Background information checks are a critical tool that many small business owners can use to evaluate and exercise due diligence before they engage in a business relationship — with customers, clients and even potential employees.
One of the key background checks employed in the United States is the consumer report (also referred to as a consumer credit report), which contains information about an individual’s personal and credit characteristics, character, general reputation, and lifestyle.
Why Use Consumer Reports?
Whether you are an employer looking to conduct pre-employment checks, a landlord needing to assess prospective tenants, or you operate a diligent sales organization that extends credit to customers, you may need to turn to consumer reporting agencies (CRAs) to help evaluate individuals with whom you are about to engage in a business relationship.
While consumer reports are not the be-all-and-end-all in terms of character or business references, they can provide insight and suggest potential “red flags” that may make you more diligent in your pre-screening process.
The government has put strict guidelines in place — designed to protect the privacy of the individual — that dictate how businesses should use, disseminate, and dispose of the information contained in consumer reports.
As a small business owner, it’s worth taking the time to understand what consumer reports are available to help you protect your interests and assets — while operating within consumer protection law.
Using Consumer Reports: What You Need to Know
If you seek access to consumer information from a consumer reporting agency you will need to observe your responsibilities under the Fair Credit Reporting Act.
Under this Act, each CRA must notify you of your obligations but it’s worth understanding in advance what you can and cannot do with the information that they provide.
Below is an overview of what you need to know about using consumer reports for your particular business need. To understand what you must do to comply with the Fair Credit Reporting Act for each of these uses, Business.gov offers a point-by-point guide for small businesses here.
- Using Consumer Reports for Pre-Employment Screening – According to the Federal Trade Commission, as an employer, you may use consumer reports when you hire new employees and when you evaluate employees for promotion, reassignment, and retention – as long as you comply with the Fair Credit Reporting Act (FCRA).
Employers often do background checks on applicants and get consumer reports during their employment. Some employers only want an applicant’s or employee’s credit payment records; others want driving records and criminal histories. For sensitive positions, it’s not unusual for employers to order investigative consumer reports – reports that include interviews with an applicant’s or employee’s friends, neighbors, and associates. All of these types of reports are consumer reports if they are obtained from a CRA.
- Using Consumer Reports for Screening Potential Tenants – Landlords can use consumer reports to evaluate rental applications – as long as they adhere to the Fair Credit Reporting Act. The Act requires landlords who deny a lease based on information in the applicant’s consumer report to provide the applicant with an “adverse action notice.” The Federal Trade Commission explains how consumer reports can be used by landlords and offers clear guidelines for how to comply with the Fair Credit Reporting Act provisions here.
- Using Consumer Reports for Underwriting Insurance Policies – As an insurer, you may use consumer reports to underwrite insurance policies and to screen high-risk applicants – as long as you comply with the Fair Credit Reporting Act. These requirements can be found here.
- Providing Information to Consumer Reporting Agencies – If you provide information about an individual to a consumer reporting agency, there are rules and guidelines governing the accuracy of the information you provide them. Consumers do have the right to register a dispute with a CRA if they doubt the accuracy of the information you may have provided about them. If you furnish information to a CRA, your responsibilities within the law are explained by the Federal Trade Commission here.
- Disposing of Consumer Credit Information – With identity theft and fraud on the rise, a new “Disposal Rule” has been introduced to govern the proper disposal of information in consumer reports and records. Learn how to comply with this rule here.
If you have questions about using consumer reports you can contact the Federal Trade Commission directly here.
- Business Privacy Laws (on Business.gov) explains which privacy laws apply to your business and how to comply with them.
- Pre-Employment Checks (on Business.gov) explains the use of personal information, such as credit reports, used in background screening.
- Protecting Financial Information (FTC) provides education and guidance to help financial companies comply with the Safeguard Rule.
- Federal Trade Commission Bureau of Consumer Protection (FTC) works for the consumer to prevent fraud, deception, and unfair business practices in the marketplace.