in a credit transaction involves honoring a credit card.
(emphasis added).
By its terms, the definition of “creditor” encompasses a person who “refers applicants or prospective applicants” only for purposes of §§ 202.4(a) and (b). Those sections address non-discrimination and non-discouragement in extension of credit. Thus, if a retailer were to discourage someone from applying for a cobranded credit card, or if it were to select which credit card applications to pass on to the lender, that retailer might be liable under ECOA Regulation B. But the rest of Regulation B does not apply to those who simply pass on credit applications. See, e.g., Treadway v. Gateway Chevrolet Oldsmobile Inc., 362 F.3d 971, 978-79 (2004) (holding that automobile dealership was creditor because it "regularly participated in a credit decision" by deciding whether to pass an application on to the lender, though it would not be a creditor if all it did was pass applications on without making such decisions) (decision attached).
The Federal Reserve Board's supplement to the § 202.2(l) comments supports this interpretation and was partially the basis for the Seventh Circuit's opinion in Treadway:
Some industry commenters expressed concern that the clarification would include in the definition of creditor persons without discretion to decide whether credit will be extended. The Board recognizes that in the credit application process persons may play a variety of roles, from accepting applications through extending or denying credit. Comment 2(l)-2 is intended to clarify that where the only role a person plays is accepting and referring applications for credit, or selecting creditors to whom applications will be made, the person meets the definition of creditor, but only for purposes of the prohibitions against discrimination and discouragement. For example, an automobile dealer may merely accept and refer applications for credit, or it may accept applications, perform underwriting, and make a decision whether to extend credit. Where the automobile dealer only accepts applications for credit and refers those applications to another creditor who makes the credit decision-for example, where the dealer does not participate in setting the terms of the credit or making the credit decision-the dealer is subject only to §§ 202.4(a) and (b) for purposes of compliance with Regulation B.
68 F.R. 13144, 13155, quoted in Treadway, 362 F.3d at 979.
Finally, other recent cases are consistent with both the supplemental comment and Treadway. See, e.g., Cochran v. Northeast Mortgage, LLC, Civil No. 3:06CV01131(AWT), 2007 U.S. Dist. LEXIS 61125, at **5-7 (D. Conn. Aug. 21, 2007); Barnette v. Brook Rd., Inc., 457 F. Supp. 2d 647, 654-655 (E.D. Va. 2006); Logsdon v. Dennison Corp., Case No. 05-1242, 2007 U.S. Dist. LEXIS 41501, at **8-10 (C.D. Ill. June 7, 2007).
Your analysis is on point. I think the conclusion you should draw is that the reason why this second, broader definition of creditor under Regulation B should NOT apply to the FCRA (and the Rule) is that neither the FCRA and the Rule have an anti-discriminatory purpose, which is at the heart of the definition. More importantly, while you make a valid point, the FTC did not say that the Rule applies to retailers who merely accept credit card applications for forwarding to issuers. Rather, FTC lawyers acknowledged on multiple panels that they would approach this question on a case by case basis, which is warranted by case law. If all a retailer does is forward the application, then the retailer would not be subject to the Rule, but if there is more involvement, then perhaps yes. If you look at case law surrounding Reg. B, you'll note that "participating" in a credit decisions is defined broadly to include, for example, advocating for credit, sharing in the interest rate and many other activities that are common in the context of a retailer involved in a private label card program. Those retailers would be subject to the Rule, and rightly so, because they fall within the primary definition of "creditor" under Reg B. Now... I know you're not going to post my comment, but I just wanted to share my thoughts with the author of the post without identifying myself. I hope you find this helpful.