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The Fair Credit Reporting Act (FCRA) of 1970, protects individuals by requiring consumer reporting agencies providing information to adopt procedures that promote confidentiality, accuracy, relevancy, and proper use of that information. Employers requesting consumer reports, too, have responsibilities under the FCRA.
The FCRA is Subchapter III of a larger act called the Consumer Credit Protection Act of 1968 (CCPA). For details on the CCPA, visit the EZ Explanation called Consumer Credit Protection Act.
Consumer reports
A consumer report contains information about a person’s personal and credit characteristics, character, general reputation, and lifestyle. To be covered by the FCRA, a report must be prepared by a consumer reporting agency (CRA), a business that assembles such reports for other businesses.
Employers often do background checks on applicants and get consumer reports during their employment. Some employers only want an applicant’s or employee’s credit payment records; others want driving records and criminal histories. For sensitive positions, it’s not unusual for employers to order investigative consumer reports—reports that include interviews with an applicant’s or employee’s friends, neighbors, and associates. All of these types of reports are consumer reports if they are obtained from a CRA.
Applicants are often asked to give references. Whether verifying such references is covered by the FCRA depends on who does the verification. A reference verified by the employer is not covered by the Act; a reference verified by an employment or reference checking agency (or other CRA) is covered. In the Definitions Section of FCRA, the term Excluded Communications provides special procedures for reference checking; otherwise, checking references may constitute an investigative consumer report subject to additional FCRA requirements.
Key provisions of the FCRA
Certifications to consumer reporting agencies
Before giving an employer an individual’s consumer report, the CRA will require that employer to certify that the employer is in compliance with the FCRA and that the employer will not misuse any information in the report in violation of federal or state equal employment opportunity laws or regulations.
Written notice and authorization
Before the employer can get a consumer report for employment purposes, the employer must notify the individual in writing—in a document consisting solely of this notice—that a report may be used. Employers also must get the person’s written authorization before they ask a CRA for the report. (Special procedures apply to the trucking industry and for employee misconduct investigations.)
Adverse action procedures
If an employer relies on a consumer report for an “adverse action” (denying a job application, reassigning or terminating an employee, or denying a promotion) then:
- Step 1: Before the employer takes the adverse action, the employer must give the individual a pre-adverse action disclosure that includes a copy of the individual’s consumer report and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” a document prescribed by the Federal Trade Commission. The CRA that furnishes the individual’s report will give the employer the summary of consumer rights.
- Step 2: After the employer has taken an adverse action, the employer must give the individual notice—orally, in writing, or electronically—that the action has been taken in an adverse action notice. It must include:
- The name, address, and phone number of the CRA that supplied the report;
- A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and
- A notice of the individual’s right to dispute the accuracy or completeness of any information the agency furnished, and his or her right to an additional free consumer report from the agency upon request within 60 days.
Trucker exemption
In 1998, Congress amended the FCRA to provide special procedures for mail, telephone, or electronic employment applications in the trucking industry. Employers do not need to make written disclosures and obtain written permission in the case of applicants who will be subject to state or federal regulation as truckers. Finally, no pre-adverse action disclosure is required. Instead, the employer must, within three days of the decision, provide an oral, written, or electronic adverse action disclosure consisting of:
- A statement that an adverse action has been taken based on a consumer report;
- The name, address, and telephone number of the CRA;
- A statement that the CRA did not make the decision; and
- A statement that the consumer may obtain a copy of the actual report from the employer if he or she provides identification.
Also, be aware of the procedures set under section 4014 of TEA-21 (Transportation Equity Act for the 21st Century enacted June 9, 1998) and 49 CFR 391.23 with respect to obtaining and providing information about a driver’s safety performance history.
Employee misconduct investigation exclusion
In 2003, Congress amended the FCRA to provide exclusion for certain employee misconduct investigations. Now employers are allowed to use consumer reporting agencies to investigate suspected employee misconduct, such as sexual harassment or securities fraud, without being required to obtain the employee’s consent first.
The change alters the effect of what is known as the “Vail Opinion Letter,” which stated that employers who hired third-party organizations to investigate allegations of sexual harassment had to provide prior notice to the individual being investigated and get that individual’s approval, under the FCRA. With the new amendment, this hurdle is removed, making it easier to perform workplace investigations and reducing risk to whistleblowers. Employers must still provide notice to employees, but not until after the investigation.
Enhanced disclosure requirements related to credit scores
Section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the FCRA’s disclosure requirements related to adverse action taken because of an individual’s credit score.
If a credit score is used in whole or in part in an employer’s decision to take adverse action against an employee or applicant, the employer must disclose the following information either electronically or in writing:
- The credit score used in taking adverse action;
- The range of credit scores possible under the credit scoring model used;
- The factors (not to exceed four) that adversely affected the credit score, ranked in order of importance;
- The date the credit score was created;
- The name of the CRA that supplied the credit score; and
- A prescribed statement explaining credit scores.
Additionally, if the number of credit inquiries made with respect to the individual’s credit report is a factor that adversely affected the individual’s credit score, it must be reported. It should not be counted as one of the four factors (see No. 3 in the list above).
The enhanced credit score disclosure requirements are in addition to the existing pre-adverse action and adverse action disclosures.
If no credit score is used in making an adverse employment decision, or if a decision is made because an individual has no credit score, the employer does not need to make the additional credit score and related information disclosures. However, the employer will still need to provide the traditional pre-adverse action and adverse action disclosures.
Noncompliance
There are legal consequences for employers who fail to get an applicant’s permission before requesting a consumer report or who fail to provide pre-adverse action disclosures and adverse action notices to unsuccessful job applicants. The FCRA allows individuals to sue employers for damages in federal court. A person who successfully sues is entitled to recover court costs and reasonable legal fees. The law also allows individuals to seek punitive damages for deliberate violations. In addition, the Federal Trade Commission, other federal agencies, and the states may sue employers for noncompliance and obtain civil penalties.
The National Small Business Ombudsman and 10 Regional Fairness Boards collect comments from small businesses about federal compliance and enforcement activities. Each year, the Ombudsman evaluates the conduct of these activities and rates each agency’s responsiveness to small businesses. Small businesses can comment to the Ombudsman without fear of reprisal.
The FACT Act
The Fair and Accurate Credit Transactions Act (FACT Act) of 2003 made sweeping changes and additions to the Fair Credit Reporting Act (FCRA). For the most part, the changes aimed to protect consumers from identity theft. See the EZ Explanation called FACT Act.