Any time you apply for a home loan or mortgage, the bank or lender will look at your credit report. This is done to determine your creditworthiness, that is, to determine whether you have the ability to pay off the loan, including the monthly payments. Lenders do this by looking at your income, current debt, and credit history.
That credit history part is where the Fair Credit Reporting Act, or “FCRA” for short, comes in. Created in 1970 and amended several times since then, the Fair Credit Reporting Act enables transparency in how consumer credit information is collected and reported. The FCRA lays out specifics about how long the information can be kept and shared with others, as well as your rights as a consumer when your credit report information is being accessed.
In this article, we’ll talk about the Fair Credit Reporting Act, why it matters to you, and the protections the FCRA offers when applying for a mortgage or renting a home.
What is the FCRA?
The Fair Credit Reporting Act is a federal law enacted in 1970 and then further updated in the late 1990s and early 2000s to prevent misuse of consumer information. It underscores that credit reporting agencies, including Equifax, Experian, and TransUnion, must provide transparency and accuracy in the way they collect consumer information. It also helps ensure fairness, accuracy, and privacy of personal information contained in the files of these credit reporting agencies.
Originally, the FCRA was enforced by the Federal Trade Commission (FTC), but now it’s the Consumer Financial Protection Bureau (CFPB), an agency created in July 2011 in response to the 2007-08 financial crisis, that does the law enforcement.
The FCRA outlines a Summary of Rights, stating credit protections that it provides to consumers, including the right to know what is in their file. Consumers are entitled to one free copy of their credit report every 12 months from each of the major credit bureaus and specialty consumer reporting agencies in order to review the file and report any discrepancies.
The FCRA and its protections are extremely important because the lender will check your credit history, whether you’re buying a house or applying for a credit card. The accuracy of this report can impact not only whether you get the loan but your ability to get low interest rates and better terms. Landlords will also use your credit score before they rent a place.
If you are a landlord, the FCRA applies to you, too, since when accessing consumer reports to make tenant decisions, landlords and property managers must comply with the FCRA as well.
How the FCRA works
The FCRA primarily governs how credit reporting agencies compile and share reports that contain sensitive and private information about consumers’ financial history. These details include things such as whether someone is making timely credit card or debt payments, what kind of loans they have outstanding, and any current or previous mortgages. The credit agencies then use this information to create a picture of what someone’s financial standing and creditworthiness looks like and how much of a risk they pose to lenders.
From a real estate perspective, the credit report is not only used by lenders when offering a mortgage but also by landlords to ascertain a renter’s history of reliability and future ability to keep paying the rent. However, the lender or landlord must seek a consumer’s authorization before pulling their credit and can only use that financial information in specific ways. If there’s anything in a consumer’s credit report that results in them being denied a mortgage or rental accommodation, they have a right to know.
While the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) are the two federal agencies overseeing the act, some states also have specific laws relating to credit reporting.
How the FCRA protects consumers
The FCRA lays out the kind of data credit bureaus can collect and share, including a person’s bill payment history, previous loans, and current outstanding balances on debts. It can also include employment information, current and previous addresses, arrest records, and whether the person has ever filed for bankruptcy or owes child support.
The FCRA helps protect you as a consumer by regulating how this information is used and accessed. Some of these consumer rights include:
- You have the right to be told: If the information in your credit file is used against you to deny your application for credit, employment, or insurance, the agency must tell you.
- You have the right to request and access information a consumer reporting agency has about you: This is called a “file disclosure.” You are entitled to a free file disclosure every 12 months from each national credit bureau or by going to AnnualCreditReport.com. You may need to provide your Social Security Number. You can also get a free credit report if a person has taken adverse action against you because of information contained in the report, if you are the victim of identity theft and place a fraud alert in your file, if your file has inaccurate information, if you are on public assistance, or if you are unemployed but expect to apply for employment within 60 days.
- You have the right to privacy: While the FCRA gives you access to your credit report, other people’s access to this report is limited. This means that while people with “permissible purpose,” such as landlords, credit, and insurance companies may access your reports, others will have to seek your permission. If an employer wants to run a background check for employment purposes, they will need your written consent.
- You have the right to dispute it: If you find inaccurate or incomplete information on your credit report, you have the right to dispute it, requiring the credit bureau to confirm whether the disputed information. Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information, typically within 30 days. Any accurate information that has been verified can continue being reported.
- You have the right to ensure the timeliness of information: Consumer reporting agencies are not permitted by law to report outdated negative information. Typically, a consumer reporting agency may not report negative information that is more than seven years old or bankruptcies that happened more than 10 years ago.
- You have the right to opt out of prescreened credit offers: That is, marketing and promotions of loan products based on your credit score.
- You have the right to put a security freeze on your credit report: This means that potential mortgage lenders cannot check your credit report without you either lifting the freeze or providing them with a one-time PIN for access. This ensures that you have full control over who is viewing your credit report and cannot do so without your permission. If asked, credit bureaus must also add fraud and active duty military alerts to your file.
Check out www.consumerfinance.gov/learnmore to learn more about the FCRA and how it can protect you.
These are some frequently asked questions about the FCRA.
What are some of the common violations of the FCRA?
Creditors, collectors, and credit reporting agencies will be considered to violate the FCRA if they report old information, report inaccurate information, mix consumer files, violate a person’s privacy, withhold notices, fail debt dispute procedures, or continue to provide negative credit information after a 7-year period.
What are the penalties for non-compliance with the FCRA?
The penalties for not complying with or violating the FCRA can include a fine of between $100 and $1,000, as well as actual damages, statutory damages, punitive damages, attorney fees, and court costs. Criminal charges can also be brought if somebody knowingly obtains information from a consumer reporting agency under false pretenses.
How can I dispute an error on my credit report?
You’ll need to contact the credit reporting agency directly with details of what is incorrect and evidence to support the claim. You can file a dispute online, by phone, or by mail, and the Consumer Finance Protection Bureau offers detailed guidance on how to do so, including a sample letter template.
Closing thoughts on the FCRA
The Fair Credit Act of 1970 made it easier for consumers to know what information was being stored, shared, and reported about them, and allowed them a vehicle through which to contest any inaccuracies. When it comes to real estate, it’s essential that you know what’s in your credit report before you apply for a mortgage. Doing so will ensure that you’re aware of the kinds of mortgage offers you may be able to get and, if you’re a real estate investor, what kind of impact this will have on your profitability.
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