U.S. Equal Employment Opportunity Commission
Meeting of October 20, 2010 - Employer Use of Credit History as a Screening Tool
My name is Sarah Crawford, and I am Senior Counsel with the Employment Discrimination Project of the Lawyers. Committee for Civil Rights Under Law. I am honored to testify here today about the discriminatory effects of credit checks.
The Access Campaign of the Lawyers' Committee for Civil Rights Under Law seeks to dismantle unnecessary and discriminatory barriers to gainful employment related to background checks. The Access Campaign also works to ensure that employers utilize the information gained from background checks responsibly and in accordance with their legal obligations.1
In light of research showing the lack of predictive value of credit information, credit checks create an unnecessary obstacle for those seeking gainful employment. Credit checks create barriers for those who apply for a job in order to support themselves and their families, to pay their bills, and to pull themselves out of debt. I am here today to comment on the negative impact of this practice, particularly for communities of color.
Credit checks are becoming an increasingly prevalent practice in the employment sector. According to a survey by the Society for Human Resource Management, approximately 60% of its employer members use credit checks as a hiring tool, compared to 35% of employers in 2001.2 Some employers report that they use credit checks in hiring for all positions.3 This practice is particularly troubling in light of research indicating that credit information bears no relation to job performance or risk of crime in the workplace.
Contrary to the fear mongering and false promises by credit bureaus that profit from selling credit reports to employers, credit information does not predict job performance or risk of theft in the workplace. A TransUnion official recently admitted under oath, “At this point 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.”4
In fact, research has shown that credit information does not predict job performance.5 In 2004, Dr. Jerry Palmer and Dr. Laura Koppes of Eastern Kentucky University studied the credit reports of nearly 200 current and former employees working in the financial services areas of six companies.6 The study revealed that applicants with good credit reports were no more likely to receive positive performance evaluations and were no less likely to be terminated from their jobs.7In fact, one aspect of the study revealed that workers with a higher number of late payments actually received higher performance ratings.8
While credit reports may show whether bills have been paid on time, they do not reflect the circumstances surrounding debts or reasons for any late payments. For example, a credit report would not explain that a factory worker lost his job when his employer went out of business. A credit report would not explain that a man.s credit was destroyed because he was the victim of identity theft or a predatory lending scam. A credit report would not explain that a woman.s credit was destroyed as a result of divorce. And a credit report would not explain that a woman lost her job and her health coverage before developing breast cancer and incurring astronomical medical bills.
Medical debts reflected in credit reports raise particular concerns about the practice of employer credit checks. Medical debt often arises due to circumstances out of an individual's control and can have a catastrophic impact on an individual's financial situation. Seventeen percent of our citizens—15 million people—are uninsured, including 12% percent of whites, 21% of Blacks, and 32% of Hispanics.9
What happens when the uninsured face a major illness? Often, they incur medical debt. Such medical debts are often impossible to distinguish from other forms of debt listed in a credit report. Although most employers report that they do not base hiring decisions on medical debt, the impact of medical debt could be reflected in outstanding judgments, bankruptcies, foreclosures, and other forms of debts that employers may take into consideration. Over half of collections accounts are composed of medical debt, and Americans often are forced to pay for costly medical procedures with credit cards.
Medical debt is often hidden in credit card debt. A study by Demos and the Access Project showed that families with medical debt had 43% more credit card debt than those without medical debt. 10 The study also showed that more than half of low and middle income families used their credit cards to pay for medical expenses, including the costs of prescription drugs, dental expenses and visits to the doctor. However, a credit report would only reveal the amount of debt owed on the credit card; thus, an employer would lack the necessary information to understand that the debt arose out of a medical need.
The effects of medical debt raise particular concerns about the impact of credit checks on women and persons with disabilities. One study found that 33% of working age women, compared to 25% of men, faced medicals bills that caused them to take out a mortgage on their home or take on credit card debt.11 Persons with disabilities could also be disadvantaged by credit checks, due to the effects of incurring higher medical expenses. One out of every three adults with disabilities live in very low income households (defined as those with less than $15,000 of annual income), as compared to one out of every eight non-disabled adults.12
Allsup, a nationwide provider of Social Security Disability Insurance (SSDI) representation and Medicare services, reports that people with disabilities have experienced significant unemployment rates in the current recession.13 According to an Allsup senior claimant representative “Many people [with disabilities] have been laid off. They.re being hit with mortgage and credit problems, resulting in foreclosures and bankruptcies.”14
Additionally, credit reports are rife with errors. One study found that 79% of the consumer credit reports surveyed contained some kind of error or mistake.15 This study found that 25% the reports surveyed contained serious errors such as false delinquencies or accounts that did not involve the consumer; 54% of the reports contained personal demographic information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect; 22% of the reports listed the same mortgage or loan twice; 8% of the credit reports were missing major credit, loan, mortgage, or other consumer accounts that demonstrate the creditworthiness of the consumer; and 30% of the reports contained credit accounts that had been closed by the consumer but remained listed as open.16
Another study found that some accounts showed balances that were not up to date, some creditors reported only negative information, and public records inconsistently reported actions such as bankruptcies and collections.17 This error rate is due in part to the sheer volume of data that credit reporting agencies handle. A Harvard report noted that credit reporting agencies are tasked with “matching over 2 billion trade line updates, 2 million public record items and an average of 1.2 million changes of household address, from 30,000 different furnishers, to the proper consumer credit files each month.”18
Furthermore, there is no common standard among employers as to how to interpret credit reports. Human resources officials are given little guidance as to how to interpret technical financial information. Despite the claims of the credit reporting companies, these reports do not provide meaningful insight into a candidate's character, responsibility, or prospective job performance.
Credit background checks disproportionately impact communities of color. Various factors contribute to racial disparities in credit scores. Unemployment has skyrocketed in recent years, and the effects of the recession have fallen most harshly on minorities. Sixteen percent of blacks and 12% of Hispanics are unemployed, compared with 9% of whites.19 The Bureau of Labor Statistics has tracked the persistent and significant racial disparities in unemployment rates over the past decade:
Fourteen percent of Americans live in poverty—that is 43.6 million people living in poverty in this country.21 According to the Census Bureau, this is largest number in the 51 years for which poverty estimates are available. Twenty-five percent of Blacks and Hispanics live in poverty, compared to nine percent of Whites.22
The wealth gap for African Americans is startling. The average median wealth for whites is $94,599, compared to $2,109 for minorities. The wealth gap is particularly stark for women of color. A recent report revealed that the median wealth for single black women is only $100 and $120 for single Hispanic women, as compared to $41,000 for single white women.23
Credit checks only compound this crisis. A 2007 Freddie Mac study found a substantial correlation between race and credit. The study found that 43% of African Americans and 34% of Hispanics had lower credit scores, as compared to 27% of whites:
The study found that nearly half of black borrowers and a third of Hispanics have a record of delinquent loans or bankruptcy -- compared with a quarter of whites. Other studies, including a 2000 study by Freddie Mac24 and a 2006 study by the Brookings Institute, 25 have shown correlations between areas with high minority populations and lower average credit scores. The The Brookings study found that “[c]ounties with credit scores ranging from 850-720 (very low risk) had a 5% African-American and Hispanic population while counties with credit scores from 500-559 (very high risk) had a 49% African-American and Hispanic population.”26
In a report to Congress on credit scoring and racial disparities, the Federal Reserve found that credit scores of African Americans were approximately half those of white non-Hispanics (54.0 out of 100 for white non-Hispanics versus 25.6 for African Americans and 38.2 for Hispanics.27 A 2008 survey by Demos studied low and middle income households and found that Blacks were more likely than whites to have declared bankruptcy, settled an agreement with a credit card company, been called by bill collectors, and to have had a car or other item repossessed.28 Among individuals with a bachelor.s degree, 27% of Blacks have debt of $30,500 or more, as compared to 16% of Whites.
The recent foreclosure crisis has also exacerbated credit disparities. Blacks and Hispanics are significantly more likely to receive high cost loans.29 Minorities are far more likely to have been steered toward the subprime loans that have experienced the highest rates of foreclosure. A study of the Washington, D.C., metro area showed that Hispanics were 70% more likely and Blacks were 80% more likely that white counterparts to receive a subprime loan. 30 Further, the study showed that almost 35% of those issued subprime loans actually qualified for fixed-rate, prime loans. Finally, the study also showed that Blacks were 20% more likely and Hispanics were 90% likely than white counterparts to go into foreclosure. As a result, Hispanics and Blacks in the Washington metro area are far more likely than white counterparts to have problems with their recent credit histories that may preclude them from employment.
In addition to impacting communities of color, credit checks can have a disparate impact on women. Women tend to earn less than their male counterparts in the workplace.31 “[W]omen who work full-time, year-round are paid only 77 cents for every dollar paid to their male counterparts. This gap in earnings translates into $10,622 less per year in female median earnings, leaving women and their families shortchanged.”32 As a result of these disparities in income and other factors, women may struggle with credit more than their male counterparts. According to statistics from the Census Bureau, in 2009, adult woman were 32 percent more likely to be poor than adult men, with a poverty rate of 13.9% compared to a 10.5% rate for adult men. There were 16.4 million poor adult women compared to 11.7 million poor adult men.”33
Credit checks can run afoul of the law. A number of states already have enacted laws to limit employers. use of credit information, including Washington, Hawaii, Oregon, and Illinois, and many others are considering similar legislation. At the federal level, Title VII of the Civil Rights Act of 196434 prohibits employers from using a practice that disproportionately screens out minorities or women, unless the employer has a “business need” to use the practice. Most employers would not be able to meet this standard, because research has shown that credit information does not predict job performance or risk of theft in the workplace. Even if employers could prove a business need for the practice of running credit checks, Title VII requires employers to explore a “less discriminatory alternative” to the discriminatory practice. As the Supreme Court has recognized in the landmark Griggs v. Duke Power disparate impact case, “[g]ood intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as „built-in headwinds. for minority groups and unrelated to measuring job capability.35
In a recent advisory letter interpreting Title VII.s disparate impact provisions, the Equal Employment Opportunity Commission has cautioned that “if an employer.s use of credit information disproportionately excludes African-American and Hispanic candidates, the practice would be unlawful unless the employer could establish that the practice is needed for it to operate safely or efficiently.”36 The EEOC's guidance on “Pre-Employment Inquiries and Credit Rating or Economic Status” states:
Inquiry into an applicant's current or past assets, liabilities, or credit rating, including bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length of residence at an address, charge accounts, furniture ownership, or bank accounts generally should be avoided because they tend to impact more adversely on minorities and females. Exceptions exist if the employer can show that such information is essential to the particular job in question.37
Additionally, EEOC's Guide to Pre-Employment Inquiries suggests that employers should avoid certain inquiries of job applicants, including credit history questions, as they could potentially expose the employer to liability for disparate impact discrimination.38 The guide explains that employment decisions made on the basis of information elicited from such questions violates Title VII “unless the information is needed to judge an applicant.s competence or qualification for the job in question.”39
The Federal Trade Commission recently issued guidance on “Employment Background Checks and Credit Reports” as governed by the Fair Credit Reporting Act.40 While the EEOC has issued more comprehensive guidance on the use of arrest and conviction records by employers, 41 the EEOC has not yet issued the same level of guidance regarding credit checks. The EEOC should provide similar, more comprehensive guidance on the interplay of Title VII and the use of credit checks.
In the 1970s, the EEOC issued two decisions finding that the use of credit checks violates Title VII disparate impact provisions, if the credit checks are not justified by a legitimate business necessity.42 In the first case, EEOC Decision No. 72-427, an African-American applicant was not hired as a computer operator by a bank, at least partially because of his marginally poor credit record. 43 Although the Commission observed that the record was silent concerning the proportion of relatively poor credit records among African-American and White individuals residing within the area from which the bank drew its workforce, it noted that according to the 1967 Census Bureau figures 35.4 percent of the total number of ... non-White persons in the United States were below the poverty level, as compared with 10.3 percent of the total number ... of White persons. Inferring that the bank's credit record policy would have a foreseeably disproportionate impact upon African-Americans as a class, the Commission held that such a practice discriminated on the basis of race within the meaning of Title VII and, thus, was unlawful absent a showing by the bank that such a policy was required by business necessity.
Similarly, in EEOC Decision No. 74-2, the Commission held that an employer's inquiry into a job applicant's financial status, including disclosure of past-due loans, would have a foreseeable disproportionate adverse impact upon the employment opportunities of minorities as a class and, thus, violated Title VII absent a showing of business justification. The EEOC again inferred from the relevant Census Bureau statistics that minorities are significantly over-represented among low-income groups and that they are more likely to suffer financial difficulties than Caucasians.
To date, the EEOC has filed one additional Title VII complaint challenging an employer.s use of credit histories, in a case against a corporate event-planning company.44 The case of EEOC v. Freeman Co. was filed in 2009 in the District of Maryland.
In 2010, the Department of Labor.s Office of Federal Contract Compliance Programs successfully challenged a federal contractor.s use of credit checks under Executive Order 11246. In January 2010, an administrative law judge with the Department of Labor found that Bank of America had discriminated against Blacks in hiring for entry-level clerical, administrative and teller positions, in part by using credit checks during the hiring process.45 The judge found that the percentage of candidates excluded due to a credit check was disproportionate based on the candidate.s race: 11.5% of Black candidates were excluded, versus 6.6% of white candidates.46 The judge was particularly troubled by the lack of criteria used by Bank of America when evaluating a candidate.s credit report, which led to a “highly subjective” process.47
The Equal Employment for All Act, H.R. 3149, would prohibit employers from using credit checks against prospective and current employees for most types of jobs, with certain exceptions. The bill would permit employers to use credit information in hiring for positions that require national security or FDIC clearance; state or local jobs that otherwise require a credit check; supervisory, managerial, professional, or executive positions with financial institutions; and when otherwise required by law. This legislation encourages employers to rely on valid, nondiscriminatory hiring tools that actually serve the intended purpose of selecting the best employees.
The Lawyers' Committee for Civil Rights Under Law recently issued a letter in support of the Equal Employment for All Act. 48 The letter was joined by thirteen other prominent groups, including the Asian American Justice Center; Communications Workers of America, AFL-CIO; Leadership Conference on Civil and Human Rights; International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW; NAACP; NAACP Legal Defense and Education Fund; National Community Reinvestment Coalition; National Council of La Raza; National Employment Lawyers Association; National Fair Housing Alliance; National Partnership for Women and Families; National Women.s Law Center; and Women Employed.
Despite the research, despite the disparate impact on communities of color and others, despite errors in credit reports, and despite existing legal restrictions on the practice, credit checks remain a prevalent practice. The practice is based on mistaken assumptions that credit information will ferret out poor performers or those who will steal from their employers. However, research has shown that these assumptions are wrong. For these reasons, the Equal Employment Opportunity Commission should provide additional guidance on the use of credit checks, increase enforcement efforts, and offer education on employers. obligations and workers. rights.
2 Society for Human Resource Management, Background Checking: Conducting Credit Background Checks, January 2010, available at http://www.shrm.org/Research/SurveyFindings/Articles/Pages/BackgroundChecking.aspx; Thomas Frank, Job Credit Checks Called Unfair. Needy hurt most; 5 states eye limits. USA Today, February 13, 2009, 1A.
13 See Allsup, Recession, Job Losses Hit Those with Disabilities Hard, Reports Allsup (2009), available at http://www.allsup.com/about-us/news-room/current-news/recession-job-losses-hit-those-with-disabilities.aspx.
15 U.S. PIRG, Mistakes Do Happen, a Look at Errors in Consumer Credit Reports, 2004, available at http://www.uspirg.org/home/reports/report-archives/financial-privacy--security/financial-privacy--security/mistakes-do-happen-a-look-at-errors-in-consumer-credit-reports .
17 U.S. General Accounting Office, Consumer Credit: Limited Information Exists on Extent of Credit Report Errors and Their Implications for Consumers, 2003, available at http://www.gao.gov/new.items/d031036t.pdf.
23 Mariko Chang, Lifting as We Climb: Women of Color, Wealth, and America's Future, March 2010, available at http://www.insightcced.org/uploads/CRWG/LiftingAsWeClimb-WomenWealth-Report-InsightCenter- Spring2010.pdf.
25 Matt Fellowes, The Brookings Inst., Credit Scores, Reports, and Getting Ahead in America 9-10 (2006), http://www.brookings.edu//media/Files/rc/reports/2006/05childrenfamilies_fellowes/20060501_creditscores.pdf.
29 See National Community Reinvestment Coalition, Income is No Shield against Racial Differences in Lending: A Comparison of High-Cost Lending in America’s Metropolitan Areas, 2007, available at http://www.ncrc.org/images/stories/mediaCenter_reports/ncrc%20metro%20study%20race%20and%20income%20disparity%20july%2007.pdf.
38 See generally EEOC Guide to Pre-Employment Inquiries, 8A Fair Empl. Prac. Man. (BNA) 443:65 (1992); EEOC Employment Tests and Selection Procedures, www.eeoc.gov/policy/docs/factemployment_procedures.html
41 EEOC Compliance Manual section 604 App. A, Policy Statement on the Issue of Conviction Records under Title VII of the Civil Rights Act of 1964, as amended, 42 USC 2000e et seq. (1982) February 4, 1987 (when considering conviction records, employers are to consider “(1) the nature and gravity of the offense; (2) the time that has passed since the conviction and/or completion of the sentence; and (3) the nature of the job held or sought.”); EEOC Notice, Policy Guidance on the Consideration of Arrest Records in Employment Decisions under Title VII of the Civil Rights Act of 1964, as amended, 42 USC 2000e et seq. (1982), September 7, 1990 (exclusion from employment on the basis of arrest is only justified when it “appears that the applicant or employee engaged in the conduct for which he was arrested and that the conduct is job-related and relatively recent” and blanket policies are not allowed).
42 EEOC Dec. 72-1176, 6359 (CCH) (1972) (bank policy of using credit information to evaluate potential employees was unlawful without business justification); EEOC Dec. 74-02, 6386 (CCH) (manufacturing company's policy of using applicant.s financial status was unlawful without business necessity).
43 Roberto Concepcion, Jr., Pre-employment Credit Checks: Effectuating Disparate Impact on Racial Minorities Under the Guise Of Job-Relatedness and Business Necessity, 12 SCHOLAR 523, 533 (Spring 2010) (internal quotations omitted) (discussing EEOC decisions that address how employment-related credit checks can have a disproportionate adverse impact upon the employment opportunities of minorities as a class).