November 11, 2024
The Consumer Financial Protection Bureau (CFPB) recently released Circular 2024-06 concerning the Fair Credit Reporting Act (FCRA). This circular addressed how the FCRA applies to employers relying on third-party screening reports, especially those using AI or algorithmic hiring scores.
Many employers have used these reports in their employment decisions over the last several years. As such, Circular 2024-06 presented the following question: “Can an employer make employment decisions utilizing background dossiers, algorithmic scores, and other third-party consumer reports about workers without adhering to the Fair Credit Reporting Act?”
The reports discussed by the CFPB often present data that extends beyond typical background checks. Examples include social media use, credit history, collective bargaining activity, and other data points. These reports often include scores representing potential employees’ risk level or performance.
The CFPB stressed that employers must comply with FCRA obligations when procuring a consumer report for initial hiring or subsequent employment purposes. As such, employers must acquire the individual’s permission to obtain a consumer report. They must also provide notices of adverse action when considering adverse action. The CFPB bans using consumer reports for anything other than FCRA’s approved permissible purposes.
According to Circular 2024-06, a background check report is the most common consumer report obtained by employers. The circular also noted how such reports have become cheaper and more accessible as third-party technology companies’ presence has grown in the background-checking environment. These companies provide an assortment of reports that can include information like personal habits, biometric data, algorithmic scores, and even how long it takes the individual to complete tasks.
Congress passed the FCRA to address how much information some companies gathered and sold about consumers. As such, the FCRA regulates what consumer reports share. The FCRA clarified the information as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility.”
Many employers may now use third-party screening reports to evaluate applicants or employees rather than the more traditional background check reports. Circular 2024-06 reminded all employers that the reports must comply with the FCRA, such as when they use consumer reports obtained from consumer reporting agencies for employment purposes. The Circular 2024-06 clarified that companies providing consumer reports can count as consumer reporting agencies. They become consumer reporting agencies when assembling or evaluating consumer information when producing the report. As such, this definition applies to most companies working with background reports.
Disclaimer:
Information provided here is for educational and informational purposes only and should not constitute as legal advice. We recommend you contact your own legal counsel for any questions regarding your specific practices and compliance with applicable laws.