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Give Us Some Credit

Amy Traub
The American Prospect

States work to curb the financial background checks that can keep the unemployed out of work.

After two years of working in a temporary job as customer-service representative, Debra Banks was offered the job permanently. She was sent a hire letter, set a start date, and confirmed her new salary. But there was a hitch: To get the job, Banks had to undergo a credit check.

They wouldn't be strict, a company representative assured her; after all, Banks had already worked at the firm for two years and consistently received high praise for her work. But when the credit report came back showing unpaid bills from a recent hospitalization, the company rescinded the offer. Her contact at the staffing agency told her the bad credit report was to blame.

Banks returned to temp work, only to yet again be denied a permanent job because of her credit history. Then she was laid-off from the temp position as well. "It made me feel worthless as a person," Banks confesses. "Unfortunately my credit has not improved ... I haven't been able to get a job to improve it."

Banks's case is hardly an isolated one. Today, six in ten employers say that they check the credit histories of some or all prospective employees before making final hiring decisions. This traps many jobseekers in what workplace advocate Nat Lippert describes as a devastating catch-22: They can't attain employment because of poor credit, yet they can't pay off bills and improve their credit without income from a job.

A growing number of states are also taking action to restrict the use of credit checks in employment. Hawaii, Illinois, Oregon, Washington, Maryland and Connecticut have passed legislation limiting the use of credit checks in hiring, firing, and promotions. More than 20 other states, including California, New York and Tennessee are considering bills. The moves are, in part, to help good employees like Banks get jobs they deserve, but also address a more fundamental problem: There's no real evidence that the practice is good for employers, either.

Discrediting America: The Urgent Need to Reform the Nation's Credit Reporting Industry

Companies justify the credit checks by saying they need some way to assess a job applicant's reliability and character. Credit checks have been aggressively marketed to employers by for-profit credit bureaus to do just that. Yet it's far from clear that running credit checks benefits employers. The only available rigorous study of employment credit checks concluded that there's no correlation between credit history and job performance. Even industry representatives admit this. Eric Rosenberg, Director of State Governmental Relations for TransUnion, one of the three major credit reporting agencies, conceded: "...we don't have any research to show any statistical correlation between what's in somebody's credit report and their job performance or their likelihood to commit fraud."

At the same time, employers may be exposing themselves to unexpected legal liability. African Americans and Hispanics - likely due to a variety of factors like higher poverty and unemployment rates, fewer assets, and a legacy of discrimination, including lending industry practices such as redlining-are disproportionately likely to have low credit scores. That means that excluding job candidates based on credit history disproportionately screens out people of color. The potential for bias is magnified by the fact that there are no accepted metrics for employers to assess a job applicant's credit report. Decisions are open to individual discretion and inadvertent bias.

Whether or not employers are intentionally trying to screen out people of color by using credit checks, they can be held accountable for the discriminatory effects. In 2010, Bank of America was found to have discriminated against African-Americans by using credit checks in the hiring process for entry-level employees. A similar lawsuit against Kaplan Higher Education Corporation filed by the Equal Employment Opportunity Commission is pending.

That states are taking action to curb the use of credit checks by employers shows a mounting political will to address the practice's unfairness, but the laws vary. So far, the credit-reporting industry has succeeded in lobbying for exemptions in every state ban. The result is that individuals who have poor credit are still shut out of employment in entire industries.

Even the strongest state laws, like those passed in Maryland in April or in Hawaii in 2009, allow credit checks on people applying for managerial positions or jobs in financial institutions. Maryland's law specifically states that employers can run credit checks for any employee that "is provided an expense account or a corporate debit or credit card." The idea is that a prospective employee's personal spending habits shed light on how responsibly they would handle a company's money. But such exemptions ignore the fact that poor credit may stem from causes - from costly medical procedures that were inadequately covered by insurance, to messy divorces where a former spouse leaves a consumer saddled with debt, or predatory lending schemes that lead to foreclosure - that have little do with a prospective employee's ability to be conscientious with the corporate credit card.

In Illinois, the exemptions are even more extensive. Employees of insurance companies, law enforcement agencies, and all local and state governments may still be subject to credit checks. Most troubling is a carve-out in both Illinois and Connecticut that permits credit checks in any case where a prospective employee has "unsupervised access to cash or marketable assets valued at $2,500 or more." With that loophole, anyone from bartenders to stockroom employees could be disqualified from work due to their credit history.

Stronger legislation is on tap at the federal level, where the Equal Employment for All Act sponsored by Representative Steve Cohen would ban employment-related credit checks except in narrow circumstances, such as positions requiring national security clearance. But with 32 exclusively Democratic co-sponsors, the bill is stuck in the Committee on Financial Services and stands little chance in the Republican-controlled House.

Ultimately litigation, like the suit against Kaplan, may have an even greater impact on employer behavior than exemption-riddled state laws. If high-profile employers are forced to pay costly damages for the racially discriminatory impact of screening potential employees' credit histories, other companies will take notice. The fear of expensive litigation and the attendant public relations fallout may be what it takes to make employers reevaluate hiring practices.

But for the millions of Americans with poor credit struggling to find or hold onto work, tearing down the credit check barrier can't happen soon enough.