Bad Credit Shouldn’t Block Employment

[Pages:27]Bad Credit Shouldn't Block Employment

How to Make State Bans on Employment Credit Checks More Effective

by amy traub & sean mcelwee

About Demos Demos is a public policy organization working for an America

where we all have an equal say in our democracy and an equal chance in our economy.

Our name means "the people." It is the root word of democracy, and it reminds us that in America, the true source of our greatness is the diversity of our people. Our nation's highest challenge is to create a democracy that truly empowers people of all backgrounds, so that we all have a say in setting the policies that shape opportunity and provide for our common future. To help America meet that challenge, Demos is working to reduce both political and economic inequality, deploying original research, advocacy, litigation, and strategic communications to create the America the people deserve.

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TABLE OF CONTENTS

Executive Summary1

Introduction3

What Are Employment Credit Checks?

3

Why Restrict Employment Credit Checks?

4

Strengths and Weaknesses of State Laws

on Employment Credit Checks7

Credit Check Laws Lift Employment in Areas with Poor Credit

7

Credit Check Laws Include Unjustified Exemptions

8

Credit Check Laws Go Largely Unenforced

12

Greater Public Awareness Would Increase Effectiveness

15

Ending Credit Discrimination in New York City

16

Policy Recommendations19

Conclusion21

EXECUTIVE SUMMARY

O ver the last ten years, a growing number of cities and states passed laws limiting the use of credit checks in hiring, promotion, and firing. Lawmakers are motivated by a number of well-founded concerns: although credit history is not relevant to employment, employment credit checks create barriers to opportunity and upward mobility, can exacerbate racial discrimination, and can lead to invasions of privacy. This report examines the effectiveness of the employment credit check laws enacted so far and finds that unjustified exemptions included in the laws, a failure to pursue enforcement, and a lack of public outreach have prevented these important employment protections from being as effective as they could be.

? Eleven states have passed laws limiting the use of employment credit checks. State laws to limit employer credit checks were enacted in California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington. Cities, including New York City and Chicago, have restricted credit checks as well.

? Credit check laws are effective at increasing employment among job applicants with poor credit. A new study from researchers at Harvard and the Federal Reserve Bank finds that state laws banning credit checks successfully increase overall employment in low-credit census tracts by between 2.3 and 3.3 percent.

? Despite important goals of reducing barriers to employment and eliminating a source of discrimination, existing state laws on credit checks are undermined by the significant exemptions they contain. Although exemptions are not justified by peer-reviewed research, many state credit check laws include broad exemptions for employees handling cash or goods, for employees with access to financial information, for management positions, and for law enforcement positions. Some legislators also express concern that the number of exemptions that were

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ultimately included in the laws make them more difficult to enforce.

? Demos research found no successful legal actions or enforcement taken under the laws, even those that have existed for a number of years. While the existence of the laws themselves may deter the use of employment credit checks, it is unlikely that every employer is in full compliance with the laws. Instead, the lack of any enforcement action against employers violating the laws suggests that credit check restrictions are not as effective as they could be.

? A lack of public awareness on the right to be employed without a credit check may undercut effectiveness. A key reason that states have not taken enforcement action is because they receive very few complaints about violations of the law. Demos finds that public education and outreach efforts about the credit check laws have been minimal in many states, suggesting that few people are aware of their rights.

? New York City's new law restricting the use of employment credit checks is an improvement on past laws. In 2015, New York City passed the nation's strongest law restricting employment credit checks. While New York's law still contains a number of unjustified exemptions, these exclusions are narrower than in many other credit check laws, and New York's public outreach effort is exemplary.

To learn more about the problems with employment credit checks that motivated many states laws, see Demos' report, "Discredited: How Employment Credit Checks Keep Qualified Workers out of a Job," available online at .

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INTRODUCTION

O ver the last ten years, a growing number of cities and states passed laws limiting the use of personal credit history in employment, also known as employment credit checks. Lawmakers are motivated by a number of well-founded concerns: although credit history is not relevant to employment, employment credit checks create barriers to opportunity and upward mobility, can exacerbate racial discrimination, and can lead to invasions of privacy. States laws to limit employer credit checks were enacted in California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington. Delaware has also restricted the use of credit checks in hiring for public employment. Cities, including New York City and Chicago, have restricted credit checks as well.1 In 2014 there were 39 state bills introduced or pending aimed at limiting the use of credit checks in employment decisions, as well as federal legislation proposed in the House and Senate.2 This report examines the impact of the credit check laws enacted so far, considers barriers to their effectiveness and discusses strategies to increase protections for workers.

In researching this report, Demos conducted a search of legal databases Westlaw and Lexis Nexis for cases brought under each statute, queried enforcement officials in each state about complaints and enforcement actions taken under the law, and contacted legislators for their impressions on the effectiveness of the legislation. We begin by looking more closely at the practice of employment credit checks and exploring the motivation for restrictions.

What Are Employment Credit Checks? Credit checks are widely used by employers making hiring

decisions.3 The federal Fair Credit Reporting Act (FCRA) also permits employers to request credit reports on existing employees for decisions on promoting or firing workers.4 While employers generally cannot access three-digit credit scores, they can obtain credit reports that include information on mortgage debt; data on student loans; amounts of car payments; details on credit card accounts including balances, credit limits, and monthly payments;

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bankruptcy records; bills, including medical debts, that are in collection; and tax liens. Under the statute, employers must first obtain written permission from the individual whose credit report they seek to review. Employers are also required to notify individuals before they take "adverse action" (in this case, failing to hire, promote or retain an employee) based in whole or in part on any information in the credit report. The employer is required to offer a copy of the credit report and a written summary of the consumer's rights along with this notification. After providing job applicants with a short period of time (typically three to five business days) to identify and begin disputing any errors in their credit report, employers may then take action based on the report and must once again notify the job applicant.

Credit reports were developed to help lenders assess the risks associated with making a loan. Over the last few years, they have been aggressively marketed to employers as a means to gauge an applicant's moral character, reliability or likelihood to commit theft or fraud. While the practice of checking credit may appear benign, a growing body of research suggests that credit checks do not accurately measure employment-related characteristics and may instead bar many qualified workers from employment. A 2013 Demos report found that 1 in 10 unemployed workers in a low or middle income household with credit card debt were denied a job because of a credit check.5

Why Restrict Employment Credit Checks? Credit checks bar qualified workers from jobs because poor credit

is associated with unemployment, medical debt and lack of health coverage, which tell very little about personal job performance, but rather reveal systemic injustice, individual bad luck, and the impact of a weak economy.6 The financial crisis and the Great Recession caused millions of Americans to be laid off from their jobs, see their home values plummet to less than their mortgage debt, and find their savings and retirement accounts decimated ? all of which can affect credit history. Even seven years after the initial stock market crash, wages for all but the top 95th income percentile have not recovered.7 Though job markets have recovered to some extent, the recovery has been slow and many Americans have been left behind.8 These are largely factors that are outside an individual's control and have no reflection on someone's "moral character" or their ability to adequately perform their job. Rather, credit checks are unfair and discriminate against the long-term unemployed and other

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disadvantaged groups, creating a barrier to upward mobility. Because of the legacy of predatory lending and racial

discrimination, people of color tend to have lower credit ratings than whites, and so may be disproportionately likely to be denied a job because of a credit check. 9 A persistent legacy of discriminatory lending, hiring, and housing policies has left people of color with worse credit, on average, than white households.10 In recent years, historic disparities have been compounded by predatory lending schemes that targeted low-income communities and communities of color, putting them at greater risk of foreclosure and default on loans, further damaging their credit.11 By evaluating prospective employees based on credit, employment credit checks can further extend this injustice.

Worryingly, credit reports are often riddled with errors. A Demos study of low- and middle-income households carrying credit card debt finds that 1 in 8 respondents who have poor credit cite "errors in my credit report" for their credit problems.12 A Federal Trade Commission (FTC) study finds that five percent of consumers, amounting to 45 million Americans, had errors on at least one of their three major credit reports.13 A follow-up study finds that majorities of these consumers still have outstanding errors on their credit report.14 A 2011 industry-funded study by the Policy and Economic Research Council (PERC), found that 1 in 5 people who reviewed their credit report found incorrect information and 12.1 percent of those errors could have a material impact on their score.15 As a result of employment credit checks, individuals can be disqualified from job because of a credit report that is not even factual.16 As the New York Times editorial board noted, "the interest around this issue shows that more law makers are starting to realize

Figure 1. Percentage of Study Participants Describing Their Credit As "Fair" or "Poor"

60%

50

40

30

20

10

0

Source: Amy Traub, 2014

White

African-American

Latino

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