FCRA: What Is The Fair Credit Reporting Act And Its Purpose?

As a consumer, why might the Fair Credit Reporting Act (FCRA) matter to you? The FCRA offers you protections with regard to your credit score, in the case of identity theft and when applying for a loan, including a mortgage.

In this piece, we'll answer the question, "What is the purpose of the Fair Credit Reporting Act?" Then we’ll explore how your mortgage, your credit score, reporting requirements, common violations, identity theft and more interrelate under the FCRA.

What Is The Fair Credit Reporting Act? 

The Fair Credit Reporting Act of 1970 outlines how consumer information should be lawfully collected, used and redistributed. Prior to 1970, before the FCRA existed, lenders were allowed to gather information from a wide variety of sources, even newspaper notices that summarized arrests or marriage announcements.

The FCRA was born out of a desire to make credit reporting fairer and outline privacy violations, how consumers can correct false information on their credit report and what to do in the case of credit report misuse of information. The Federal Trade Commission website houses the full text of the law.

In 2010, Congress passed the Dodd-Frank Act, which granted rule-making authority under the FCRA to the Consumer Financial Protection Bureau (CFPB). The Dodd-Frank Act also required disclosing a credit score and related information when a lender takes an adverse action or in the case of risk-based pricing.

What Is The Purpose Of The Fair Credit Reporting Act?

The FCRA helps consumers understand how they can use and respond to the information in their credit reports. When you apply for a credit card, auto loan, mortgage or more, it's important that the entity that looks into your credit does so with your authorization and that all steps are followed. The FCRA requirements apply to major consumer credit bureaus, employers, banks and credit unions, landlords and more.

The FCRA And Your Mortgage

As mentioned, the FCRA works as the primary federal law that governs credit bureaus and information about consumers and borrowers. This also applies to home buyers obtaining a mortgage.

Your lender must ask your authorization before pulling your credit and can only use that information in certain ways. If any information in your credit report is used against you, you have a right to know. For example, if your mortgage application is denied, your lender must tell you why.

If your rights under the FCRA have been violated, you may be able to sue the offending entity. If you believe a reporting agency, reporter or receiver of your credit information violated your rights, you may want to speak to a lawyer about your options.

Credit Reporting Agencies

Credit reporting agencies (CRAs), also called credit bureaus, gather account information from various creditors. The three major credit reporting bureaus are Equifax®, Experian™ and TransUnion®. These furnishers aren't the only ones who provide information. Some specialty agencies also collect information on checking accounts, apartment rental history and more.

Your Rights Under The FCRA

The Fair Credit Reporting Act (FCRA) protects consumers by limiting who can access their credit information and for what purpose. The FCRA gives consumers the right to be informed about how their credit is being used.

You have certain rights, such as whether information in your credit report has been used by a lender to deny you credit. You can also find out what is in your credit report, to know your credit score and to dispute inaccurate information with consumer reporting agencies.

You also have the right to have negative information removed after a certain amount of time (typically 10 years for bankruptcy and 7 years for other negative information) and to restrict access to your report only to certain entities, such as to employers, without your written consent.

You can also opt out of unsolicited prescreened credit or insurance offers, freeze your credit or place a fraud alert on your credit file. You also have the right to take adverse action by seeking damages from those who have violated your rights under the FCRA.

You also have the right to:

• Know if the information in the file resulted in the denial of a home loan, employment, insurance, credit, etc.
• Access to your credit report and credit score
• Have inaccurate or outdated information corrected, removed or disputed
• Protect the privacy of your medical information

FCRA Reporting Requirements

What are FCRA requirements?

The FCRA requires accuracy and privacy for all consumer credit reports. This includes removing most negative information and some bankruptcies after 7 years. FCRA requirements also ensure that any employer, insurer, lender or entity requesting information has a permissible reason.

To sum up, under the FTC and the Consumer Financial Protection Bureau (CFPB), the government agency responsible for consumer protection in the financial sector, FCRA ensures:

• Accuracy and privacy: Credit reporting agencies create consumer credit reports, which are statements that summarize your past and current credit activity. This information in your report can only include true, verifiable information and must only be given to entities that have a valid reason (typically, only your permission) to view it.
• Transparency: The law also ensures that credit reporting is easy to understand and gives them the right to dispute inaccurate or incomplete information. You can sue for damages if your rights are violated under the FCRA.
• Fraud protection: In 2003, the FCRA expanded with FACTA to add identity theft protections. Individuals have the right to obtain a free copy of their credit report each year and can also place fraud alerts on their credit files.

Common Violations Of The FCRA

Creditors, collectors and credit reporting agencies violate the FCRA in some common ways, including in the following situations:

• Furnishing and reporting old information
• Furnishing and reporting inaccurate information
• Mixing files
• Failing debt dispute procedures
• Privacy violations
• Withholding notices

If you suspect that a furnisher has mishandled negative information or if you believe you're the victim of identity theft, you can seek recourse by writing a letter to the credit reporting agency and the reporting company. You should also report any identity theft to the FTC and your local police department (and contacting the creditor who reported the fraudulent activity). Next, you need to freeze or close your account.

FCRA FAQs

Let's take a closer look at some questions you may have about the FCRA.

Who enforces the FCRA?

The Federal Trade Commission (FTC) enforces the FCRA and rule-making authority under FCRA goes to the Consumer Financial Protection Bureau (CFPB).

What are the penalties for not complying with or violating the FCRA?

The penalties for not complying with or violating the FCRA include actual damages, statutory damages, punitive damages and attorney fees and court costs. Check with a lawyer for more information if you're concerned that you are a victim of FCRA violation.

Can I get a copy of my credit report?

Yes, you can get a copy of your credit report every year. You are entitled to one free credit report from each credit agency bureau every 12 months at annualcreditreport.com.

How do I dispute an error on my credit report?

If you find an error, you can dispute that information with the credit reporting agency (Equifax®, Experian™ and/or TransUnion®) directly. Explain what you think is wrong and provide evidence that supports your claim.

Here are the dispute websites and phone numbers for each credit reporting agency:

• Equifax®: equifax.com/personal/credit-report-services/credit-dispute/ and (866) 349-5191
• Experian™: experian.com/disputes/main.html and (888) 397-3742
• TransUnion®: https://dispute.transunion.com and (800) 916-8800

The Bottom Line

The Fair Credit Reporting Act (FCRA) of 1970 outlines the lawful use of consumer information. It explains how to make credit reporting fairer and details privacy violations, how consumers can correct false information on their credit report and what to do in the case of credit report misuse of information.

If you feel you are the victim of a violation under the FCRA, there are a few steps you need to take. First, write a letter to the credit reporting agency. Next, report the identity theft to the FTC and your local police department. Then contact the creditor who reported the fraudulent activity and get your account frozen or closed.

Having a fair and accurate credit history is crucial for home buyers applying for a home loan. Ready to take the next step in your home buying journey? Start the approval process.