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What is the Difference Between State and Federal FCRA Laws?

Posted by Ryan Howard on Mon, Jun 19, 2017

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When employers are using credit reports and other background checks to determine their hiring decisions, they must abide by the consumer protections set forth in the federal Fair Credit Reporting Act (FCRA). Some states have enacted their own FCRA laws that may be more specific and offer greater protections for that state's citizens. As a hiring manager, these two levels of legislation can be overwhelming or confusing during the hiring process.

When screening potential employees, what's the difference between state and federal FCRA laws?

History of Consumer Reporting and Protections

To gain a clearer understanding of the differences between state and federal FCRA laws, let's take a closer look at the history of consumer report protections. 

Consumer reporting agencies began in the early 1900's in an effort to compile credit information on individuals. The CRA's were built by and worked exclusively to the benefit of their members - typically retailers, financiers, and banks. CRA's began reviewing local newspapers to add notices of arrests, marriages, and deaths to the individual's file. Any time a creditor would request information on an individual, these inquiries were also noted in the paper file. The CRA's were separate identities and didn't share information, therefore limiting a full view of a consumer's entire credit history and debt.

Investigators were hired by the CRA's and expected to fill quotas on obtaining information on individuals. They began adding incomplete or fabricated data, and the CRA's were also sharing the files to unauthorized individuals and law enforcement. By the late 1960's, consumers were reporting widespread abuse by these CRA's, including being denied for certain services and not being allowed to see what was in their file. Because of these complaints and a government inquiry, the federal Fair Credit Reporting Act was signed into law in 1970 as an amendment to the Consumer Credit Protection Act of 1968.

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What is the Federal FCRA?

The FCRA was enacted to protect individuals by regulating the collection and use of consumer information by CRA's. After its passage, the Federal Trade Commission began pursuing CRA's for violating consumer rights and holding them accountable for punitive damages. Since it's passage, the FCRA has been amended in 1996 (Consumer Credit Reform Act) and 2003 (Fair and Accurate Credit Transactions Act).

The Act defines such things as (mostly paraphrased):

  • Person - any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity.
  • Consumer - an individual
  • Consumer report - communication by a CRA offering information related to a consumer's credit worthiness, credit standing, credit capacity, character, reputation, personal characteristics, or mode of living, which is expect to be used or collected for the purpose of use in determining eligibility for:
    • credit or insurance
    • employment
  • Consumer reporting agency - any person who regularly engages in the practice of compiling or evaluating consumer information and providing the information to third parties.
  • Furnisher - an entity that furnishes information relating to consumers to one or more CRAs for inclusion in a consumer report.
  • Permissible purposes - a CRA may provide a consumer report if:
    • there is a court order
    • the consumer has given written instructions to share it
    • the person intends to use it in deciding credit, employment, insurance, professional licensing, law enforcement, child support, or a business need.

For the full text, click here.

Consumers also have the right to access, review and dispute information contained in their consumer reports, including one free credit report annually.

Why do States have their own FCRA Laws?

The federal FCRA provides a standard baseline for consumer reporting protections. Some states such as California, Kansas, New York and Texas have passed their own supplemental laws, leaving HR managers needing a clearer process for determining which FCRA laws apply to their hiring process. State laws may be stricter than the federal mandate and include differences in reporting related to:

  • Bankruptcies
  • Arrest records and convictions
  • Collections
  • Salaries

Where there is a discrepancy between state and federal FCRA laws, the federal law preempts any state legislation. Also, if a consumer encounters a legal issue with a CRA that is covered under the federal FCRA law and the state law, they are only allowed to seek damages under the federal law. Part of the federal act that dictates the handling of inaccuracies on consumer reports and the portion that concerns how long information can appear on the consumer report are the overriding law of the land unless the state passed their own legislation prior to September 1996. In most cases, the law with the most consumer protect is the rule to be followed.

How can Employers ensure FCRA Compliance?

To ensure FCRA compliance during the hiring process, employers must be aware of both the federal and state FCRA laws. Hiring manager can also partner with a consumer reporting agency or background screening partner that is FCRA compliant. A trusted CRA will have experience with consumer protections and assist employers with compliance when making a hiring decision. No question should go unanswered in keeping your business out of a courtroom. Find a screening agency that can offer guidance through this often complex process.

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Resources:

An Overview and History of Credit Reporting

The Fair Credit Reporting Act (FCRA) and the Privacy of Your Credit Report

40 Years of Experience with the Fair Credit Reporting Act

Topics: Employment Background Screening, FCRA Compliance, Hiring and Recruiting