Understanding the Fair Credit Reporting Act: Does it Apply to Your Business?

The Fair Credit Reporting Act (FCRA) usually pertains to credit transactions by a consumer. In some cases, it may apply to commercial credit transactions as well. Employers apply the FCRA to conduct checks on potential employees and applicants.

The FCRA protects consumers (not businesses) by mediating the privacy, accuracy, and fairness of their personal information, which is reported to or held by consumer credit bureaus. Consumers are protected from the consequences that come from incorrect information or erroneous entries in their credit reports. Each stage of the credit reporting procedure is regulated by the FCRA, which includes collecting information, reporting details to credit agencies, distributing credit-related information, and the use of the information, such as providing new lines of credit.

Who Does the FCRA Apply To?

The Credit Reporting Act is applicable to all those who prepare or use a credit report to extend credit, sell insurance, and recruit or fire an employee.

The Fair Credit Reporting Act controls and administers employers obtaining and handling consumer credit reports along with conducting standard background checks. As per the FTC (Federal Trade Commission), a Fair Credit Reporting Act report comprises the communication of information reported by a consumer credit reporting agency. This report reflects the creditworthiness of an individual, their morals, overall reputation, character traits, standard of living, credit capacity, and credit standing. 

While conducting an overall background check, employers will want to look at a consumer’s criminal record, driving history, credit reports, and checks conducted by a third party, which includes drug tests. The Fair Credit Reporting Act will not be applicable when an employer conducts background checks. However, it is an FCRA requirement that employers secure employee consent before obtaining their reports to use for hiring decisions. Employers must also provide individuals with a copy of their report and their FCRA rights in case of adverse employment action.

Employee investigations such as harassment cases interrogated by a third party are excluded from the FCRA as required by law. Employers, however, will still have to inform employees after an investigation has been completed.

Furthermore, reports from the FCRA do not include reports internally generated by employers, such as fitness or pre-placement tests and internal reference checking. In a situation where a credit reporting agency reports to an employer, drug tests will most likely be covered. Employers must ensure that a third party’s practices are under the laws before outsourcing and conducting investigation checks for employees or applicants due to the intricacy and complex nature of the FCRA.

How Does the Fair Credit Reporting Act Work?

The Act provisions are revised and implemented by the FTC (Federal Trade Commission) and Consumer Financial Protection Bureau. The Fair Credit Reporting Act can be located in section 1681 of the U.S. Code Title 15.

Its primary function includes acquiring consumer credit reports. Section 604 in the FCRA details the reasons for acquiring a consumer credit report.

The reasons will vary from background checks, upon consumer requests, reviewing credit information to apply for new lines of credit, business dealing and transactions, court orders, and child support.

The FCRA has set credit information reporting standards to determine the validity and reliability of details in the credit report and the nature of the information reported. Due to this, a trade line has been established for consumer credit accounts with credit reporting bureaus. 

Consumer information reported by lenders and creditors is recorded by the set trade line along with other details pertaining to bankruptcy, tax liability, and child support liability. 

What’s more, is that the duration of consumer information has also been established by the FCRA, stating the span of time negative information stays on an individual’s credit report. A few reported factors are let go after a short period of time, while extreme elements like bankruptcies stay on a credit report for about seven to ten years.

The Fair Credit Reporting Act provides consumers with the right to have free access to the information reported and their files, obtaining a free annual copy of their credit report from each of the three major credit bureaus, notifications and alerts for issuance of files, requesting eradication of old negative information, disputing file errors, and having their report’s accuracy determined for employers.

A few changes were made to the FCRA in 2003 to permit consumers to obtain a free copy of their credit report annually from each of the three major credit reporting agencies. Additionally, rules for credit reporting bureaus and businesses to decrease identity theft and fraud were also established in the act. These included putting fraud alerts on credit reports, removing credit and debit card numbers, and getting rid of consumer information in a secure and protected manner.

For instance, a seller may request authority to review your credit report before you make a big purchase. The request placed by the creditor will be governed by the FCRA, after which you may be given credit as financial debt.

Does the FCRA apply to Big or Small Businesses?

As Congress did not intend the Fair Credit Reporting Act to be applied to reports for commercial use, the FCRA does not apply to business accounts even if the information in it pertains to individuals. Reports intended to make business decisions rather than individuals do not qualify and are not eligible to be termed consumer reports. 

The FCRA standards must be followed by every business that conducts employment background checks. The FCRA does not only apply to million-dollar companies but also to small businesses that must comply with it. Violation of the FCRA might result in a civil penalty, jail term, or a lawsuit in the United States.

Employers conducting background checks for employment purposes through a third party are subject to the FCRA. These reports will include details such as criminal records, educational background, employment checks, auto insurance records, healthcare receipts, and professional licenses.

The FCRA applies to the three major consumer credit bureaus, Experian, Equifax, and TransUnion, as an individual’s financial history is collected and sold by them.

Bottom Line

Due to Title VI of the Consumer Credit Protection Act, consumer credit reporting agencies like medical companies, credit bureaus, and tenant screening organizations are kept safe from debt collection practices. The act strictly prohibits consumer report information from being distributed to anyone other than the mentioned institutes whose purposes are stated.