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Democrats in both houses of Congress have introduced legislation that would overhaul the nation's credit reporting system—including by restricting the use of credit information for most employment decisions—in the wake of one of the largest data breaches in history.
Rep. Maxine Waters, D-Calif., and Sen. Elizabeth Warren, D-Mass., proposed their bills in the U.S. House and Senate respectively, following the announcement that 143 million people were affected by the security breach at Equifax, one of the nation's largest credit reporting agencies. The bills would result in several changes for credit bureaus and consumers, but would also restrict the use of credit information for employment purposes. Employers would be allowed to conduct a credit check as part of an employment screen only when required by local, state or federal law or for national security clearances. The bills would also bar hiring managers from asking questions about past defaults or bankruptcies during job interviews or including questions about credit history on job applications.
[SHRM members-only resource: Credit Check Policy]
"Despite the fact that credit history has not been proven to predict job performance, credit information is increasingly used by employers for hiring, promotion and retention," Waters said. "This practice creates obstacles for upward mobility and can be an invasion of consumers' privacy. The widespread use of credit reports to screen job applicants is particularly troubling given that there is no reliable data demonstrating a correlation between credit history and job performance."
The federal Fair Credit Reporting Act permits employers to request credit reports on job applicants and existing employees, after first obtaining written permission from the individual being screened. Employers are also required to notify individuals before they take adverse action based on information in the credit report and to offer a copy of the credit report and a written summary of the consumer's rights with the notification.
"These consumer protections are important, yet they are far from sufficient to prevent credit checks from becoming a barrier to employment," said Amy Traub, a senior policy analyst at Demos, a public-policy think tank in New York City. "My research finds that poor credit is linked to economic stress. Weak credit is correlated with unemployment, lack of health coverage and the presence of children in a household. By screening out job applicants who have flawed credit, employers are effectively judging a prospective employee on the basis of economic disadvantage, and effectively multiplying that disadvantage."
Targeted Credit Checks Strengthen Fraud Prevention
But others argue that being able to access candidates' credit history in a responsible way can be a valuable tool and that, in fact, personal financial health can be an indicator of potential employee fraud.
The Association of Certified Fraud Examiners found that the top two red flag warnings exhibited by employees leading up to engaging in fraudulent activity on the job were living beyond financial means (present in 39 percent of all cases) and experiencing financial difficulties (present in 34 percent of all cases).
Melissa Sorenson, executive director of the National Association of Professional Background Screeners (NAPBS), headquartered in Raleigh, N.C., said her organization understands and appreciates legislative efforts to address discrimination but urged lawmakers to first review how employers are using credit today before eliminating or severely limiting access to credit information.
Sorenson cited the 2017 NAPBS survey conducted by HR.com that found more than half of employers, 62 percent, do not use credit checks at all, while 25 percent screen credit history for some candidates based on position. Only 6 percent conduct credit checks on all candidates.
"Not all financial difficulties will or could lead to fraud, but lawmakers should not tie the hands of employers and undercut fraud prevention measures by outlawing the use of information that shows a correlation between past or current behavior and future fraud," she said.
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