What Is FCRA Compliance?

The Fair Credit Reporting Act (FCRA) is a federal law that employers and business owners must follow before and during an investigation into the financial background of an employee or job candidate, such as by reviewing someone’s consumer credit report.

Violating the FCRA can lead to judgements amounting to $100-$1,000 per violation, and that doesn’t include the complainant's attorney fee or any punitive damages (in case of willful and persistent FCRA violations). The charges can rack up, especially if an employer has a number of employees or applicants suing it.

Read on to learn about the origin of the Fair Credit Reporting Act, what behavior it mandates, and how it strives to shield everyone’s financial record from misuse and abuse.

How the FCRA Came About

So why did the U.S. government enact a law to protect the privacy of consumer financial records? Let's take a step back in time to the mid-1960s. Then, most employers and financial institutions would make hiring and lending decisions based on whims or good faith. Criminal and credit histories weren't tracked as thoroughly as they are today.

That changed when data collection became the new buzzword—employers realized that they could get more insight into a person with detailed employment background checks. But it backfired. While data was used to make decisions about people, integrity issues came into focus. No one knew if the information was regulated, and employees and candidates had no way to take action in case of errors.

The Fair Credit Reporting Act was introduced in 1971 to ensure that employers and consumer reporting establishments like banks respect their privacy. For example, the law protects consumers by limiting what a reporting agency can report.

Besides credit reports, the FCRA is also applicable to reports on a consumer's reputation, lifestyle, character, and other personal information that can affect their eligibility for loans, jobs, or insurance. It's why background-checking agencies are among the institutions regulated by the FCRA and why an FCRA background check violation can lead to costly lawsuits.

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FCRA Compliance Checklist

The FCRA binds agencies as to what they can report. For example, they cannot report bankruptcy cases older than a decade, and all other adverse data (except criminal information) cannot be older than seven years. Additionally, an FCRA-compliant background check doesn't have medical information unless the report is for insurance purposes.

Here is a checklist that can help you avoid FCRA violations:

• Besides protecting consumers during a background check, the FCRA requires employers and institutions to disclose their intention to research the subject’s finances and to obtain permission beforehand. This has to be done via a written notice, which should mention what the check will be used for.
• Employers must acquire the subject’s written consent to a background check.
• Subjects must be notified in writing if a background check will include interviews to discern their character, lifestyle, reputation, and other personal traits.
• Employers must provide the subject with a notice of a pre-adverse action if the background check revealed certain information. The notice should be accompanied by a copy of the results and a copy of the summary of the subject’s rights under the FCRA.
• An employer must certify to the background check company/service that it has the subject’s written consent, it does not violate FCRA requirements, and it will not misuse the data or discriminate.
• Employers must give the subject at least five working days to dispute information in the report before deciding.
• If an employer wants to reject a candidate based in part on the background report, the candidate should be given a final notice with the name, address, and contact info of the company/service that provided the report.
• The subject should be given a notice allowing them the chance to dispute the report's accuracy. This notice should also tell them they have the right to get a free report from the agency within 60 days of requesting it.
• All background reports and records should be disposed of via shredding, burning, or pulverizing per state and federal law. Similarly, electronic data should be encrypted.

Consumer and Employee Rights Under the FCRA

To be forewarned is to be forearmed. Consumers and employees have several rights under the FCRA that protect their privacy. These rights include the following.

• Individuals have the right to know whether a background check could be used against them. For instance, a potential job candidate should know if an employer hires or overlooks them because of information revealed in the background check.
• People have the right to know the contents of their files. For example, credit institutions cannot withhold credit data if they are requested to hand it over by the individual it belongs to.
• The individual can file a disclosure if he or she faced an adverse action because: (1) bad credit information; (2) a false accusation a crime since their identity was stolen; (3) the report contains incorrect data; (4) the individual is on public assistance; or (5) or if they are unemployed but will apply for a job in 60 days. Please note that this doesn't mean they can get free credit scores.
• Individuals have the right to dispute inaccurate information. For example, if they see a bogus late payment on their report, they have the right to dispute it with the credit bureau, who must respond with the corrected information. This usually takes 30 days.
• If employees or candidates ask, employers must show proof of consent for background reports. This means employers can face an FCRA-compliant background check violation if they don't get written permission beforehand. If they perform a background check without consent, the job candidate can take legal action against them and seek damages.

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How an Employer Can Avoid FCRA Violations

As an employer, you can go a long way toward ensuring that you comply with the FCRA by working with a professional, FCRA-compliant background check company. Also, you should establish clear and fair policies and procedures in your organization as they relate to hiring. Make sure your policies are reviewed by Human Resources and an attorney before implementation.

Here are some things you can do to avoid FCRA violations:

• Ensure you get written consent from the job candidate for a background check. It’s best if this permission is presented in a separate document rather than “buried” in other paperwork or screens, where the candidate might overlook it.
• Avoid including NDAs in the FCRA consent form and disclosure document. You may be able to include the consent form in the disclosure only.
• If you find yourself in the position of making unfavorable decisions based on info found in a background check, make sure to notify the applicant. He or she should also be given a copy of the report as proof and given at least five days to correct or challenge the adverse information. Plus, send the candidate a copy of the summary of rights as per the FCRA.

The aforementioned notice should contain the name and contact details of the agency that conducted the background check and provided the report. This notice should mention that the agency did not make the decision and cannot field questions regarding the information, and that the individual has 60 days to dispute the data.

The Role of the FCRA in Background Checks

The FCRA regulates the three credit bureaus, but that doesn't mean it also regulates consumer information. For instance, it does not have any say in ensuring the accuracy of online data like payment credentials and passwords.

While credit bureaus conduct background checks and report them to employers, those employers have to comply with the FCRA as well or risk violations. In other words, the FCRA governs what these agencies and employers can and cannot do with your data and gives you certain rights to protect yourself if that data is used against you.

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However, please remember that these reports can impact your employability and your ability to get a loan. So check them regularly to ensure there are no errors or missing information, and get issues corrected as soon as possible if you find any. You can get free copies of your reports once yearly under the FCRA. Reports are absolutely free when you download them via the only official government-backed site, AnnualCreditReport.com.

Bottom Line

A clean credit report is key to a bright and happy future, provided it isn't used against you. Very few people have pristine financial records. The FCRA strives to prevent employers and lenders from discriminating against people based on disputable marks and records, and from handling the information carelessly. The FCRA protects consumers, ensuring that they are treated fairly and preventing employers and agencies from free reign that can disrupt lives.

So before you apply for a job or a loan, review your free credit reports from the three credit bureaus. The last thing you need is to be rejected for a job or a loan because of errors on your credit reports. While you’re at it, consider pulling a background report on yourself to look for mixups, such as someone else’s court records under your name or home addresses where you never lived.

Also, remember that employers who request your credit reports can only use them internally. If they share your financial records with an external party without your consent—or they failed to get your consent before pulling the reports—you could sue for FCRA violations and damages. Work with a reliable agency and hire an attorney if you think your rights are being violated or you were discriminated against after a background check.