The popularity of background checks has been rising in recent years, and nowadays, it feels like everyone is using them. However, it turns out that not exactly anyone can go digging into anyone’s past and learn confidential information, as there are laws that protect our privacy.
One of the most important laws regulating background screenings is the Fair Credit Reporting Act.
Read on to learn more about, who can run background checks, what requirements they have to fulfill, and what the fines are for noncompliance with the FCRA.
What Is the Fair Credit Reporting Act (FCRA)?
The FCRA is a federal law that regulates and provides the limitations under which consumer reporting agencies can collect and use consumer data.
All consumer reporting services, such as credit bureaus, background checking companies, tenant screening services, etc., are obligated by law to adhere to the FCRA.
Put simply, employers who want to run pre-employment background checks on potential hires, or creditors who want to learn the credit history of borrowers have to comply with a set of rules imposed by the FCRA.
Let’s have a closer look at what the FCRA regulations mandate and what the fines are for non-compliance.
FCRA Requirements
Here’s a breakdown of the requirements consumer reporting agencies must meet when releasing consumer information to creditors or employers:
1. Only persons with a legitimate reason and legally permissible purpose, like employers, creditors, landlords, firearms dealers, etc., may request consumer reporting agencies to provide them with information on a subject.
2. Even persons with a legitimate reason and legally permissible purpose must get the written consent of the subject before they conduct a background search on them.
3. The FCR Act also sets limitations on how far back can consumer reporting agencies go when releasing criminal history, or credit information on a subject.
4. Once the screening is done, the subject must be provided with a copy of the background check report and given the right to dispute it, in case they find inaccuracies or incomplete information in the report.
5. If the requestor (employer, creditor, landlord, etc.) decides to take adverse action against the subject based on information found in the report, they must notify them that that was the reason their application got rejected.
Now let’s see these regulations in action by getting into more detail with two examples.
FCRA Requirements For Creditors
In our first example, a creditor needs access to a potential borrower’s credit history to determine the terms of the credit or loan and whether or not they will approve the loan at all.
As a creditor, they already fulfill the first FCRA requirement of having a legitimate reason and legally permissible purpose for requesting information about their subject. Now all they need to do is get written permission from the borrower and request a credit report from one of the three major credit bureaus (Equifax, Experian, and TransUnion).
In accordance with the FCRA, credit bureaus generally don’t report on negative information, such as late or missed payments, accounts in collection, etc., when they are older than seven years.
Notably, past bankruptcies are an exception to this rule and are usually reported for up to 10 years. Additionally, these time limitations do not apply to applications for over $150,000 worth of credit or life insurance.
If the borrower requested a copy of the credit report for themselves, the creditor needs to ensure that the borrower has received it and allow them five days to review it and dispute it if necessary. All consumer reporting agencies, including credit bureaus, must correct the inaccuracies within 30 days and provide a new, accurate report.
If the creditor needs to take adverse action, in this case, reject the subject’s loan application based on information found in the credit report, they must notify them about it.
FCRA Requirements For Employers
For our second example, let’s say that an employer wants to conduct a pre-employment background check on a prospective applicant they might hire. As an employer, they have reasonable grounds to ask the candidate to have them do a screening on them.
The next step would be informing the applicant about their intention on running a background check and getting their written consent to do it. The employer must also inform the applicant that the information from the background check report will affect their decisions in the hiring process.
Once the employer gets written permission from the subject, they can hire a professional background-checking company to conduct the screening.
Depending on what information the employer is interested in, background check companies can provide reports on several different areas, and they all have different time limitations:
- In most states, only criminal records from the past seven years can be reported, though, in some states, they can be reported indefinitely.
- Lookback periods for driving record checks also vary from one state to the next, and depending on state law, they can range from three to seven years.
- Education and past employment verification can go back into the applicant’s past for as long as it is necessary to verify the validity of the claims in their resume.
If the employer doesn’t hire a professional background screening agency, they must know how far back in the candidate’s past they can go. Otherwise, they risk non-compliance with FCRA.
When the employer receives the report, they need to make sure that the subject has received their copy and give them five days to review it and dispute if there are inaccuracies. If the employer decides to take adverse action based on information found in the report, they must notify the applicant about it.
What is important to note here is that, in addition to the FCRA law guidelines, employers must be aware of other laws that regulate screenings in the recruitment process, like Ban the Box laws and other fair chance of employment ordinances.
FCRA Violations
Employers who don’t adhere to the FCRA guidelines and employment laws are liable to hefty fines and potential class action lawsuits.
The penalty for an FCRA violation ranges from $100 to $1,000, and in some cases, they might be required to cover the attorneys’ fees, as well. If they violate the regulations with a large number of applicants, these charges can add up.
Here are the five most common violations of the Fair Credit Reporting Act and how employers can make sure they avoid them:
Background Check Disclosure
Many employers fail to properly inform the applicant of their intention to conduct a background check on them. To remain compliant, employers should notify the candidate in writing and ensure that the disclosure statement is not mixed with other unrelated documents or fine print.
Express Written Consent
According to the FCRA background check laws, applicants must provide express written consent with a signature or a digital equivalent before employers can request the screening. Additionally, FCRA law allows combining the disclosure statement and consent on one single document, but prohibits the inclusion of other notices or approvals on it.
Sharing the Screening Results
In the case of rejecting an applicant because of information found in the background check report, the employer must send:
- Pre-adverse action letter
- A copy of the report
- A Summary of Rights document
to the applicant before they take any adverse action. All three documents are equally important and must be sent out to remain compliant. Additionally, employers have to give applicants enough time to review the documents and dispute inaccuracies if they find any.
Considering Outdated Records
If the employer conducts the screening in-house, or uses a subpar background check provider, they might violate the FCRA lookback period limitations, either because they don’t know the law, or the provider didn’t notify them about it. If they reject a candidate because of criminal records older than seven years, in 7-year states like California, they make themselves liable for legal action against them.
Considering Non-Conviction Arrests
It is against the federal Fair Credit Reporting Act for criminal background check providers to release information for arrests that didn’t result in a conviction. Furthermore, the law also prohibits reporting expunged, sealed, or dismissed charges, and if the provider includes them in a report and the employer denies a candidate because of them, they make themselves liable for legal action against them.
Overall, the best way to avoid making a costly mistake as an employer is to rely on trusted background screening companies that work in compliance with the FCRA and can help you with the whole process.
The Bottom Line
Employers, creditors, and several other interested parties have valid reasons to want to conduct a background check on someone, but there are laws, regulations, and limitations they must adhere to.
In addition to getting written consent, they must ensure they are considering viable information within the time limits mandated by law. Furthermore, they have to allow the applicant time to review the report and give them a chance to dispute it if necessary.Staying compliant with the FCRA reporting requirements and other regulations requires advanced knowledge of state and federal, so hiring a trusted background check company is an investment worth considering.
