FCRA Amendment Provides Direction on the Use of Credit Scores

On July 21, 2011, an amendment to the Fair Credit Reporting Act (FCRA) will take effect. The amendment provides direction on the use of credit scores as a pre-employment selection tool.

I personally don't like the use of credit scores as a pre-employment screening process. Credit scores can be impacted by how much an individual owes - regardless of whether or not he or she is able to pay it, the length of time the individual has had credit, how much new credit the individual has, and the types of credit he or she has. None of these factors would be particularly informative with regard to how the person will perform in a particular job.

In the past the EEOC has frowned on the use of credit scores because the use of credit scores could create an adverse impact situation. A study by Freddie Mac revealed that almost twice as many black people had "bad" credit records than did white people. As credit scores are based on information that is not necessarily reflective of the applicants ability to perform the job, employers should strongly consider whether or not there is value in using the credit score to determine eligibility for employment.

What the Amendment Requires:

In an article on the SHRM website by Allen Smith, Bruce Richards, an attorney with Taylor English Duma LLP in Atlanta and
formerly general counsel with the credit reporting agency Equifax, states that if an employer uses a consumer report that includes a credit score in order to determine eligibility for employment, the employer will be required to disclose that a credit score was used and to disclose information on the credit score, including the credit score itself, up to four key adverse factors in the score, and the identity of the agency that provided the score so that an applicant may contact the agency to correct any errors.

(http://www.shrm.org/LegalIssues/FederalResources/Pages/NewFCRARequirement.aspx)

This is a tad bit more onerous than utilizing a credit report because it requires the company to identify up to four key adverse factors in the score. When utilizing a credit report for pre-employment screening purposes, the FCRA requires that companies do the following:


Written Notice and Authorization

Before you can get a consumer report for employment purposes, you must notify the individual in writing — in a document consisting solely of this notice — that a report may be used. You also must get the person's written authorization before you ask a CRA for the report. (Special procedures apply to the trucking industry).

Adverse Action Procedures

Step 1: Before you take the adverse action (not hiring, firing, etc), you must give the individual a pre-adverse action disclosure that includes a copy of the individual's consumer report and a copy of "A Summary of Your Rights Under the Fair Credit Reporting Act," a document prescribed by the Federal Trade Commission. The CRA that furnishes the individual's report will give you the summary of consumer rights.

Step 2: After you've taken an adverse action, you must give the individual notice orally, in writing, or electronically that the action has been taken in an adverse action notice. It must include:

- The name, address, and phone number of the CRA that supplied the report;
- A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and
- A notice of the individual's right to dispute the accuracy or completeness of any information the agency furnished and his or her right to an additional free consumer report from the agency upon request within 60 days.

(http://business.ftc.gov/documents/bus08-using-consumer-reports-what-employers-need-know)

The Take Away:

Employers should only use credit checks when the use of the check can be tied back to the position. Requiring a credit check for a janitor will likely be hard to defend, unless perhaps the janitor is responsible for purchasing supplies or has access to organizational funds.

When you have determined that a credit report should be run for a position, be sure to follow the appropriate steps as outlined in the FCRA in order to maintain compliance.

HR Consult Team can assist you with your pre-employment screening needs, including assistance with FCRA compliance.