The three major credit bureaus have taken a great deal of fire lately – from regulators (the Federal Trade Commission – FTC) and the press (60 Minutes – for example) – regarding the accuracy of consumer credit reports and the handling of disputes. The anecdotes are compelling. Our hearts go out to those whose credit is negatively impacted due to identity theft or a mistake on the part of the creditor (or Furnisher as defined by the Fair Credit Reporting Act). But what is the true scope of the problem – the error rate and the extent to which errors negatively impact consumers?
The FTC issued its fifth interim Report to Congress regarding credit report accuracy in December 2012 as required by the FACT Act. The study sampling was 1,001 consumers and 2,968 reports (roughly three per consumer). The study found that 6.6% of reports examined contained errors that when corrected resulted in a score increase – but only 2% of those had a score increase of 25 points or more. Only 2.2% of reports examined had credit score increases sufficient to move them to a lower credit risk classification – reduce their borrowing costs.
So roughly 98% of scores accurately drive the proper credit risk classification. Not bad, right? But if you are among the roughly 2% assigned to a higher risk tier due to an error – it is not good enough!
It is important to recognize, as Congress did when passing the Fair Credit Reporting Act (FCRA), that the banking system and, arguably, the entire economy “…is dependent upon fair and accurate credit reporting”. It is equally important to recognize that it is the interest of all concerned (Consumers, Furnishers, End-users and CRA’s) to do the very best we can to improve upon and ensure the:
- Accuracy of data furnished and maintained by creditors and others;
- Proper use of that data by CRA’s and End-users;
- Prompt and effective handling of disputes; and
- Transparency of the entire process.
It is transparency more than anything else that improves accuracy, and it is the humble notice of Adverse Action that is the primary driver of transparency in consumer reporting – including tenant and employee screening. The FCRA defines Adverse Action as any action that is adverse to the interest of the consumer. Denial of tenancy as a result of a tenant background check certainly falls within that definition – but so too is requiring an additional deposit or co-signer. Denial or termination of employment based on an employee screening report is an Adverse Action as well.
§615 of the FCRA requires that users of consumer reports (like landlords and employers) provide oral, written, or electronic notice of adverse action to the consumer – if Adverse Action is taken in whole or in part due to the content of a Consumer Report. These notices must include:
- The name and contact information for the Consumer Reporting Agency;
- Notification of the consumer’s right to a free copy of their report; and
- Their right to dispute the accuracy and completeness the report.
Note that section §604(b)(3) goes even further by requiring that such notice be delivered prior to taking such action based on consumer reports used for employment purposes – and that such notices include a copy of the report and description in writing of the rights of the consumer as outlined in §609(c)(3) for the FCRA.
Best practice #4
Provide written Notice of Adverse Action AND the CFPB Summary of Rights document prior to taking adverse action of any kind – include a copy of the report when such action is based in whole or in part on a consumer report used for employment screening purposes.
The FCRA allows for verbal notification. Don’t do it! Written notice of Adverse Action fulfills (and documents fulfillment of) your obligation under the FCRA. As important, it increases the likelihood that the consumer will actually see a copy of their report and exercise their right to dispute anything that is reported in error – which goes to accuracy!
Note that §607(c) of the FCRA states that “A consumer reporting agency may not prohibit a user of consumer reports… from disclosing the contents of a report upon which adverse action is taken. This applies beyond employment screening, where doing so is required. So you may, if requested and if you wish, share the content of a tenant screening report (for example) when adverse action is taken – assuming, of course, you have taken (and documented) steps to confirm the identity of the applicant and that you feel safe doing so.