What Is the Fair Credit Reporting Act?
The Fair Credit Reporting Act (FCRA) is a federal law that regulates credit reporting agencies and compels them to insure the information they gather and distribute is a fair and accurate summary of a consumer’s credit history.
The FCRA is chiefly concerned with the way credit reporting agencies use the information they receive regarding your credit history. The law is intended to protect consumers from misinformation being used against them. It offers very specific guidelines on the methods credit reporting agencies use to collect and verify information and outlines reasons that information can be released.
The law was passed in 1970 and amended twice. It is primarily aimed at the three major credit reporting agencies — Experian, Equifax and TransUnion — because of the widespread use of the information those bureaus collect and sell. The law also applies to banks, credit unions and agencies that sell medical records and check writing or rental history records, as well as any businesses that use information on credit reports for hiring purposes.
The FCRA has come up often in media reports because advocacy groups question the accuracy of the information credit reporting agencies gather and consumers’ ability to dispute that information and have it removed from their credit report.
What Are Credit Reporting Agencies?
Credit reporting agencies (CRA) are responsible for gathering, processing and archiving credit information on consumers. The CRAs have information on more than 200 million Americans. They sell that information to help businesses make decisions about granting loans or credit.
The agencies collect information on every consumer’s use of credit and their bill-paying habits. The data comes from “information suppliers,” or any business that extends credit to customers. Information also is taken from public records like court judgments and bankruptcy filings. Information suppliers transmit consumer credit information electronically to the credit reporting agencies on a continuous basis, thus credit reports could change almost daily, depending on the level of a consumer’s activity.
The CRAs feed the data they receive into their own set of algorithms to come up with a score that predicts a consumer’s creditworthiness.
CRAs do not make decisions on whether consumers get a loan. That decision is made by banks, credit unions, mortgage companies or card companies that extend credit. The information from the CRA is used to set the interest rate and conditions for a loan.
The FCRA provides a list of consumer rights regarding individuals’ credit history information.
Under the Fair Credit Reporting Act, you have a right to:
- Access to Your Credit Report – The act requires credit reporting agencies to provide you with any information in your credit file upon request once a year. You must have proper identification. You have a right to a free copy of your credit report within 15 days of your request.
- Protected Access – The act limits access to your file to those with a valid need. That would usually be banks, insurance companies, employers, landlords or others doing business that involves offering credit. You also have the right to know who has requested your credit report in the last year or, for employment-related requests, two years.
- Accurate Reporting – If inaccurate information is discovered in your file, the consumer reporting agency must examine the disputed information, usually within 30 days. If the inaccurate information cannot be verified, the consumer reporting agency has a responsibility to remove it. If you are not able to clear up the matter, you are allowed to add a statement to your credit file explaining the situation.
- Have Outdated Information Removed – Negative information must be removed from your file after seven years. Bankruptcy, however, may remain on record for 10 years, and criminal record information can remain indefinitely.
- Maintain Medical Information Privacy – You are protected from having medical information in a consumer report, as creditors are prohibited from obtaining or using medical information when making a credit decision.
- Limit Unsolicited Credit Offers – The law allows you to request to have your name and address removed from unsolicited prescreened offer lists for credit and insurance. To opt out of such correspondence, call (888) 5-OPTOUT (888-567-8688).
- Protect Your Personal Account Numbers – Businesses are not permitted to publish full credit card numbers on receipts. The law also allows you to protect your Social Security number by having it truncated on your credit report.
- Receive Notification of Possible Negative Information – You have the right to be notified if any financial institution submits, or plans to submit, negative information to a credit reporting agency. This information may be included in a billing statement or a notice of default.
- Seek Damages – You have the right to sue and seek damages in a state or federal court from anyone, such as a consumer reporting agency or a user of consumer reports, who violates the Fair Credit Reporting Act.
- Know When Your Credit Report Is Used Against You – If you are denied credit, insurance or employment because of your credit report, you can ask for the specific reason for the denial.
- Know Your Credit Scores – You have a unique credit score with each credit bureau, which you can request. In some cases, you may be required to pay for this information.
Credit CARD Act
The Fair Credit Reporting Act includes several smaller acts that deal with various arms of the financial industry. The Credit CARD Act is one of the three most visible parts of the FCRA.
Under the Credit Card Accountability, Responsibility and Disclosure Act, credit card companies are not allowed to increase your interest rate on an existing balance. The act also requires a company to give you 45-day notice prior to increasing the rate on new account balances. It also requires credit card companies to keep regular and consistent payment deadlines.
The Dodd-Frank Act is one of the most visible parts of the FCRA. Several of the Dodd-Frank Act’s statutes stand on their own and have become important parts of the modern financial system.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) was passed in 2010 to stop major financial institutions and creditors from continuing unfair practices. The act is intended to prevent a major recession like the one started in 2007.
The DFA created an independent watchdog system to monitor information given to consumers and ensure consumers receive clear and accurate credit information. It ended bailouts, meaning taxpayer money cannot be used to save failing financial firms. It also imposed new requirements on big companies to deter them from growing. And it implemented a new warning system to give the government more advanced notice of problems before they significantly weaken the national economy.
The DFA also forces big financial institutions to be more transparent and accountable. It gives investors a greater say in company issues, strengthened enforcement of existing laws and eliminated loopholes that allowed risky and detrimental behavior.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) is a government agency that serves as a consumer watchdog on the financial industry.
It was created as part the Dodd-Frank Act financial reform law and gives consumers a voice when they want to dispute something with the financial industry. Much of their focus has been on helping consumers understand the laws and regulations that govern the credit card, mortgage and banking industries.
The CFPB website invites consumers to send questions and complaints to the agency. It also publishes blogs and news stories on subjects like how to avoid overdraft fees from banks, dealing with debt collection agencies, problems with pre-paid accounts and facts about payday lenders.
The Volcker Rule
This is a part of the Dodd-Frank Act meant to protect consumers. In this case, the “Volcker Rule” restricts large banks from making speculative, high-risk investments with funds from their own accounts.
It essentially prohibits a bank from engaging in proprietary trading and from acquiring ownership interest in a hedge fund or private equity fund.
The rule was named after former Federal Reserve Chairman Paul Volcker and is meant to keep banks from hedging bets that put their customers in danger, one of the banking practices that led to the recession in 2008.
Although it was passed in 2010, implementation of the rule was delayed until the summer of 2015.
The Financial Stability Oversight Council
Also a consumer protection agency sprouting from the Dodd-Frank Act, the Financial Stability Oversight Council’s purpose is to monitor the financial system and regulate companies whose practices pose a serious threat to the U.S. economy.
The council is composed of nine members and is chaired by the Treasury Secretary. Its members include the Chairman of the Federal Reserve Board, Comptroller of the Currency, Chairman of the Federal Deposit Insurance Corporation, Chairman of the Securities and Exchange Commission, Chairman of the Commodity Futures Trading Commission, Chairman of the National Credit Union Administration, Director of Federal Housing Finance Agency, Director of the Bureau of Consumer Financial Protection and a Senate-confirmed independent member with insurance expertise.
The board is charged with recommending regulatory and supervisory measures for the companies whose practices could create risks of significant liquidity, credit or other problems among banks, holding companies and financial markets.
SEC Office of Credit Ratings
The SEC Office of Credit Ratings is charged with protecting investors and maintaining fair and efficient markets through oversight of credit rating agencies. It issues information that educates investors on the risks involved with investing in debt securities like bonds, notes and asset-backed securities. Credit ratings also are assigned to companies and governments.
The SEC Office of Credit Ratings was created as part of the Dodd-Frank Act to help oversee credit rating agencies.
Credit ratings reflect a relative ranking of credit risk and play a critical role in the marketplace. The ratings have a dramatic effect on the perceived value. Unfortunately, there were some “conflict of interest” situations involving credit rating agencies and certain investments that led to significant mismanagement of risks during the economic meltdown in 2008.
Fair and Accurate Credit Transactions Act
The third most well-known part of the FCRA is the Fair and Accurate Credit Transactions Act.
If someone assumes your identity through the use of stolen personal information and commits fraud, the event is likely to damage your credit report. FACTA outlines rights to protect consumers’ finances and repair damage to the credit report if this happens. It specifically protects identity theft victims and active duty military personnel.
If you are an identity theft victim, FACTA gives you the right to:
- Place a “Fraud Alert” in Your Credit Reports – An alert makes potential creditors wary of credit applications and inquiries in your name, protecting you from additional fraud. This can be short-term or long-term, anywhere from 90 days to seven years.
- Receive Free Copies of Your Credit Reports – Check the documents for signs of fraud, such as an unauthorized line of credit or a change of address.
- Request and Obtain Copies of Documents Related to Fraudulent Dealings – You may be required to show proof of identity theft, such as a police report.
- Request and Obtain Relevant Information from Debt Collectors – This includes details of the debt, such as the creditor and amount due.
- Request a “Block” on Information Resulting from Identity Theft – When supplied with adequate proof, credit reporting agencies can prevent an identity thief’s actions from appearing on your credit report and negatively affecting your credit score.
- Request Businesses Not Report Information Related to Your Identity Theft – Once you provide proof of identity theft, the involved businesses can stop reporting the false information to credit reporting agencies, preventing negative effects to your credit report.
Active duty military personnel have another right under FACTA. Special regulations allow military personnel to place “active duty alerts” in their credit reports.
If you place an active duty alert in your report, creditors must take extra steps to verify your identity. This protects against identity theft while you are deployed by making it more difficult for thieves to impersonate you. The alert typically lasts one year but may be canceled sooner or renewed.
To place or remove an active duty alert, as with a fraud alert, you must call only one of the three national reporting agencies — TransUnion, Experian or Equifax. The agency you contact will then notify the remaining two.