By Johnna Leeds
The Fair Credit Reporting Act (FCRA) is a federal law that protects information collected by consumer reporting agencies (CRAs) such as credit bureaus, background screening companies, and tenant screening services. If companies using third parties to provide these reports don’t abide by its regulations, they may be found non-compliant and fined or sued. In fact, the number of FCRA lawsuits has tripled from 2011 to 2021.
While the FCRA regulates the way consumer information can be gathered, used, and shared, following and executing a compliant strategy can be confusing. There are many ideas about the FCRA that are just plain wrong.
It’s important for employers, landlords, lenders and all users of consumer reports to have an accurate understanding of the FCRA so they can stay in compliance. That means knowing what is true about FCRA requirements and what isn’t.
5 Misconceptions About the FCRA
Myth #1: The FCRA only applies to a consumer’s credit report.
One of the most recognized consumer reports is the credit report, which is used by creditors to determine a person’s creditworthiness. However, it isn’t the only report governed by the FCRA. There are other consumer reports, such as background check reports, that are covered as well.
The FCRA defines a consumer report as “any written, oral, or other communication of any information bearing on a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.” These reports may collect information to use in credit, employment, rental, and insurance decisions, or any other permissible purpose.
Fact: Companies must use all third-party gathered consumer reports, not just credit reports, in compliance with the FCRA.
Myth #2: An employer can pull information on an applicant for any reason.
It’s widely assumed that employers and personal associates alike can “check someone out” for curiosity’s sake. This is untrue and violates the FCRA.
The FCRA lays out finite permissions as to who, why, and when consumer reports can be used. These are called “permissible purposes.”
Some acceptable permissible purposes are the extension of credit, employment purposes, underwriting insurance, determining the consumer’s eligibility for certain licenses, or in connection with a consumer-initiated business transaction.
Fact: The FCRA requires a permissible purpose to use the information collected in a consumer report.
Myth #3: The FCRA has little impact on regulated industries.
Organizations that give the FCRA little thought because “it doesn’t apply to them” could be setting themselves up for costly headaches down the road. The law affects almost every business in some manner.
Companies that use a background screening company to compile background checks in their hiring process are subject to the FCRA, as are companies that “pull” their customers’ credit before extending or increasing terms.
Fact: The FCRA is a wider blanket affecting more aspects of business than many companies understand. Leaders should take time to review how the federal law impacts their companies.
Myth #4: Information in a consumer report can be used to take adverse action on a job applicant without telling the applicant about it.
This misconception is especially confusing because it’s a partial truth. Yes, employers are within their rights to access a CRA-collected consumer report and use it to reach hiring decisions. However, they must do it transparently. Consumers must provide authorization that they are aware of and agree that a report can be compiled on them and used for the purpose in question.
The FCRA lays out the rule for authorization by stating “A person may not procure or cause to be prepared an investigative consumer report on any consumer unless:”
(1) it is clearly and accurately disclosed to the consumer that an investigative consumer report including information as to their character, general reputation, personal characteristics, and mode of living, whichever are applicable, may be made, and such disclosure:
(A) is made in a writing mailed, or otherwise delivered, to the consumer, not later than three days after the date on which the report was first requested.
(B) includes a statement informing the consumer of their right to request the additional disclosures provided for under subsection (b) of this section and the written summary of the rights of the consumer prepared pursuant to section 609(c) [§ 1681g].
(2) the person certifies or has certified to the consumer reporting agency that:
(A) the person has made the disclosures to the consumer required by paragraph (1).
(B) the person will comply with subsection (b).
(Source: Fair Credit Reporting Act).
Fact: When companies order a consumer report for a permissible purpose, they must inform and receive written authorization from the consumer.
Myth #5: Companies that use consumer reports have no obligation to allow the subject of the report to dispute erroneous information.
In a perfect world, every piece of data collected on a consumer would be complete and accurate. Unfortunately, various factors combined with human error cause mistakes to show up on reports. The FCRA protects consumers from having adverse action (such as being turned down for a mortgage loan or losing out on a job) taken against them based on erroneous information.
The FCRA requires companies to give consumers the right to dispute incorrect information on any consumer report. For example, employers that are using the information in a background check report to choose not to hire a candidate must:
1)Notify the applicant in writing. This is called the “Pre-Adverse Action Letter” which must include the name and contact information of the firm that provided the report.
2) Include a “Summary of Rights Under the FCRA, a statement notifying the consumer they are entitled to a copy of the report at no charge, and a statement that the CRA that compiled the report did not decide to take adverse action.
The applicant has the right to dispute the information found in the consumer report. They would contact the CRA and file a dispute, which the CRA would then investigate. The CRA would provide a copy of the re-investigated report to the employer and the consumer.
The employer would review the re-investigated report and make a final decision. The FCRA does NOT require the employer to hold the position open until the dispute is settled.
Fact: The FCRA requires companies using consumer reports to inform consumers if and when they are taking adverse action due to information contained in the report. The consumer has the right to dispute any erroneous information.
When it comes to using third-party-built consumer reports, it’s crucial for companies to follow the FCRA requirements to the letter or risk non-compliance. By understanding the intricacies of the law, and being aware of the common misconceptions, it’s easier to maintain a fair hiring process and avoid lawsuits.
SVP Compliance
Data Facts, Inc.
[email protected]
www.datafacts.com