Background Checks: Important New Credit Report Rules; Plus A 6-Point Compliance Guide

Credit reports can be a useful tool for screening job applicants, but using them recently became more complex. That’s because of several important changes to the federal Consumer Credit Reporting Reform Act that are effective September 30, 1997. If you violate these provisions or a similar state law, you can be sued for steep penalties, punitive damages and attorneys’ fees. To help clarify what you can and can’t do, we’ll review your obligations under both state law and the new federal regulations.

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Guide To Obtaining Credit Reports

Here’s what you need to know about using credit reports:

1. Employment purposes only. Under federal and state law, you can access credit reports only for purposes of hiring an applicant or promoting, retaining or reassigning an employee. It’s illegal to use them for any non-employment purpose, such as checking someone’s age or marital status or reviewing the credit of a spouse or a former employee suspected of embezzlement or other wrongdoing.
2. Detailed disclosure. State and federal laws require you to disclose in writing to the applicant or em- ployee, before you actually request a credit report, that you will obtain one and its source. Also, under California law, the notice must contain a box that the person can mark to receive a copy of the report. If they want a copy, you have to pay for it. And you must arrange for the credit bureau to send your copy and the applicant’s or employee’s at the same time.

   Although not mandatory, it’s a good idea to include a statement on the notice indicating that if the person wants to dispute any item in the report, they should contact the credit reporting agency and request an investigation.

3. Separate document required. The new federal law requires that the above disclosure be placed in a stand-alone document. Putting it in an application form or employee handbook is not sufficient.
4. Signed authorization. The new federal rules mandate that the person sign an authorization (which you can include as part of the disclosure form) agreeing to the credit check before you obtain a credit report. You can decline to hire an applicant who refuses to sign. But because the law isn’t clear regarding existing workers, taking adverse action against an employee who won’t consent can be tricky.

   One strategy for dealing with this problem is to have new hires sign a separate consent allowing you to obtain credit checks during their em- ployment. This is necessary because the Federal Trade Commission (FTC), the federal regulatory agency, takes the position that a pre-hire consent by an applicant authorizing future reports if hired, isn’t adequate.

5. Certification. Another new federal provision requires you to certify to the credit bureau that you have made the proper disclosures and received written authorization, and that you won’t use the report in violation of anti-discrimination laws. You must also certify that if you take adverse action against someone based on a credit report, you’ll provide the person with a copy of the report and summary of their rights (see below). The credit agency should send you a certification form to fill out and return.
6. Your obligations when making adverse decisions. If you make an adverse decision based in whole or in part on someone’s credit history, you have additional disclosure responsibilities.

Under previous law, you had to notify the applicant or employee following an adverse decision. Now federal law requires that you provided disclosures to the person before you make the decision in order to give them time to correct any mistakes on the credit report. Here’s what you need to do:

• Pre-decision disclosure. You must give the person a copy of the report (even though they may already have received one from the credit bureau) and a “Notice of Consumer Rights,” which you can obtain from the credit agency. William Haynes, an attorney with the FTC, told CEA you must give the person a reasonable amount of time to deal with report problems before taking adverse action. There’s no set time limit.

  But generally, if the job is frequently available-such as teller positions at a large bank-you probably wouldn’t have to give much notice because the person could simply reapply after correcting the report’s errors. On the other hand, if there are few job openings-as with high-level positions or those requiring specialized expertise-you might have to allow the person more time to resolve credit report disputes before you act.

• Post-decision notice. Once you take the adverse action, you must provide a second written notice informing the person that your decision was based in whole or in part on the credit report. You need to include the name, address and telephone number of the credit agency that provided the report. Be sure to state that the agency didn’t make the adverse decision and cannot explain why the decision was made.

  Also, the notice must explain that the person may request a free copy of the report from the credit bureau within 60 days (even though they should have gotten it with the pre-decision notice), and that they may dispute the accuracy or completeness of the information directly with the credit agency.

Maintain Privacy

Finally, keep in mind that information in credit reports can be very sensitive. It’s important to store these reports in a separate cabinet-locked is best-apart from employee personnel files.