The Legal Lowdown: Understanding Background Screening Companies and CRAs

Is a background screening company a consumer reporting agency? Master FCRA compliance & legal duties to ensure accurate, compliant checks.

Is a background screening company a consumer reporting agency? The answer is almost always yes. Under the Fair Credit Reporting Act (FCRA), any company that regularly assembles or evaluates consumer information and provides it to third parties for employment, credit, insurance, or housing decisions is classified as a Consumer Reporting Agency (CRA).

Here's what makes a background screening company a CRA:

• Assembles consumer information for monetary fees
• Provides reports to employers for hiring decisions
• Influences eligibility for employment, credit, or housing
• Uses interstate commerce to prepare or furnish reports

The confusion often stems from terminology. While we commonly call them "background checks," these are legally classified as "consumer reports" under federal law. This distinction isn't just semantic - it triggers significant legal obligations under the FCRA.

According to the Consumer Financial Protection Bureau, there were 1,954 background screening companies operating in the United States in 2019, generating $3.2 billion in revenue. Yet many don't fully understand their CRA status and the compliance requirements that come with it.

The stakes are high. FCRA lawsuits have increased by 125% since 2014, with 1,681 cases filed in just the first quarter of 2024. Recent settlements like The Salvation Army's $1.87 million payment show the financial risks of non-compliance.

As Ben Drellishak, owner of Business Screen, I've helped countless businesses steer these complex regulations while conducting due diligence investigations. Understanding is a background screening company a consumer reporting agency is crucial for both compliance and avoiding costly legal pitfalls.

The FCRA Framework: Defining CRAs and Consumer Reports

To understand if a background screening company is a consumer reporting agency, we must look at the Fair Credit Reporting Act (FCRA). Enacted in 1970 and enforced by the Federal Trade Commission (FTC), the FCRA has expanded beyond credit reporting to govern any company that collects and shares personal information for employment, tenant screening, and other decisions. The law's definitions are the foundation for compliance, and misinterpreting them can lead to costly legal issues.

What is a Consumer Reporting Agency (CRA)?

The FCRA defines a Consumer Reporting Agency (CRA) as any entity that, for a fee, assembles or evaluates consumer information and provides reports to third parties using interstate commerce. In simple terms, if your business:

• Assembles or evaluates information like criminal records or employment history.
• Charges monetary fees for its services.
• Provides reports to third parties like employers or landlords.
• Uses interstate commerce (internet, phone, mail) to conduct business.

...then it is almost certainly a CRA under the law.

What Constitutes a "Consumer Report"?

The term "consumer report" is broader than just a credit report. The FCRA defines it as any communication from a CRA bearing on a consumer's credit worthiness, character, general reputation, or mode of living used for eligibility determination in employment, credit, insurance, or other approved purposes.

A typical employment background check, including criminal history and employment verification, falls under this definition. The scope is intentionally broad to protect consumers. If you provide background information for decisions on employment or housing, you are creating consumer reports under federal law, no matter the terminology used.

For a deeper understanding of how this applies to different types of screening, check out our guide on FCRA vs. Non-FCRA Background Checks.

So, Is a Background Screening Company a Consumer Reporting Agency?

So, is a background screening company a consumer reporting agency? The answer is almost always yes. If your business provides background checks to third parties like employers or landlords, you are a Consumer Reporting Agency (CRA) under federal law. This status is determined by your business activities, not your company name, and ignoring this reality is a costly mistake.

Under What Circumstances is a Background Screening Company a CRA?

A company becomes a CRA when it assembles personal information for a fee and provides it to third parties for decision-making. This includes providing reports to employers for hiring or to landlords for tenant screening. Given that 95% of employers conduct background screening, and a significant portion of industry revenue comes from rental screening, most companies in this field are classified as CRAs.

The simple answer: Yes, almost always. If you're in the business of background screening for employment or housing purposes, you're a CRA.

Key Differences: Background Check vs. Consumer Report

The terms "background check" and "consumer report" are often used interchangeably, but they have different legal implications. "Background check" is the common term, while "consumer report" is the legal term under the FCRA. When a third-party screening company provides a background check, it is legally a consumer report.

This distinction is crucial because it triggers all FCRA compliance requirements. Whether it's a simple employment verification or a comprehensive Criminal Records Due Diligence Background Check, if it comes from a screening company, it's a consumer report. Understanding this is the difference between operating legally and facing FCRA lawsuits.

The Legal Obligations of a Compliant CRA

Once it's established that a background screening company is a consumer reporting agency, the focus shifts to legal obligations. Being a CRA means committing to strict federal rules designed to protect consumer privacy and ensure data accuracy. For background screening companies, FCRA compliance is the foundation of ethical and legal operation.

Ensuring "Maximum Possible Accuracy"

The FCRA mandates that CRAs follow "reasonable procedures to assure maximum possible accuracy" in their reports. This is a demanding standard requiring robust systems to prevent errors. Key practices include:

• Verifying identifiers: Carefully checking names, dates of birth, and other personal data to ensure records belong to the correct individual.
• Avoiding mismatched files: Using technology and human oversight to prevent mix-ups, where a small detail like a middle initial can be critical.
• Handling expunged records: Implementing procedures to identify and exclude sealed or expunged records from reports, as reporting them is a major compliance risk.

Inaccuracy can have devastating consequences for individuals, which is why these FCRA requirements are so stringent.

Handling Public Record and Investigative Reports

The FCRA has special rules for certain types of reports. When reporting public records (e.g., arrests, convictions) for employment purposes, a CRA must either notify the consumer or maintain "strict procedures" to ensure the information is complete and up-to-date. For example, a conviction report must include its current status, such as whether it was overturned or expunged.

Investigative consumer reports, which are based on personal interviews about a person's character or lifestyle, have even stricter requirements. They demand additional disclosures to the consumer about the nature of the investigation. These rules underscore the law's focus on protecting individuals from the harm that inaccurate or incomplete information can cause.

Furnishing Reports for "Permissible Purposes" Only

A CRA cannot provide a consumer report to just anyone. The FCRA strictly limits access to those with a valid "permissible purpose." These include:

• Employment purposes (hiring, promotion, retention)
• Credit transactions
• Insurance underwriting
• Housing purposes (tenant screening)
• Government licensing or benefits
• A court order or written consent from the consumer

A CRA must verify that the requestor has a legitimate, legally defined reason for the report. This is a critical safeguard against the misuse of sensitive personal information, and a compliant CRA will not furnish a report without this certification.

Navigating Compliance: A Guide for Employers and Consumers

FCRA lawsuits have increased by 125% since 2014, with 1,681 cases filed in Q1 2024 alone. Major settlements, like The Salvation Army's $1.87 million payout, highlight the severe financial risks of non-compliance. Understanding that a background screening company is a consumer reporting agency is crucial for employers and consumers to steer the law and protect their interests.

The Employer's FCRA-Compliant Screening Process

For employers, FCRA compliance involves a structured, five-step process to protect both the company and the applicant.

• Step 1: Disclosure: Provide a clear, standalone written disclosure to the applicant stating that a consumer report may be obtained for employment purposes.
• Step 2: Written Consent: Obtain the applicant's written permission to conduct the background check after they have received the disclosure.
• Step 3: Making an Informed Decision: Use the report information responsibly, considering it alongside other factors and in compliance with equal opportunity laws.
• Step 4: Pre-Adverse Action Notice: If considering adverse action based on the report, first send the applicant a notice, a copy of the report, and a copy of A Summary of Your Rights Under the Fair Credit Reporting Act. Allow them a reasonable time (typically at least five business days) to respond.
• Step 5: Final Adverse Action Notice: If you proceed with the adverse action, send a final notice informing the applicant of the decision, the CRA's contact information, and their right to dispute the report's accuracy.

Why it Matters if a Background Screening Company is a Consumer Reporting Agency

The fact that a background screening company is a consumer reporting agency has significant implications for all parties:

• For the screening company: CRA status mandates operating under strict federal oversight, with rigorous procedures for accuracy, client verification, and dispute resolution to avoid legal liability.
• For employers: Every background check is a "consumer report," triggering FCRA obligations. Ignorance is not a defense against costly lawsuits.
• For consumers: CRA status provides powerful protections, including rights to disclosure, consent, report review, and dispute resolution.

Reliability is paramount. As we discuss in Are all due diligence background checks reliable?, not all checks are equal. Partnering with compliant firms, often members of the Professional Background Screening Association (PBSA), is key.

"Instant" Background Checks vs. Legitimate CRAs

Beware the allure of "instant" background checks. These low-cost services often rely on outdated or incomplete databases, leading to significant accuracy and compliance issues. They typically lack the real-time verification that legitimate CRAs provide, creating enormous risks.

Unlike instant checks, legitimate CRAs perform real-time searches directly with primary sources like courthouses and employers. Instant services often fail to meet FCRA standards for accuracy and consumer rights, leading to problems like reporting expunged records or misidentifying individuals. This can result in wrongful hiring decisions and costly lawsuits.

As a Cleveland-based private investigation firm, we emphasize that true due diligence is investigator-led, not algorithm-driven. Our focus on real-time, verified reports for risk management stands in stark contrast to the unreliable nature of instant database searches.

Frequently Asked Questions about CRAs and Background Checks

Understanding that a background screening company is a consumer reporting agency raises many questions. Here are answers to some common concerns about FCRA compliance and consumer rights.

What are the consequences for non-compliance with the FCRA?

The financial and legal risks of FCRA non-compliance are severe. Consequences include:

• Statutory damages: $100 to $1,000 per violation, which can accumulate quickly.
• Punitive damages: Awarded for willful non-compliance and can reach millions.
• Attorney's fees: Companies that lose a case are often required to pay the consumer's legal fees.
• Class-action lawsuits: These can lead to multi-million dollar settlements, as seen in the growing number of FCRA cases.
• Regulatory enforcement: The FTC and CFPB can impose heavy civil penalties and shut down non-compliant operations.
• Reputational harm: News of violations can damage a company's brand and client trust for years.

What are my rights as a consumer in the background check process?

The FCRA provides consumers with powerful protections during the background check process. Key rights include:

• Right to Know: You must be given a clear, separate disclosure before an employer can run a background check.
• Right to Consent: You must provide written permission before a report can be ordered.
• Right to a Copy of the Report: You have the right to see a copy of your report, especially if it's used to make an adverse decision against you.
• Right to Dispute Inaccuracies: If you find errors, the CRA must investigate and correct them, typically within 30 days.
• Right to Pre-Adverse Action Notice: Before an employer takes adverse action, they must notify you and provide a copy of the report, giving you time to respond.
• Right to Not Have Outdated Information Reported: Most negative information older than seven years cannot be included in your report.

These rights are detailed in the "Summary of Your Rights Under the Fair Credit Reporting Act" document.

How does the FCRA apply to tenant screening companies?

Yes, the FCRA applies fully to tenant screening. Tenant screening reports are consumer reports, and the companies that provide them are CRAs. They must adhere to the same rules for accuracy, permissible purpose, and consumer rights as in the employment screening context.

Landlords, as users of these reports, also have obligations. They must get your consent, provide disclosures, and follow the adverse action process if they deny your rental application based on the report. If you are denied an apartment, you have the same rights to receive notices, see your report, and dispute inaccuracies as a job applicant. Your FCRA rights are the same whether you're applying for a job or an apartment.

Conclusion: Partnering with a True Investigative CRA

The answer to is a background screening company a consumer reporting agency is a clear yes, and this fact is the foundation of compliant business decisions. With FCRA lawsuits on the rise and multi-million dollar settlements becoming common, the stakes for non-compliance are higher than ever.

The value of accuracy is paramount. Inaccurate reports lead to poor decisions and legal exposure. This is why investigator-led diligence is superior to cheap, instant database searches. True due diligence requires expertise and verification from primary sources to ensure the information is trustworthy.

At Business Screen, our Cleveland-based practice is built on avoiding legal pitfalls through meticulous, investigator-led work. We don't just compile data; we investigate it to ensure every report meets the highest standards of accuracy.

Choosing a background screening partner isn't about finding the cheapest price; it's about investing in risk mitigation and peace of mind. Working with a legitimate CRA that takes its FCRA obligations seriously is essential. Your business deserves the confidence that comes from verified, compliant reports delivered by licensed private investigators.

Ready to experience what real investigative due diligence looks like? Get a compliant Company Background Check and see the Business Screen difference.

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