Another Way to Look At It: Credit Reports

Another Way to Look At It: Credit Reports

Employers Who Use Credit Reports in Their Hiring Process Find Themselves Under Increased Media and Government Scrutiny.

In recent presentations to Clients and Prospects, I’ve emphasized, what I perceive to be, the changing enforcement environment related to the pre-employment screening process. With a new regulatory agency in charge, the Consumer Finance Protection Bureau or CFPB, history tells us we can expect the new “sheriff” to assert himself. Add to that several very one-sided media events (the Today Show and 60 Minutes), the first ever fine for a Fair Credit Reporting Act (FCRA) violation and recent legislation passed by several states, it doesn’t take a rocket scientist to see the shift in focus. Now comes the New York Times’ article, “The Long Shadow of Bad Credit in a Job Search” (link below). If you didn’t believe that FCRA enforcement was getting tougher before, I strongly encourage you to re-consider because things are going to get rough and expensive for those users of consumer reports who don’t adjust their process.

The article tells the story of several unfortunate applicants who, through no fault of their own, can’t get a job (ostensibly) because of their bad credit. No one knows how accurate the stories are but like all media of this genre, that’s not the point. They want to make the case that 1) unemployment is still high because people like this can’t get a job (I disagree), 2) employers are using personal data incorrectly and costing otherwise employable people job opportunities (the former absolutely and the latter maybe) and 3) if we could just put a stop to all this, things will be better (I doubt it).

That thinking is delusional at best. Better for whom? I don’t mean to paint everyone with the same brush; certainly there are applicants who could be employed were it not for their credit reports and/or background checks. That said, the risk associated with hiring someone you know has problems is potentially lethal for employers. Let’s be fair: If it were your company, what level of risk would be acceptable when it’s your future on the line? How can anyone on the outside, be it the government, an HR consultant or the New York Times, make that decision on your behalf or, worse, impose one on you?

And while we’re in Fantasyland, one of the statistics quoted is that “47% of employers use credit checks when making a hiring decision”. That number is just wrong. 47% of all employers aren’t doing background checks at all. But I can be open minded. Perhaps they meant to say that 47% of employers who use background checks are using credit reports. Now I can only speak for my Clients but last year we screened over 25,000 applicants but only sold 1842 credit reports – roughly 8% and that’s within a hiring demographic where over 50% of the applicants would meet the “job relevancy” definition. I also know we spend a great deal of time vetting and educating our clients about when and, more importantly, when not to order a credit report.

For the record: Credit reports formatted for employment purposes, the only kind available to employers, do NOT affect an applicant’s credit score. The reports don’t even have a credit score – that’s an FCRA violation. They also redact account numbers and don’t leave an inquiry. Of course, this doesn’t stop employers who have access to true “consumer” credit reports from using them improperly. But if their annual credit bureau audits are anything like mine, they won’t be doing it for long.

According to this article, no one seems to know (or, more likely, is willing to say) either why they use credit reports or if there is any hard data correlating bad credit with poor performance or potential for theft. That may be true but no one seems to be able to say the converse either: that someone with bad credit isn’t a higher risk. Ironically, my Clients are more inclined to give their applicants with bad credit reports the benefit of the doubt. I end up playing the devil’s advocate to get them to understand the risk they’re taking.

The article quotes a “senior policy analyst” (who, frankly, should know better) as saying, “the law requiring an adverse action letter is rarely enforced”. That would surprise Toll Brothers Real Estate – the defendant in a recently filed class action lawsuit – for just that: failing to provide Notices of Adverse Action. This follows HireRight’s $2 million fine last year for not doing its job as a consumer reporting agency. According to what I’m reading, these lawsuits are popping up faster than roofing companies in your neighborhood after a hailstorm.

A leader of a New York non-profit is also quoted as saying, “Prohibiting the use of credit checks is now our number one campaign…because it’s discriminatory.” Lookout. Whenever you see the “D” word, it’s usually followed by a stampede of politicians and government agencies (read EEOC) seeking to level the playing field by creating unnecessary laws. As if that will solve the high unemployment problem.

Perhaps the most telling comment in the article is that the applicants are not being told why they’re not being hired. I’m not talking about a specific reason (as in “you blew the interview”) but rather using the FCRA required “Notice of Adverse Action” which, at least, tells the applicant they’re being denied employment and how to get a copy of their report. This is another example of employers not understanding the rules related to the use of background checks.

This is not a black and white issue and there are certainly reasonable explanations i.e. divorce, health issues, etc., that create bad credit reports. But you tell me: absent a reasonable, verifiable explanation, would you trust your company’s assets, checking account, cash, (your Clients!) etc., to someone who can’t manage their own finances? It’s certainly not a stretch to assume they’ll care less about your affairs than they do about their own.

Are employers mis-using credit reports? Absolutely. Are credit reports an effective tool for employers to use in their hiring process? Absolutely. Should credit reports be used for all positions? Absolutely not and employers should always offer the applicant an opportunity to explain their reports.

The improper use of data is getting out of control whether it be the use of instant criminal records without verification at the county level or running a credit report on forklift drivers. And, unless and until employers start using data more judiciously, you can expect the government to take notice – even if it’s only to bungee jump in, create a few laws, ten tons of paperwork and levy some big fines.

I just don’t want my Clients or my company to get caught in the crossfire.

http://wap.nytimes.com/2013/05/12/business/employers-pull-applicants-credit-reports.html