Notification of employment actions based on credit score

Section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Fair Credit Reporting Act to require employers who take an adverse action against an applicant or employee which is based in whole or in part upon credit score information to provide specific information to the affected individual.  In the area of home loans, the FCRA incorporates the following language explaining the concept of credit score:

The credit score is a computer generated summary calculated at the time of the request and based on information that a consumer reporting agency or lender has on file. The scores are based on data about your credit history and payment patterns. Credit scores are important because they are used to assist the lender in determining whether you will obtain a loan. They may also be used to determine what interest rate you may be offered on the mortgage. Credit scores can change over time, depending on your conduct, how your credit history and payment patterns change, and how credit scoring technologies change.

Beginning July 21, 2011 – the date this particular statutory provision becomes effective – an employer which uses a credit score in any way to make an employment decision should notify the individual:

• That a credit score was used in making the employment decision;

• The actual credit score that was used, and the date that actual credit score was generated;

• What the general range of possible scores may be under the model for credit scores that was used;

• A list of the key factors that adversely affected the credit score of the consumer in the model used.  That list is not to exceed four, unless the 'number of enquiries' made was a factor, but not among the top four.  In that instance, 'number of enquiries' must be listed as a fifth factor, regardless of its place in consideration; and

• The identity of the agency that provided the credit score so the applicant or employee can correct any error.

It is suggested that this change provides an impetus for all Iowa employers to review the processes in place today for compliance with the requirements of the Fair Credit Reporting Act as they relate to employment decisions.  

• Under the Fair Credit Reporting Act, an employer must have written consent from an employee or applicant before the employer requests any information from a consumer or credit reporting agency where the information is to be used in making any employment-related decision.  In addition to that consent, before an employer can get a consumer report for employment purposes, it must provide the applicant or employee with a written disclosure of the applicability and general provisions of the FCRA in a document consisting solely of this notice and disclosure. 

• Prior to taking any adverse action – such as rejecting an applicant, reassigning or terminating an employee, or denying a promotion – in which an employer relies in any way on information in a consumer report (even if the information is not a major consideration), the employer must provide a 'Pre-Adverse Action Notice.'  This notice must notify the individual that the employer has obtained a credit report, and it must provide a copy of the credit report and a written description of the individual's rights under the FCRA to seek correction of erroneous information in the report.

• After an employer has taken any adverse action against an individual, the FCRA requires that the employer provide notice to the applicant or employee that it has taken action which was based in whole or in part upon information contained in a consumer report, also informing the individual of (1) the name, address and telephone number of the consumer reporting agency that provided the information, (2) a statement that the credit reporting agency did not make the decision and cannot give the specific reasons for the decision; and (3) a notice of the individual's right to obtain a copy of the actual report free (upon request to the credit reporting agency within 60 days) and to dispute the accuracy or completeness of any information the agency furnished in the report.

 Given the requirements of Dodd-Frank, it is suggested that Iowa employers should very carefully consider the question of whether or not to base employment decisions on numerical credit scores rather than on the information in a credit report and the employer's independent analysis of the information contained in the report. If the decision is to use credit score information, employers must ensure they will be in compliance with the additional FCRA statutory notice requirements when they become effective July 21, 2011.  The Federal Trade Commission, in conjunction with the Federal Reserve Board, issued final rules under this provision of Dodd-Frank on July 6, 2011.  The rules themselves are effective 30 days after publication in the Federal Register. Update added July 28, 2011:  The required publication in the Federal Register occurred on Friday, July 15, 2011.  While both the Federal Reserve board (FRB) and the Federal Trade Commission (FTC) published model notices – the use of which is optional – none are directly related to the general requirement under the Fair Credit Reporting Act that extends the obligations to employers making employment decisions.  No doubt with environmental concerns in mind (?), the July 15, 2011 publication in the Federal Register did not have the first four model forms for either the FRB or the FTC.  The first four 'models' of the FTC can be found at the GPO web site for the Code of Federal Regulations.  To quote the new rules of the FTC:

(2) Model forms. Model forms of the risk-based pricing notice required by Sec. 640.3(a) and (c) are contained in Appendices B–1 and B–6 of this part.  Appropriate use of Model form B–1 or B–6 is deemed to comply with the requirements of § 640.3(a) and (c).  Model forms of the risk-based pricing notice required by § 640.3(d) are contained in Appendices B–2 and B–7 of this part.  Appropriate use of Model form B–2 or B–7 is deemed to comply with the requirements of § 640.3(d).  Use of the model forms is optional.

And, in the jointly prepared discussion of the final rule, the agencies note:

The final rules are effective and compliance is mandatory beginning 30 days after the date of publication in the Federal Register.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.