The Fair Credit Reporting Act initiated policies to ensure the proper maintenance and disclosure of credit information, in order to protect consumers, as well as to maintain the efficiency of and public confidence in the national banking system.
The Fair Credit Reporting Act (an amendment to the Consumer Credit Protection Act of 1968), was passed by Congress on October 26, 1970, and became law in April of 1971. Senator William Proxmire of Wisconsin was instrumental in the passage of this legislation.
Section 602 of the Fair Credit Reporting Act (FCRA) outlined the need for this law. First, the banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence essential to the continued functioning of the banking system. Second, elaborate mechanisms exist to investigate and evaluate creditworthiness, credit standing, credit capacity, character, and general reputation of consumers. Consumer reporting agencies have assumed a vital role in assembling and evaluating consumer credit and other information on consumers. There is a need to ensure that consumer reporting agencies exercise their responsibilities with fairness, impartiality, and a respect for consumers’ right to privacy.
The FCRA had four primary objectives. They were to establish acceptable purposes for which a consumer credit report may be obtained; to define the consumer’s rights regarding credit reports, with particular emphasis on giving consumers access to their reports and procedures for correcting inaccurate information; to establish requirements for handling an adverse credit decision that resulted in whole or in part from information contained in a credit report; and to define the responsibilities of credit reporting agencies.
In general, it was the realization by Congress that consumer credit has had major impacts on economic activity as a whole that spurred the legislation. Consumers’ inability to obtain credit for expensive items such as automobiles and large appliances negatively affected economic factors such as employment, production, and income, ultimately magnifying the business cycle, particularly in downturns. Financial institutions, as the grantors of consumer credit and the users of information supplied by credit reporting agencies, weighted their credit decisions heavily on the information supplied. Timely, accurate, and intelligible information was necessary for proper credit decisions. Consumers also needed to be protected from ramifications resulting from inaccurate, untimely, or improper credit information.
Consumers by far were the most heavily affected by the passage of this legislation. Consumers rely heavily upon consumer credit as a means of purchasing expensive items and raising their standards of living by purchasing goods for current use with future income. Reporting agencies faced higher costs as a result of the legislation but gained a greater reputation for accuracy and usefulness.
The following information is usually contained within a consumer credit file: name; address; previous address; Social Security number; date of birth; employer; length of employment; previous employment; credit history including creditors, balances, and payment patterns; and public filings such as mortgages, chattels, marriages, divorces, collections suits, and bankruptcies. The FCRA made all information within a consumer’s credit report accessible to the consumer.
Consumers can get access to their credit files in several ways. If a consumer is denied credit on a credit application, the lending institution is required to mail a detailed letter outlining the reasons for denial and including the name, address, and telephone number of any reporting agency consulted. The consumer may take this letter to the reporting agency within thirty days of the date of the letter to discuss and obtain a free copy of the report. A consumer who has not been denied credit may obtain a copy of his or her file from the local reporting service for a nominal fee. A consumer must provide proper identification in order to obtain a copy of his or her credit file. The FCRA identifies the type of material available to the consumer. The consumer has the right to know all the information in the file, with the exception of medical records. This includes names of people or companies that have obtained the report within the past six months and the names of those who received the report for employment purposes within the past two years.
The FCRA greatly benefits consumers by allowing them to dispute information contained within their files. Erroneous or inaccurate information can be contested and asked to be verified by the reporting agency. The consumer has the right to place within the credit file a consumer statement outlining his or her interpretation of negative information. This statement is then part of the file and is presented to future users. The consumer statement is usually limited to one hundred words. The FCRA limits the amount of time that unfavorable information can be reported on a consumer. Seven years is the maximum, with the exception of bankruptcies, which are reported for ten years.
In some instances, an investigative credit report may be compiled on an individual. It includes all the information mentioned above. In addition, it includes information on the character, reputation, and living style of the consumer. This information is obtained from interviews with friends, associates, and neighbors. The consumer has the same rights of access to this report as to an ordinary credit file.
The final major area that the FCRA addresses is consumers’ right to privacy. Credit information is basically for use by the consumer, the reporting agency, authorized credit grantors, employers, and insurance companies. To restrict dissemination to proper users, those who request credit information must prove their identity and their reason for wanting access to a consumer’s credit file. For users who obtain information under false pretenses, the law provides for fines of up to $5,000, prison sentences up to one year, or both. The same penalties apply to officers and employees of reporting agencies who misuse information. Consumers are allowed to pursue civil litigation against reporting agencies and are entitled to compensation for any financial injury, extra penalties imposed by the court, court costs, and attorney fees. Consumers can discuss complaints with credit reporting agencies by contacting the Federal Trade Commission.
Consumers were not the only parties affected by the FCRA. Reporting agencies assumed a more clearly defined fiduciary responsibility to act in good faith and trust. Their goals are to maintain timely and accurate files on consumers, handle disputes in a timely manner, and investigate complaints and inaccurate information on consumers. They must also ensure the confidentiality of their information while still making it available to the proper users. Failure to follow proper procedures and guidelines can result not only in consumer complaints but also in lawsuits, fines, or even imprisonment for employees of reporting agencies.
Consumer credit grantors also were affected by the FCRA. Lenders need to be careful when disclosing credit information. It must be both timely and accurate. Letters denying credit must be sent out on time, and procedures need to be in place to handle direct requests made to the organization. Lenders need to be careful with outside requests so as not to be viewed as credit reporting agencies. The final area lenders must address is the use of information for decision-making purposes. Many lenders place great weight in consumer credit decisions on the information obtained from credit files. It is essential that lenders have reliable information in order to make proper credit decisions. Lenders also use credit reporting agencies to screen borrowers. This works in two ways for lenders. It improves their credit quality by eliminating marginal borrowers and also gives them access to potential new customers. Lenders are bound by privacy laws and are forbidden to give copies of reports to consumers or other lenders.
The FCRA had major ramifications for consumers applying for credit, credit reporting agencies, and lenders who relied upon information for decision-making purposes. The emphasis of this act was that information contained within a credit file must be timely and accurate, accessible to all concerned parties, and inaccessible to unconcerned parties. The FCRA and subsequent amendments dealt with these issues.
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Beares, Paul. “Regulation of Consumer Credit.” In Consumer Lending. Washington, D.C.: American Bankers Association, 1987. An excellent book dealing with all phases of consumer credit. Written from a banker’s perspective, but easy reading for the layperson. Discusses in detail the process of granting consumer credit. This chapter in particular focuses on legislation and regulation. -
Calder, Lendol. Financing the American Dream: A Cultural History of Consumer Credit. New ed. Princeton, N.J.: Princeton University Press, 2001. A history of Americans’ attitudes toward credit and debt and of the function of debt in the U.S. economy. Bibliographic references and index. -
Cole, Robert, and Lon Mishler. “Regulation of Consumer Credit.” In Consumer and Business Credit Management. 10th ed. Chicago: Irwin, 1995. This chapter discusses consumer credit regulation in detail. Chapter 9 in the same volume details the operations of credit reporting agencies. -
U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. Subcommittee on Consumer Affairs and Coinage. Fair Credit Reporting Act: Hearing. 101st Congress, 1st session, 1989. Hearings discussing problems, loopholes, and noncompliance by credit reporting agencies. -
_______. Fair Credit Reporting Act: Hearing. 102d Congress, 1st session, 1991. Hearings discussing pending legislation designed to modernize and amend the FCRA. Discussions include abuses and reclarifications of the intended purpose of the original act. -
_______. Give Yourself Credit (Guide to Consumer Credit Laws). 102d Congress, 2d session, 1992. A detailed guide covering consumer credit regulations. Uses a question-and-answer approach. Written in everyday language. Actual consumer situations are included. Chapter 5, “Your Credit File,” is directly applicable to this article. -
U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs. Subcommittee on Consumer and Regulatory Affairs. Fair Credit Reporting Act: Hearing. 102d Congress, 1st session, 1991. Senate hearings and testimonials relating to proposed amendments prompted primarily by the explosive growth of consumer credit, in conjunction with implementation of computer technology as a means of managing credit information.
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