As the National Association of Credit Management ("NACM") has reported to its members throughout this year, a substantial concern had arisen with respect to the applicability of the Financial Services Modernization Act of 1999, which is formally known as the Gramm-Leach-Bliley Act ("GLB"), as it may affect trade creditors. The perceived ambiguity in the language of the GLB and the lack of preciseness in regulations promulgated by the federal regularity authorities had led NACM to take a very conservative approach with respect to the advice that it has given to its members concerning the lack of certainty with respect to the applicability of GLB, not only to trade creditors, but also to other business entities. Indeed, the American Bar Association promulgated recommendations to its members concerning the need for law firms to give the GLB privacy notice to their clients. Based on further review and additional materials, NACM has changed its position and now believes that the GLB does not apply to trade or business creditors unless consumer credit is extended in a particular transaction.

As has been previously reported, Title V of the GLB entitled "Privacy" was created in order to further the congressional intent and mandate that individuals would have adequate protection with respect to the privacy of their personal financial information. Although the GLB dealt more with the deregulation of the banking industry, Title V was to apply to all "financial institutions," with that term having a very broad interpretation. This policy was made clear in the preamble to Title V of the GLB when it provides:

PRIVACY OBLIGATION POLICY - It is the policy of Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers' non-public personal information.

The concern of NACM and others did not originate from the language of the GLB. Unfortunately, because of the lack of preciseness and ambiguity in the GLB, one could interpret the provisions of Title V to either apply or not to apply to trade credit. The GLB is clear that it is only to apply to consumers who are defined as individuals who purchase goods or services primarily for personal, family or household use. The GLB further defines the term "customer" as a "consumer." As had been previously reported, at first blush, it appeared that the GLB would not be applicable to trade credit. Since there was ambiguity, and based on positions taken as a result of statements made by the Federal Trade Commission ("FTC") with respect to the Fair Credit Reporting Act ("FCRA"), NACM believed that it must advise its members that the GLB should be considered to apply to trade credit until the situation could be clarified. The FTC's position on the FCRA originated in a letter dated July 26, 2000 to NACM's counsel. David Medine, Associate Director of the Division of Financial Practices of the FTC, responded to a question raised by NACM's counsel as to whether or not with respect to sole proprietorships, partnerships, small businesses or situations where personal guaranties are provided to the creditor, trade credit grantors would be required to comply with the FCRA and obtain written consent before using consumer credit reports. It had been originally thought that the FCRA would not apply to trade or business credit, but there was uncertainty as well. Since last July when the Medine letter was received, NACM has been attempting to gain a clarification or reversal of the position taken by Mr. Medine in his letter.

When this ambiguity was noted, NACM sought clarification from legislative and regulatory offices to state that the GLB did not apply to trade credit. When this was not forthcoming and given the concern about the liability for non-compliance, NACM issued advice to its members to consider the GLB applicable to trade credit. As a result of further research and as noted below, it now appears that the GLB does not apply to the extension of trade or business credit.

On June 22, 2001, Joel Winston, acting Associate Director of the Division of Financial Practices of the FTC issued a letter to counsel for various federal agencies concerning the letter sent to counsel for NACM on July 26, 2000 by Mr. Medine. The text of that letter is as follows:

Dear Banking Agency Counsels:

This responds to your May 31 letter concerning the Federal Trade Commission staff opinion letter dated July 26, 2000 from David Medine, former Associate Director for Financial Practices, to Charles Tatelbaum.

That letter was in response to Mr. Tatelbaum's request for the Commission staff's written views on whether a permissible purpose exists under the Fair Credit Reporting Act ("FCRA") for a business credit grantor to obtain a consumer report on an individual who is a principal, owner, or officer of a commercial loan applicant (a sole proprietorship, partnership, or corporation), or who signs a personal guarantee in connection with a commercial credit application by a third party. Mr. Medine's letter set forth the position of the Commission staff that neither Section 604(a)(3)(A) nor Section 604(a)(3)(F)(i) of the FCRA provides such a purpose.

Your letter advocates an alternative interpretation of Section 604(a)(3)(A), concluding that "the FCRA would permit a lender to obtain a consumer report in connection with a business credit transaction where the consumer in question is or will be personally liable on the loan, such as in the case of an individual proprietor, co-signer, or guarantor." ⁽¹⁾

We agree that it is reasonable to view a business transaction in which an individual has accepted personal liability for the business debt as involving the consumer, thus providing a permissible purpose for the lender to obtain a consumer report under Section 604(a)(3)(A). We understand your practical reasons for desiring that all parties be able to rely on your interpretation. Therefore, we are willing to consider the Tatelbaum letter superseded to the extent that it concludes otherwise.

This informal staff letter is not binding on the Commission.

Sincerely,

Joel Winston

Endnote:

⁽¹⁾ However, we note that you "generally agree that a lender would not have a permissible purpose under Section 604(a)(3)(A) of the FCRA to obtain a consumer report on an individual who will not be personally liable for repayment of the credit, such as when the individual is a shareholder, director, or officer of a corporation, but does not guarantee or co-sign the loan, and is not an individual proprietor liable for the loan."

This very significant letter has a major impact upon NACM members and trade creditors at large. First, and foremost, it reverses the position taken by Mr. Medine concerning the use of consumer credit reports in a business or trade credit situation. NACM members can now resume the appropriate practice of utilizing consumer credit reports on trade or business credit transactions where the transaction itself does not involve a consumer transaction primarily for personal, family or household use.

Just as significant is the fact that with the reversal of the FTC's position taken by Mr. Medine, based on regulations of the FTC and this letter, the possible FTC interpretation of the GLB which would expand the GLB formalized NACM's reversal of position. Utilizing the rationale set forth above in the letter from Mr. Winston of the FTC and in reviewing the regulations, it can no longer be interpreted or argued that the ambiguous language of the GLB (which is similar to the language in the FCRA) could be used to require applicability of the GLB in a non-consumer situation such as the extension of trade or business credit. This effects the clarification needed to remove the ambiguity and uncertainty that had existed until this letter was issued.

This conclusion is further amplified by regulations that have been promulgated by the FTC dealing with the scope of Part V of the GLB. Taking the regulations and reading them consistently with the above referenced letter from the FTC clearly leads to the conclusion that the GLB will not affect trade or business credit.

Having said all of the above, this does not create a situation for the carte blanche ignoring of the provisions of either the FCRA or the GLB. To the extent that a trade creditor may extend consumer credit to a customer either in a series of transactions or something more than a single isolated transaction, the trade credit grantor is still required to comply with both laws for the consumer transaction. Trade credit grantors cannot rely on the fact that these transactions may only be occasional to fail to comply with either or both statutes.

A clarification needs to also be given to a prior writing by NACM concerning the potential applicability of the GLB to trade or business credit. A statement was made that the Attorney General's office of the State of Idaho had effected notification to NACM's Affiliates in that state concerning the applicability of the GLB. This is not correct. The Business Licensing Division of the state effected a written communication to many businesses in the state. On a telephone inquiry to that division, the stated position was that the GLB applied to all "financial institutions" in the state, and since the GLB had a broad interpretation as to what constituted a "financial institution," the notification was sent to many business entities within that state.

What should the prudent trade creditor do? To the extent one can be assured that a particular transaction involves trade or business credit which, once again, means that it is not a consumer transaction which is primarily for personal, family or household use, the trade creditor can utilize consumer credit reports for legitimate business transactions without the written consent of the individual whose credit report is to be used, and, at the same time, eliminate the need for compliance with Part V of the GLB.

Charles M. Tatelbaum, Esq., BCBL, BCBB is NACM's counsel and practices with the law firm of Cummings and Lockwood in Naples, Florida. He can be reached at ctatelbaum@cl-law.com .

The following extract was taken from the Federal Register dated May 24, 2000 and describes the scope of the GLB as defined by the Federal Trade Commission (FTC). The same language was also published in the Register by the Federal Reserve, OTS, FDIC and the OCC.

Section 313.1 Purpose and Scope

Purpose. Paragraph (a) of this section states that the rule is intended to require a financial institution to provide notice to customers about its privacy policies and practices; to describe the conditions under which a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties; and to provide a method for consumers to prevent a financial institution from disclosing that information to certain nonaffiliated third parties by "opting out" of that disclosure, subject to various exceptions as stated in the rule. No significant comments addressed this provision, and the Commission made no substantive change to this section.

Scope. Paragraph (b) sets out the scope of the rule and tracks the enforcement role assigned to the Commission by section 505(a)(7) of the GLB Act. It states that the rule applies only to information about individuals who obtain a financial product or service from a financial institution to be used for personal, family or household purposes. The principal type of entity subject to the rule is a "financial institution," a term section 509(3) of the GLB Act defines very broadly to mean "any institution the business of which is engaging in financial activities as described in section 4(k) of the Bank Holding Company Act of 1956" (12 U.S.C. 1843(k)). Those "financial activities" include not only a number of traditional financial activities specified in section 4(k) itself, \6\ but also those activities that the Federal Reserve Board has found to be either closely related to banking, \7\ or usual in connection with the transaction of banking or other financial operations abroad, \8\ by regulation (or order or interpretation) "in effect on the date of the enactment of the Gramm-Leach-Bliley Act." \9\ Section 313.1(b) also lists some examples of "financial institutions" subject to Commission jurisdiction under the Act. Finally, this part notes that the Commission is also authorized to enforce the Act against "other persons" who are not financial institutions but receive protected information from a financial institution and are subject to section 502(c) of the GLB Act ("Limits on Reuse of Information"), which imposes restrictions on recipients of such information as set forth in 16 CFR 313.11, infra.