New regulations announced by the Federal Reserve System and the Federal Trade Commission (FTC) on credit scores and the Fair Credit Reporting Act (FCRA) should not affect employers that use employment credit reports that do not contain credit scores. Credit reports provided by background screening firms do NOT contain credit scores.
The two federal agencies announced that the new regulations would go into effect on July 21, 2011. The new rules would require “disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit.” The rules were announced in the Federal Register on March 15, 2011 and can found at: http://www.federalregister.gov/articles/2011/03/15/2011-5413/fair-credit-reporting-risk-based-pricing-regulations#h-48.
The regulations were required by both by provisions of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA), as well as new requirements contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The question has been raised if the new rules would require additional notices to be supplied to consumers that seek employment. For employers that utilize employment credit reports from a background screening firm, the answer is no, since an employment credit report does NOT contain a credit score. A background screening firm credit report also does not contain a date of birth or the actual account numbers of a credit card. In addition, an employment credit report from a background screening firm does not have an impact on a consumer’s credit score in any way.
Many consumers and news articles seem to confuse “credit scores” and “credit reports.” The reason an employment credit report does not contain a “credit score” is that there is no correlation between a credit score and the ability to do a job. However, an employment credit report from a background screening agency does contain a “credit history,” which will tell an employer if an applicant pays bills on time, or has such a large monthly debt that it raises a red flag if a person is to be put in charge of cash or assets or placed in a fiduciary position.
A great deal of misinformation about the basics of credit reports, background checks, and job hunting exists in the current economic climate. Most employers are not using credit reports to find ways to eliminate people from jobs. A background check that includes a credit report is usually run only after an employer has gone through the time, cost, and effort to find the right candidate. Under the rules of the federal Fair Credit Reporting Act (FCRA), a credit report is only obtained after the applicant has given consent and after a legally required disclosure has been given. If the employer utilizes the credit report in any way not to hire, applicants are entitled to a copy of their credit report, a pre-adverse action notice, as well as a statement of their rights. Before any employment decision becomes final, applicants also have the right to challenge the credit report before any denial of employment is made final.
Employers also should be aware of states laws as well as the federal FCRA when using credit reports for employment screening. While only five U.S. states – Hawaii, Washington, Oregon, Illinois, and most recently Maryland – currently have laws limiting or prohibiting credit checks on job applicants and employees, lawmakers in the following states have proposed legislation restricting the use of credit reports for hiring: California, Connecticut, Florida, Georgia, Indiana, Kentucky, Michigan, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas, and Vermont.
It is the position of Employment Screening Resources (ESR) that employers should approach credit reports with caution when using them for employment background checks, and must articulate a clear rationale as to why a credit report is related to a particular job. Employers should also be aware of the potential for errors in credit reports. In addition, negative entries may well not be a valid predictor of job performance especially since many job applicants have faced a long period of unemployment that may lead to larger debts. An overly broad use of credit reports by employers could lead to claims of discrimination from a disparate impact on protected minority groups such as Blacks and Latinos. The idea that credit reports can be used in a discriminatory manner in the eyes of the Equal Employment Opportunity Commission (EEOC) means employers will continue to face controversy over using credit reports for employment screening.
To help job applicants better understand employment credit checks, Employment Screening Resources (ESR) offers a white paper – ‘The Use of Credit Reports in Employment Background Screening: An Overview for Job Applicants’ – available for download at http://www.esrcheck.com/Download/.
About Employment Screening Resources (ESR): Founded in 1997 in the San Francisco area with a mission to help employers and employees maintain safe workplaces, Employment Screening Resources (ESR) is accredited by The National Association of Professional Background Screeners (NAPBS®) and provides industry leading technology, legal compliance, service, turnaround, and accuracy. ESR also wrote the book on background checks with ‘The Safe Hiring Manual’ by founder and President Lester Rosen. For more information, visit http://www.ESRcheck.com.