Although the FCRA allows employers to consider credit reports for employment purposes, state laws that are more protective of employee rights trump the federal law. Eight states (California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont and Washington) and at least one locality, the City of Chicago, limit the employers’ consideration of credit history in personnel decisions. And Colorado was just added to this list with its S.B. 18 that was signed into law on April 19, 2013. Aggressive legislative efforts are likely to continue. The most restrictive bill yet is pending before the New York City Council. It would prohibit employers from using credit reports in hiring except in few instances where such checks are required by law.
Effective July 1, 2012, Vermont will be the eighth state to regulate the use of credit-related information for employment purposes. Although similar in many ways to laws already enacted in California, Connecticut, Hawaii, Illinois, Maryland, Oregon and Washington, Vermont’s requirements under Act No. 154 exceed those of other state laws as they prohibit even exempt employers from using an applicant or employee’s credit history as the “sole factor” in employment decisions. Additionally, Vermont exempt employers who take adverse action based in part on a credit history must return the report to the individual or destroy it altogether. Neither the Fair Credit Reporting Act (FCRA) nor any of the other similar state laws imposes such a requirement.
Generally, the Act prohibits employers from inquiring into an applicant’s or employee’s credit report or credit history, and further bans employers from discriminating against or making employment decisions (e.g. hire, fire, alter the compensation or any other term or employment condition) based on a credit report or credit history. Notably, credit history in this context includes credit information obtained from any third party that reflects or pertains to an applicant’s or employee’s “borrowing or repaying behavior, financial condition or ability to meet financial obligations,” even if that information is not contained in a “credit report.”
The trend in restricting credit report use for employment purposes will continue as several other states and the federal government are considering comparable legislation. Soon to follow most likely will be New Jersey. In May 31, 2012, the Senate approved S455 that would prohibit employers from seeking credit checks on employees or applicants under most circumstances. A parallel bill (A2840) was introduced by the Assembly on May 11, 2012, and a similar bill (A704) in December 2011.
Connecticut has joined five other states (Hawaii, Illinois, Maryland, Oregon, and Washington) that, with some exceptions, prohibit the use of credit reports in employment decisions. Effective October 1, 2011, S.B. 361 will ban many employers from using credit information in determining whether to deny employment to an applicant, terminate an employee, decide compensation, or evaluate other terms and conditions of employment. Financial institutions, as well as employers who are required to obtain credit reports under federal or state law, are excluded from the Act’s provisions
There are certain exceptions to the S.B. 361 prohibitions. Employers may request or use credit reports when such information is related to a “bona fide purpose that is substantially job-related.” The bona fide purpose exception generally applies to positions involving money handling or other sensitive job duties. If an employer requests or uses credit information for a bona fide purpose, it must disclose its intent to do so in writing to the employee or applicant.
As in Connecticut’s S.B. 361, employers in the other states that have passed employment-related credit report restriction laws need to ensure that their hiring, retention, and promotion practices fall within the guidelines of their legislation.
The Federal Reserve Board and the Federal Trade Commission (FTC) issued final rules to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).
The final rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements. These rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA.
For employers, this means that if a consumer report that includes a credit score is used to determine eligibility for employment, the employer will be required to disclose to the subject the usage of the credit score in an adverse employment decision and to provide information about the credit score, including the score itself, up to four key adverse factors in the score, and the identity of the agency that provided the score.
For credit transactions, creditors, including banks, credit unions, credit card issuers, and utilities, that extend credit on terms that are less favorable than those offered to other consumers because of information contained in a credit report, or if other adverse action is taken, will have to provide to the subject a “risk-based pricing notice” which discloses the credit scores and related information. Such notice will include: 1) the numerical credit score used by the creditor in making the decision; 2) the range of possible scores under the model used by the creditor; 3) the key factors that adversely affected the credit score; 4) the date on which the credit score was created, and 5) the name of the entity that provided the score.
In certain cases, such as for applications for a mortgage, auto loan, or another type of credit, a lender will have to furnish to the subject a “credit score notice” that lists the credit score and how the score compares to other consumers’ scores regardless of the credit terms offered. If no credit score is available for a consumer, the lender’s notice will identify the particular credit bureau which reported this information. Additionally, if a consumer’s annual percentage rate (APR) on an existing credit account is increased based on a review of a credit report, the creditor will have to provide an “account review notice.”
The Board and the FTC have stated that it is imperative to have the regulations and revised model forms in place as close as possible to July 21, 2011. This will help ensure that consumers receive consistent disclosures of credit scores and related information, and facilitate uniform compliance when Section 1100F of the Dodd-Frank Act becomes effective.
According to September 2010 congressional testimony by the Society for Human Resource Management (SHRM), credit checks are a useful tool to “assess the skills, abilities, work habits and integrity of potential hires.” However, SHRM states that only 20 percent of employers conduct credit checks on all applicants. Fifty-seven percent of these employers perform the checks only after contingent offers, and 30 percent after job interviews; 65 percent allow job candidates to explain their credit results before the hiring decision is made, and 22 percent accept explanations after the hiring decision.
A bill in the U.S. House, called the Equal Employment for All Act, would amend the Fair Credit Reporting Act (FCRA) to ban the use of credit checks on prospective and current employees for employment purposes, with the following exceptions:
- jobs that require national security or Federal Deposit Insurance Corp. clearance;
- jobs in state or local government that require the use of credit reports;
- supervisory, managerial, and executive positions in financial institutions.
The states of Illinois, Oregon, Hawaii, and Washington already have passed laws to prevent employers from using credit reports in employment decisions.