Insights

Consumer reports have proven to be useful screening tools in the hiring process. For licensed mortgage lenders and servicers whose employees are subject to loan originator licensing requirements, consumer reports that include a credit score may be an invaluable management tool as well. Recent rules implementing the SAFE Act requirements related to financial responsibility allow some state regulators to set a threshold credit score deemed to satisfy the financial responsibility requirements imposed on loan originators. If an employer wants to know whether an applicant for a loan originator position has the threshold score, then the employer may want to review a credit report for the applicant. Similarly, if an employer wants to know whether existing employees will continue to meet financial responsibility and character requirements for loan originators, the employee’s credit report could be useful tool.

In order to obtain consumer report information – including credit scores – for employment purposes, companies must give the notices mandated by the Fair Credit Reporting Act (FCRA). The FCRA sets forth very specific, but relatively simple, notice requirements that apply before a company can request the consumer report for employment purposes, before a company can make an employment-related decision based upon information in the consumer report, and when the company makes an adverse employment decision based on the information in the consumer report. Failure to satisfy these notice requirements could give rise to liability for actual damages for a negligent violation and, under certain circumstances, punitive damages for willful violations of the FCRA.

As with credit applicants, companies must have a permissible purpose to obtain a consumer report for employment purposes. The company does not have a permissible purpose merely because an individual has applied for a job. Instead, the company must give a clear and conspicuous disclosure, in writing, to the job applicant that a consumer report may be obtained for employment purposes. The applicant, in turn, must provide written authorization for the company to procure the report.

Before taking adverse action based in whole or in part on the report, the company must provide the applicant a copy of the report and notice of the rights that the applicant has under the FCRA. The Federal Trade Commission (FTC) refers to this as a “pre-adverse action notice.” The notice of the applicant’s rights appears on the form prescribed by the FTC that must be sent with the report.

Finally, if a company takes adverse action based upon information in the consumer report, then the company must give oral, written or electronic notice of the adverse action. The notice must include the same disclosure given to credit applicants whose application is denied. The company’s notice must inform the job applicant of the name, address, and phone number of the consumer reporting agency that supplied the report; a statement that the consumer reporting agency that supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and a statement that the applicant has the right to dispute the accuracy or completeness of any information the agency furnished, and his or her right to an additional free consumer report from the agency upon request within 60 days.

The FCRA obligations seem simple enough, but there are a few factors that may complicate the process of obtaining and using consumer report information. There are some important issues to consider and address:

• When there are multiple parties involved in making the employment decision, the form of authorization should specifically identify each party authorized to receive the applicant’s consumer report. This will ensure that when a third party employment agency or contractor is involved, everyone has a permissible purpose to review the applicant’s report.
• Employers using a third party employment agency or contractor will want to be sure that third party service agreements clearly indicate the party who will be responsible for sending the pre-adverse action and adverse action notices. A general statement in a contract that the employment agency or contractor will give any and all notices “required by law” probably won’t work if the company retains the right to make the ultimate employment decision. This doesn’t mean that the company cannot contract with a third party to send the notice; it simply means that the company should identify the obligations and have operational procedures in place to make sure that the decisions are communicated to the agency so that the agency can send the required notices in a timely manner.
• Before relying on a prior written authorization from an employee, confirm that the employee receives (or previously received) a separate notice that consumer reports may be obtained during the course of their employment. If the employee received the notice in the past, no additional notice or permission is required. If the employee has not received notice and given permission, then the company must notify the employee and get his or her written permission before requesting a consumer report.
• Every time information in a consumer report is a factor in the employment decision, the pre-adverse action and adverse action notice requirements will be triggered. This is true even if other reasons played a role in reaching the adverse decision.

Keep in mind that the same underlying concerns about the use of consumer reports for credit decisions also exist for making employment decisions. An individual’s right to privacy is critical. In addition, an individual’s right to know that there is negative information in a consumer report is essential so that the individual has the opportunity to correct any inaccurate information or explain why information on the report is incorrect (e.g., the individual has been the victim of identity theft). These are just a few items to consider in reviewing and/or updating the practice of using consumer report information. As employers begin implementation of the loan originator licensing requirements under the SAFE Act, employers who want to use consumer reports as part of the hiring decision and for periodic evaluations need to comply with the authorization and notice requirements under the FCRA. For those that have not reviewed authorizations, notices and procedures recently, this may be a good time to revisit the company’s polices and procedures.

Lisa Crowley DeLessio is a partner in the Maryland office of Hudson Cook, LLC. Basis Points readers can reach Lisa at ldelessio@hudco.com or 410-865-5437.