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Federal Reserve Board Issues New Report Studying the Disparate Impact of Credit Histories

By Michael Klazema on 3/14/2011

The use of credit reports in employment decisions has recently become a controversial issue. Legislatures, regulatory agencies, and employers have debated whether or not making hiring decisions based on credit history could have a disparate impact based on race or gender.

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 based on race or gender.

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 information that credit bureaus use in their calculations of credit scores. Although the credit bureaus do not necessarily use all this information in calculating credit scores, an answer to whether a credit score has a disparate impact would suggest the answer to whether the underlying credit history does.

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 high credit scores and older people and native-born citizens to have lower 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=1726601and the criteria they use for making decisions based on credit history.

If you would like more information about how this update may affect your program and how backgroundchecks.com can help, please contact customer service.


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