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-- November 1992

Credit reports are gaining popularity with employers faced with the task of recruiting honest, reliable employees. Some employers use credit reports to screen applicants for sensitive positions, such as cashiers or couriers. Other employers use credit reports to give them a general indication of an applicant's financial honesty and personal integrity. But many employers may not know that a federal law, the Fair Credit Reporting Act (FCRA), governs their use of credit reports.

This brochure briefly explains the FCRA and then describes how you, as an employer, can use credit reports. It also discusses your legal responsibility under the FCRA to notify applicants if information in their credit reports influenced your decision not to hire them.

The Act

The FCRA, which has been in effect since 1971, is designed to protect the privacy of information in credit reports and to ensure that information supplied by credit bureaus about consumers is as accurate as possible. The law specifically permits credit bureaus to release to employers credit reports for employment purposes. While the FCRA does not supersede fair employment laws, it allows employers to review credit records for the purpose of evaluating anyone they may hire, promote, reassign, or retain, consistent with other laws.

The Disclosure Notice

When a decision to deny employment is based on information in a credit report, the employer must disclose this fact to the applicant -- along with the name and address of the credit bureau making the report. This is important because some credit reports may contain errors. The disclosure notice allows an applicant to obtain a free copy of the credit report and check it for accuracy and completeness.

The disclosure is required even if credit-report information was not the main reason the applicant was turned down. It may have played a small part in the overall decision, but the applicant still must be notified.

The disclosure requirement also pertains to any current employee who applies (and is turned down) for a new position or whose employment is terminated because of information in a credit report.

A written disclosure is not required. However, employers often provide written notices -- and keep copies of them for two years -- to show compliance with the FCRA.

Some Common Situations

The following examples illustrate situations where the notice must be given to job applicants.

* A business receives 100 applications for a cashier position. It obtains credit reports on all of them and dismisses 50 from further consideration based on information contained in the credit report. The remaining 50 have good credit histories. All but ten of them are ultimately rejected for other reasons.

The first 50 applicants are entitled to the notice. Their rejections were based solely on their credit reports.

* A person with an unfavorable credit history is denied employment. Although the credit history was considered a negative factor, the applicant's lack of relevant experience for the position was even more important.

The applicant is entitled to the notice because the credit report played a part -- however minor -- in the employer's decision.

* An employer is looking for an employee to fill a particularly sensitive position. It rejects one applicant with a good credit repayment history because the report shows a debt load that may be too great for the proposed salary. Another applicant is rejected because the credit report shows only one trade line, and the employer prefers to hire someone who has demonstrated financial responsibility.

Both applicants are entitled to notices. If any information in the report influences an adverse decision -- even though the information may not be otherwise thought of as "negative" -- the disclosure must be given.

* An employer obtains credit reports on applicants. It does not send rejection letters to those not hired. These applications are simply filed and later discarded.

Employers are not excused from their notification responsibilities merely because they had not communicated with the applicants. Once an applicant is no longer under consideration, in part because of something in a credit report, the notice must be given.

Noncompliance with FCRA

Employers who do not provide the disclosure when it is required may face several consequences. Under the FCRA, individuals can sue employers in federal court for actual damages suffered from an FCRA violation that occurs because of negligence. A person who successfully sues under the FCRA is entitled to recover court costs and a reasonable attorney's fee. The law also permits suing for punitive damages if it is established that the employer willfully violated the law.

In addition, the FTC (and other Federal agencies) may sue users of credit reports who do not comply with the FCRA. Most employers (except banks and a few other employers) are subject to the FTC's jurisdiction.

Facts for Business from the Federal Trade Commission

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