Use of credit report requires disclosure - Legal Trends

HR Magazine, April, 1992 by David Israel, Anita Lechner

With the number of questions that an employer can safely ask an applicant diminishing, many employers are using consumer-credit reporting agencies for background information. Employers who use this information are subject to substantial reporting obligations under the Fair Credit Reporting Act (FCRA).(1)

The FCRA allows employers to use a consumer report when evaluating an applicant for employment provided that the report contains information on the applicant only, and it is used only for the purpose for which it was requested - the evaluation of an applicant for employment.(2) For example, it would be impermissible for the employer to request a consumer report on the applicant's spouse.(3)

To ensure that an employer is not requesting a consumer report improperly, employers must tell the reporting agency why the information is being requested, and certify that the information will not be used for any other purpose. Strict adherence to this requirement is essential because "[a]ny person who knowingly and willfully obtains information from a consumer reporting agency under false pretenses" will be subject to criminal penalties.(4) An employer may also be sued by an individual consumer (applicant) for actual and punitive damages and attorney's fees for having willfully failed to comply with this requirement.(5)

Under FCRA, there are two types of reports that an employer may access when evaluating an applicant for employment: a "consumer report" and an "investigative consumer report." A consumer report bears "on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living which is used . . . in part for the purpose of serving as a factor in establishing the consumer's eligibility for . . . employment purposes."(6)

In contrast, an investigative consumer report is a report "in which information on the consumer's character, general reputation, personal characteristics or mode of living is obtained through personal interviews with neighbors, friends or associates of the consumer reported on or with others with whom he is acquainted or who may have knowledge concerning any such items of information."(7) The investigative consumer report is a more extensive report. The use of either report triggers specific reporting obligations under the act.

If an applicant is denied employment based either in whole or in part on the information obtained from a consumer report, the employer must tell the applicant that a consumer report was secured, that the applicant was denied employment either in whole or in part because of the information contained in a consumer report obtained from a consumer reporting agency, and the name and address of the agency making the report.(8)

The employer must comply with this disclosure requirement (even if the information on the consumer report is positive) if any information in the report prompted the adverse action.[9] This disclosure gives the applicant/consumer the opportunity to contact the consumer-reporting agency and correct any negative credit information.

Although not required, it is best if employers complete the disclosure obligation in writing. Because this notification must be given after the adverse employment decision is made, a blanket statement on the employment application (that the applicant's credit history could affect the employment decision) will not satisfy the disclosure requirement.

Rejecting an applicant solely on the basis of credit history could cause problems for the employer. For example, if an applicant receives notification of employment denial because of credit and the applicant corrects the negative credit information, the applicant could reapply, assuming to be now qualified for the job.

Because most applicants are not rejected based on one factor, such as a poor credit reference, the FCRA disclosure should be precise and indicate that the applicant's credit history was one of many factors used in analyzing the applicant's qualifications.

For the more comprehensive investigative consumer report, an employer must make certain disclosures to the applicant within three days of when the employer requests this report. This special disclosure obligation exists for the investigative consume report, regardless of whether the information is actually used. The employer must inform the applicant that a consumer investigative report was requested; the nature and scope of the investigation requested, which could include the types of questions asked and the number and types of persons interviewed; and the fact that the applicant has a right to request, within a reasonable period of time, a complete and accurate description of the nature and scope of the investigation.[10] An employer must respond to an applicant's request for more information within five days after this request has been received.(11)

In all cases, investigative consumer report disclosures must be clear, conspicuous and in writing. They also must be in a form that the applicant can retain. Consequently, if these special reports are requested, the special disclosure must be given to the applicant at the time of application.