Making Sense of the Federal Fair Credit Reporting Act (FCRA)

From laws dictating minimum wage to regulations on age discrimination, there are many laws about labor in this country. However, managers may not think to Google “laws about running a background check.” Company leaders understand the importance of sexual harassment laws, workplace safety rules, and family leave guidelines, but it’s unusual for managers to be familiar with the Federal Fair Credit Reporting Act (FCRA), just one of several federal laws that mandate specific actions when partnering with a background check service.

This article reviews what the FCRA states and explains why the FCRA is important for employers and employees alike.

Introduction to the Federal Fair Credit Reporting Act (FCRA)

The Federal Fair Credit Reporting act protects individuals’ privacy while aiming to advance fairness and truthfulness among Credit Reporting Agencies (CRAs). CRAs, also known as credit bureaus or consumer reporting agencies, originally came about at the very end of the 1900s. Their main role was and is to collect information on individuals on behalf of employers, banks, landlords and others. You can think of a CRA as a sort of background check company.

The use of a background check service is obvious. Business owners, loan providers and property owners need a way to ensure that the individuals they employ or do business with are honest; a background check company can therefore bring peace of mind. However, by the 1960s many were calling for more restrictions on background check service providers.

The first problem was that the CRAs’ “investigative consumer reports” were being used to deny job opportunities and basic services, yet individuals had no way to examine what was in their reports. Moreover, it was found that some CRAs were falsifying reports in order to meet internal company quotas on negative background information. Finally, not every background check company simply reported an individual’s credit and criminal history – some also gathered “lifestyle information” on a person’s sexual preference, drinking habits, cleanliness, etc.

You can appreciate why many Americans were upset to learn that some CRAs also shared their findings with law enforcement and other unauthorized persons. For all these reasons, Missouri Representative Leonor Sullivan and Wisconsin Senator William Proxmire lead the years-long battle to pass the FCRA in 1970.  Since then, the Federal Trade Commission (FTC) has prosecuted violators of the FCRA. In 2000, the FTC brought a case that resulted in a $2.5 million settlement paid by three CRAs. Even more recently, the FTC has warned developers of background check apps for Smartphones that they could be violating the FCRA.

What Employers and Employees Need to Know about the Fair Credit Reporting Act

Both laborers and the companies they work for have an interest in understanding the FCRA. Employees should be aware of their rights under the law. All individuals have the right to access a background check company’s files on him or her. To access your credit reports, go to AnnualCreditReport.com, a government-authorized website. If you find inaccuracies, you have the right to dispute them with the background check company. According to the FCRA, the background check service is required to take steps to verify the truthfulness of their findings.

Finally, individuals should know that the FCRA bans CRAs from keeping negative information on credit reports past a specified amount of time. For instance, late payments cannot be kept on a credit report for longer than seven years. Bankruptcies stay for ten years, and tax liens appear for seven years after they have been paid. Because employers and others use credit reports to judge your personal character, it’s important to stay up-to-date on your credit reports.

Employers should also be very careful about their dealings with CRAs. Managers should appreciate that one non-compliant background check company can destroy an individual’s reputation. The background check service you contract with could impact the investigatee for decades to come. And if word gets out that you’re using a questionable background check company, you’ll find it very difficult to attract new hires.

Here are a few tips to help you avoid violating FCRA standards:

Avoid any service that doesn’t comply with FCRA. This seems obvious, but the advent of new internet-based background check services that offer the opportunity to “know anything about anyone immediately” has complicated things. We recommend using a professional, established background check service, even if it appears to cost a bit more up front. (Remember, you can’t buy back a reputation for honesty.)

Notify job seekers of adverse actions taken as a result of CRA findings. If you decide not to offer employment to an individual based on negative findings provided by the background check company, you are required to notify the applicant in writing of your decision. You must include the contact information for the CRA, along with an explanation of the consumer’s rights to access their credit report and dispute the background check service’s findings. Additionally, you must state that the CRA did not make the ultimate adverse decision, so they cannot explain why the decision was made.

Properly dispose of consumer report information. Section 628 of the FCRA dictates that those who receive individuals’ credit information must dispose of it properly.


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