Volume XI
October 2006

From the Desk of Jason B. Morris, President and COO

Fair Credit Reporting Act 101

As your organization grows and evolves and as employeescreenIQ continues to expand it is important to revisit the roots of our right to conduct compliant background checks. Each of our clients receives information about the FCRA and state laws upon account registration and we provide regular updates as modifications are made I thought it might be wise to review the most basic standards of The Fair Credit Reporting Act (FCRA).

In 1970 the FCRA was enacted by the Federal Trade Commission (FTC) in order to promote accuracy, fairness and privacy of information assembled by Credit Reporting Agencies. In 1996 the FCRA was amended under the Consumer Credit Reporting Reform Act. These amendments contained several "improvements" to the FCRA and limited the pre-emption of what some considered stronger state laws. When these amendments were adopted in 1997 it included not only Credit Reporting Agencies but also Consumer Reporting Agencies (CRA’s). This now-broadened area of the FCRA arguably changed the pre-employment screening industry and defined the construct within which reputable CRAs serve our clients today. Many of the areas that were considered ambiguous under the language of the FCRA and its amendment were subsequently clarified by opinion letters published by the FTC, but there was still confusion as to what would be considered a CRA.

In 2003 the FCRA was amended yet again under the Fair and Accurate Credit Transactions Act of 2003 (FACTA). This act, among other things, finally clearly defined pre-employment screening companies as CRA’s and solidified any argument that could have been made to the contrary. However, it is important to note that since 1997, the FCRA has set the national standard for pre-employment screening as it applies to background checks conducted by CRA’s as opposed to those conducted in-house using your organization’s own resources. The spirit of the FCRA is to protect consumers and many would argue that in this latter case, the law falls short.

Listed below are some of the most basic compliance requirements mandated by the FCRA:

  • Users must have permissible purpose - For BIS clients, that permissible purpose is contained in Sections 604(a)(3)(B) and 604(b).

    "For employment purposes, including hiring and promotion decisions, where the consumer has given written permission."

    While there are other permissible purposes such as tenant screening, suitability for credit, etc. BIS only conducts background checks for employment purposes unless otherwise notified.

  • Users must provide certifications - Section 604(f) prohibits any person from obtaining a consumer report from a consumer reporting agency (CRA) unless the person has certified to the CRA the permissible purpose(s) for which the report is being obtained and certifies that the report will not be used for any other purpose

  • Users must notify consumers when adverse actions are taken: The term "adverse action" is defined broadly by Section 603. "Adverse actions" include all business, credit, and employment actions affecting consumers that can be considered to have a negative impact as defined by Section 603(k) of the FCRA - such as denying or canceling credit or insurance, or denying employment or promotion. No adverse action occurs in a credit transaction where the creditor makes a counteroffer that is accepted by the consumer. If a user takes any type of adverse action as defined by the FCRA that is based at least in part on information contained in a consumer report, Section 615(a) requires the user to notify the consumer. The notification may be done in writing, orally, or by electronic means

  • Other obligations can be found at: http://www.employeescreen.com/web/pdfs/Notice_Users.pdf

Basic Tips for Complying with the FCRA:

  • Ensure that your applicant signs a release consenting to a background check

  • The release must be a separate document; it may not be attached to a job application or any other document

  • When making an adverse hiring decision based on the outcome of the information provided by a background check, be sure to follow the pre-adverse and adverse action policy as laid out in the FCRA

  • Do not use arrest records in your hiring decision

  • Ensure that all other steps in the notice to users documents are adhered to. The fine for not following the FCRA can exceed $10,000 per incident

This article covers some of the basics of the FCRA at the federal level, but does not address the myriad of individual state regulations. It is very important to stay up to date with the various laws governing use of consumer reports in the states in which you do business. Contact employeescreenIQ if you have questions about the FCRA or state laws regarding consumer reporting.