A Credit Check Pitfall Cooperative Boards Can Avoid

By Randall Pentiuk, Esq., and Kerry L. Morgan, Esq.

In considering a new member, cooperative boards usually include a credit check authorization form in their application packet. The credit check form to be signed by the applicant is usually straightforward, authorizing the board to run a credit check on the applicant to be used in the membership eligibility process. The Fair Credit Reporting Act (FCRA) indicates that the credit check authorization form, however, “consists solely of the disclosure.” See 15 U.S.C. § 1681b(b)(2)(A)(i).  Thus, courts will carefully scrutinize authorizations which add additional language to the disclosure.

As it happens in life, someone had a new idea. The thinking goes like this:

“Why not include some additional language in the disclosure? In addition to the housing applicant authorizing the cooperative to run a credit check, let’s add release and indemnity language in the disclosure form. That way, if the cooperative misuses the credit check information, it can’t be sued because the applicant has released the cooperative.”

Good idea? Bad idea? New ideas sometimes lead to unexpected consequences. A recent case of interest to cooperative boards was decided in California. It did not involve an application to a cooperative. It involved an application for employment, but the principle is the same. The applicant sought a position with a company, and the company asked the applicant to sign an authorization allowing the company to run a credit check under the FCRA. So far so good. The applicant filled out and signed a one-page form entitled “Pre-Employment Disclosure and Release.” That form contained acceptable disclosure language, but it also added the following language:

“I understand that the information obtained will be used as one basis for employment or denial of employment. I hereby discharge, release, and indemnify prospective employer, PreCheck, Inc., their agents, servants, and employees, and all parties that rely on this release and/or the information obtained with this release from any and all liability and claims arising by reason of the use of this release and dissemination of information that is false and untrue if obtained by a third party without verification.”  Syed v. M-I LLC, CIV. NO. 1:14-742 WBS BAM (E.D. Cal. Oct. 22, 2014).

Note the additional language—“I hereby discharge, release, and indemnify.” The applicant alleged that the FCRA prohibited this language on the disclosure form. On Appeal, the Ninth Circuit Court of Appeals agreed. The Court found that the employer’s agent’s Pre-Check, violated the FCRA by adding this additional release language. It was a good idea that led to a bad result for the employer.

The Court’s exact ruling held that a prospective employer violates 15 U.S.C. § 1681b(b)(2)(A) when it procures a job applicant’s credit report after including a liability waiver in the same document as a statutorily mandated disclosure. The Court also held that, in light of the clear statutory language that the disclosure document consists “solely” of the disclosure, a prospective employer’s violation of § 1681b(b)(2)(A) is “willful” when the employer includes terms in addition to the disclosure, such as the liability waiver here, before procuring a credit report or causing one to be procured. A “willful” violation triggers statutory damages from $100 to $1,000 per violation, punitive damages, and costs, including attorneys’ fees.

What should you do? The best place to start is to look at your membership application packet, especially the credit check disclosure form. Read it carefully. Does it contain any language about “discharge, release, and indemnify?” If so, send it off to your legal counsel for review and possible revision. There may be an opportunity to keep the release language in a separate stand-alone document that covers the entire membership application process. But one thing is for certain: to let such language remain in the credit check authorization form is inviting disgruntled and denied applicants to go to a lawyer of their own and question why they were denied membership. That could lead back to the FCRA and the possibility of damages. Why expose the cooperative when prior legal review, care and planning can better ensure that your membership application package is in tip top legal shape?

Randall Pentiuk is the founding member, attorney and managing shareholder at Pentiuk, Couvreur and Kobilijak, PC. In Wyandotte, Mich.

Kerry L. Morgan, Esq., is an attorney with the firm of Pentiuk, Couvreur and Kobilijak, PC. He leads the firm’s Civil Rights and Employment Practice along with Class Actions and Complex Litigation.

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