What to Know About FCRA Compliance When Using AI Tools

As artificial intelligence continues to reshape how employers recruit, hire, and manage employees, its use has introduced complex legal obligations that many organizations are still learning to navigate. 

A key area of concern is compliance with the Fair Credit Reporting Act (FCRA) when AI tools are used in the workplace. The Consumer Financial Protection Bureau (CFPB) recently clarified these issues in its October 24, 2024, Circular, which highlights how third-party technology vendors may fall under the Consumer Reporting Agencies (CRAs) definition and what that means for employers using such tools.

Employers must understand their responsibilities under the FCRA, particularly when AI tools generate or process information that can affect employment decisions. This requires vigilance to avoid noncompliance, protect candidate rights, and hire with confidence.

AI Tools and the Consumer Reporting Agency Designation

The CFPB’s Circular clarified a critical point for employers: third-party technology vendors providing AI-driven services may qualify as CRAs if they assemble or evaluate consumer information for employment purposes. 

This designation brings with it specific obligations under the FCRA. 

For instance, if an AI tool analyzes candidate data to assess employability, this process might constitute a “consumer report.” Consequently, employers using such tools must adhere to the same rules as they would when obtaining traditional background checks.

The CFPB’s guidance reminds businesses that technology doesn’t exempt them from compliance. Employers must treat information derived from AI-driven tools with the same legal diligence as any other consumer report, ensuring accuracy, fairness, and proper handling throughout employment.

Triggers for FCRA Compliance

The FCRA applies when an employer uses information classified as a “consumer report” to make employment decisions. This can include data generated by AI tools for purposes such as assessing creditworthiness, verifying identity, or evaluating qualifications. 

Employers must watch for triggers such as:

• The use of data collected, evaluated, or assembled by third-party vendors to inform employment decisions.
• The inclusion of data sources like criminal records, credit histories, or other consumer-related information in AI analysis.
• Any decision-making process that relies on third-party data to reject, promote, or assess candidates.

Understanding these triggers is essential to avoid unwitting violations of the FCRA when incorporating AI into hiring workflows.

Obtaining Consumer Reports with AI

Several steps must be followed when an employer needs to obtain a consumer report, whether through traditional means or AI tools. First, the employer must notify the candidate in writing that a consumer report will be procured. This notice must be presented in a standalone document, separate from other application materials or legal disclosures.

Next, the employer must obtain written consent from the candidate. This consent allows the employer to request the consumer report from the CRA or third-party technology vendor acting in this capacity. Transparency is paramount at this stage, as candidates have the right to understand what information will be collected, how it will be used, and the potential consequences.

Steps Before Taking Adverse Action

If information derived from a consumer report—including data analyzed by AI—leads an employer to consider adverse action against a candidate, the FCRA imposes specific obligations to ensure fairness. Before taking any action, the employer must provide the individual with a pre-adverse action notice. 

This notice must include:

• A copy of the consumer report used in the decision-making process.
• A summary of the candidate’s rights under the FCRA.

The purpose of the pre-adverse action notice is to allow the individual to review the information and dispute any inaccuracies. Employers must wait a “reasonable amount of time” after issuing the notice before proceeding with an adverse action. The Federal Trade Commission (FTC) generally considers five business days an acceptable waiting period, though no fixed rule exists.

What Happens When an Adverse Action Is Taken

If the employer decides to proceed with adverse action, such as rejecting a job applicant or rescinding an offer, the FCRA requires a final adverse action notice. 

This notice must include:

• The name, address, and contact information of the CRA or third-party vendor that provided the consumer report.
• A statement that the CRA did not make the adverse decision and cannot explain its reasoning.
• A reminder of the individual’s rights, including the right to dispute the report’s accuracy and request another free copy within 60 days.

By following this process, employers demonstrate a commitment to fairness and transparency, reducing the likelihood of legal disputes and fostering trust with candidates.

Ensuring Compliance to Reduce Risk

To maintain compliance with the FCRA when using AI tools in the workplace, employers must adopt a proactive approach that integrates legal safeguards into their processes. Here are several strategies:

Understand the Tools You’re Using

Employers should evaluate the AI tools and third-party vendors they engage with, ensuring that these tools are compliant with FCRA requirements. This includes confirming whether the vendor qualifies as a CRA and verifying the accuracy of their data sources. A robust due diligence process will help employers avoid working with vendors that might expose them to unnecessary legal risks.

Train HR and Hiring Teams

Compliance starts with education. 

HR teams, hiring managers, and other relevant staff must understand the FCRA’s requirements and the specific obligations that arise when AI tools are used. Training should include how to recognize compliance triggers, properly notify candidates, and handle adverse actions.

Review and Update Policies

Employers must ensure their policies align with FCRA standards and reflect the realities of AI use. Regular policy reviews should address how candidate data is collected, evaluated, and stored and how decisions are communicated to applicants.

Audit AI Tools and Vendors

Periodic audits of AI tools and vendors are essential to ensure ongoing compliance. This includes verifying that the data used by the tool remains accurate, relevant, and free from bias. Employers should also confirm that their vendors adhere to FCRA data handling and reporting standards.

Choosing the Right Background Screening Company

Partnering with a reputable background screening company is critical to ensuring compliance and protecting your organization. Here’s what to look for:

1. FCRA Expertise: The screening company should thoroughly understand FCRA obligations and provide guidance on adhering to these rules.
2. Accuracy and Transparency: Ensure the provider has robust processes for verifying the accuracy of their reports and offers transparent practices for candidates to access and dispute their data.
3. Integration with AI: If using AI tools, the company should seamlessly integrate these capabilities while maintaining compliance with FCRA requirements.
4. Real-Time Support: Look for a provider that offers responsive customer support to address any questions or concerns during the screening process.
5. Secure Data Handling: The company must prioritize data security and confidentiality to protect sensitive candidate information.

Navigating the Future of AI and FCRA Compliance

As AI continues to evolve, its application in the workplace will undoubtedly expand. Employers must stay informed about regulatory changes and adapt their practices accordingly. The CFPB’s October 24 Circular is a clear reminder that compliance is not optional, even as technology advances.

Employers can minimize risk and foster trust in their hiring practices by understanding their obligations under the FCRA, monitoring compliance triggers, and implementing robust processes for obtaining and handling consumer reports. 

Choosing the right background screening company is a critical step in this journey, offering the expertise and support needed to navigate the complexities of AI-driven decision-making.

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