The House Committee on Financial Services on July 11 passed legislation that would prohibit employers from using credit reports for employment decisions, except when required by law or for a national security clearance.
The bill would also prohibit hiring managers from asking questions about applicants' financial past during job interviews or including questions about credit history on job applications.
Opponents of the practice say that it blocks upward mobility, disproportionately affects minority job seekers and can be an invasion of privacy.
On the other hand, those in favor of credit checks on job candidates argue that the information is an indicator of a person's judgment and potential risk to the organization, especially for certain positions involving finances and accounting.
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Credit Checks Harm U.S. Workers
The legislation is a component of a multi-bill overhaul of the credit-reporting industry brought forward by Rep. Maxine Waters, D-Calif., chair of the committee.
She said that she's been very concerned about the use of credit checks for employment purposes because too often qualified candidates have been denied a job because of inaccurate reporting or due to financial hardships from years ago.
In addition, "an individual's credit history has been shown not to predict their job performance," she said. "Nevertheless, credit information is increasingly used by employers. People who have been unemployed for an extended period of time, and whose credit standing has been damaged because they were unable to pay their bills, cannot secure a new job to end their financial distress because prospective employers conduct credit checks as part of an application process."
Chi Chi Wu, staff attorney at the National Consumer Law Center based in Boston called the practice of using credit checks for employment "absurd."
"Simply put, workers who lose their jobs are likely to fall behind on paying their bills due to lack of income," she said. "If credit reports are used against them, these workers now find themselves shut out of the job market because they're behind on their bills. This leads to a financial spiraling effect—the worse the impact of unemployment on their debts, the harder it is to get a job to pay them off."
Wu added that credit reports were designed to predict the likelihood that someone will miss a loan payment, and not whether they will steal in the workplace. "The overwhelming weight of evidence is that people with impaired credit histories are not more likely to be bad employees or to steal from their employers," she said.
Finally, Democrats on the committee cited data that showed how the use of credit checks in hiring can be discriminatory against black and Latino job applicants. The legislation noted that studies have consistently found that black and Latino households tend, on average, to have lower credit scores than white households.
"The growing use of credit checks, therefore, may disproportionately screen otherwise qualified racial and ethnic minorities out of jobs, leading to discriminatory hiring practices," Waters said.
The Bill Is Too Broad
Employer groups such as the U.S. Chamber of Commerce and the Society for Human Resource Management (SHRM) oppose the bill because it overreaches.
SHRM believes employers must have the ability to enact policies and procedures that best meet the needs of their individual organizations, said Johnny C. Taylor, Jr., SHRM-SCP, president and CEO of SHRM.
"This legislation would make it more difficult for employers to review the backgrounds of prospective employees, which would make it more difficult to hire for sensitive positions or would otherwise delay the hiring process," said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce.
Melissa Sorenson, executive director of the National Association of Professional Background Screeners, said that employers have a right to applicant and employee data that speaks to the individual’s suitability for a particular position. “For the third consecutive year our survey of human resources professionals found that employers’ primary use of background screening services is to protect employees, customers and others,” she said.
"The bill puts restrictive prohibitions on companies who may be using it in a correct, limited manner for a job-related purpose," said Pamela Devata, a partner in the Chicago office of Seyfarth Shaw. "Many employers don't use credit checks for their entire workplace but potentially would use it for certain positions—executive-level positions or for people who have unfettered access to a company's finances in accounting and finance roles."
SHRM data backs that assertion up, indicating that employers primarily use credit checks for applicants seeking employment in either financial, security or fiduciary roles within an organization. "This layer of protection reduces organizational exposure to financial losses and legal liability, while protecting the security of customer and company information," Taylor said.
"Given the increase in state and local laws passing credit check laws, as well as the EEOC's stance on the use of credit checks—that credit checks create a disparate impact on certain minority groups—there appears to be a trend of all employers decreasing the number of credit checks that they conduct," Devata said.
She explained that the Fair Credit Reporting Act (FCRA) does not bar employers from using credit reports when making employment decisions, but other applicable laws may.
Currently ten states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington), the District of Columbia, and the cities of Chicago, New York City and Philadelphia have passed laws restricting the use of credit reports used by employers for employment purposes, with several more jurisdictions poised to join the trend, she said.