Legislation and Compliance Update : Federal Reserve Board Issues New Report Studying the Disparate Impact of Credit Histories

The Federal Reserve Board has issued a new report entitled “Does Credit Scoring Produce a Disparate Impact?”

The use of credit reports in employment decisions has recently become a controversial issue. It has been put up for debate whether or not making hiring decisions based on credit history could have a disparate impact on racial and ethnic minorities with the end result of hiring fewer minority applicants. A recent report from the Federal Reserve Board calls into question the generally held belief that hiring decisions based in part on credit histories have a disparate impact on racial and ethnic minorities. Rather than analyzing the potential disparate impact in hiring decisions, the October 12, 2010 report analyzed a parallel question: whether the use of credit scores in lending would have a disparate impact on applicants for loans. An important distinction between these two questions is that employment-purpose credit reports do not show a credit score; but they do show the types of information that credit bureaus use in their calculations of credit scores.

What makes the new report interesting for employers is:

  1. The report found no evidence that credit scores create a disparate impact based on race or gender. Since credit scores generally add information not available on the face of an employment-purposes report, a reasonable inference is that credit history does not create a disparate impact either.
  2. The report did find limited evidence that credit scores create a disparate impact based on age. Usefully, it identified the variable that caused the credit scores to create a disparate impact. That variable was the average age of the person’s credit accounts on file. Inclusion of this variable lowered credit scores with age, causing younger people, foreign nationals, and recent immigrants to have lower credit scores and older people and native-born citizens to have higher scores. This means that the average age of credit account is potentially misleading and might cause a disparate impact if used in employment decisions. For users of employment-purpose credit reports, a reasonable precaution would be to avoid placing any weight on any available information about the age of accounts. (The age of the oldest account appears on sample reports we reviewed; average age did not.)

We strongly urge that our clients have their equal employment opportunity lawyers review this paper (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1726601) and the criteria they use for making decisions based on credit history.

Michael Klazema

About Michael Klazema The author

Michael Klazema is Chief Marketing Technologist at EY-VODW.com and has over two decades of experience in digital consulting, online product management, and technology innovation. He is the lead author and editor for Dallas-based backgroundchecks.com with a focus on human resource and employment screening developments.

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