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Banks and other financial institutions routinely use consumers' credit history to make decisions about lending. Credit reports help financial institutions decide if somebody is likely to make the repayments on a loan and can also help banks show that they make responsible lending decisions. However, some businesses also ask applicants and employees to provide their credit history when they apply for a job. Is this legal? Find out here.
Why companies ask for this information
Credit reports are not just useful when it comes to lending money. An applicant's credit history is sometimes a good indication of his or her ability to manage money, and this information is useful when hiring for certain roles. For example, if you're hiring a finance manager or somebody who will have authority for approving funding and business cases, you may rightfully decide that you don't want somebody who has had problems repaying personal finance in the past.
Financial institutions routinely ask for this information when they screen all new applicants, and many banks and lenders will not employ somebody with any history of late or defaulted payments. Similarly, police officers and other public officers are often subject to similar restrictions.
Federal law
In the United States, federal law allows companies to ask employees for information about their credit history. As part of your standard application process, you can ask applicants to give their consent for you to run a credit check through an authorized credit agency. What's more, if the applicant refuses to give consent or the results of the check throw up negative information, you can decline the person for the role or even take back an existing job offer.
Crucially, you must only use these consumer reports in accordance with the Fair Credit Reporting Act, which means you must follow certain steps. For example, before you get the report, you must tell the applicant what you plan to do, and you must also get his or her consent in writing to carry out the check. If you decide to take adverse action, you must also give the applicant a notice in writing, as well as a copy of an FCRA brochure that advises people about how they can deal with adverse credit reports.
If you don't meet the requirements of the FCRA, the applicant could make a complaint about you to the Federal Trade Commission. He or she may also take legal action against you. For this reason, it's important to make sure you have robust procedures that meet FCRA requirements. More importantly, it's also a good idea to avoid requesting credit checks for every applicant. It's a better use of resources to restrict consumer reports to the roles where this information is most valid.
Nonetheless, in certain states, you may still fall foul of state laws.
State laws
Consumer groups are increasingly uncomfortable with the actions that certain employers take with supposedly adverse credit reports. These groups believe that employers often fail to follow the rules, leading to unfair decisions about applicants who are perfectly able to do the jobs they apply for. What's more, state legislators increasingly agree that this information can lead to discriminatory decisions.
In September 2015, a law in New York came into effect that prohibits employers from using these credit reports for employment purposes. The Stop Credit Discrimination In Employment Act no longer allows employers to make decisions about employment, compensation or terms and conditions based solely on information sourced from a credit report.
There are several exceptions. For example, the information is still permissible for regulated roles where the law specifically states that employers must run a credit report before hiring somebody, such as financial advisors or brokers. Similarly, the law does not exclude checks on police officers and some other state employees. Nonetheless, for many other roles, employers could fall foul of local laws when using this information.
American employers routinely use credit reports for employment purposes, but this practice could now land you in trouble with the law. Talk to an experienced employment lawyer from a firm like Carter West Law firm for more advice.
Share15 January 2016
