Credit Reports: Useful Screen Or Lawsuit Unforeseen?

Watch for increased restrictions on the use of credit reports.

January 11, 2012
/ PRINT / ShareShare / Text Size +

For financial institutions and most employers, using credit reports to evaluate job applicants is standard practice. These reports verify employment history and disclose facts about an applicant’s or employee’s accountability and responsibility.

For positions involving fiduciary or financial responsibilities, employers may even seek a numerical credit score to determine the likelihood of fraud or theft.

But before requesting that next credit report, make sure you comply with new restrictions state and federal laws impose on accessing employees’ or applicants’ credit information.

At the federal level, Congress submitted H.R. 321—the Equal Employment for All Act—currently up for committee review. H.R. 321 seeks to amend the Fair Credit Reporting Act (FCRA) to prohibit the use of consumer credit checks against current and prospective employees for the purposes of making adverse employment decisions.

Adverse action includes denying someone a job or promotion, or reassigning or terminating an employee. Submitted in part due to the struggling economy’s impact on employee credit scores, this pending bill could significantly change hiring practices for all employers.

While it doesn’t prohibit the use of credit reports, the Dodd-Frank Act amended FCRA to impose new notice requirements on employers relating to any use or decision based on any employee’s credit score.

The Dodd-Frank Act requires employers to provide applicants and employees with their credit scores and certain additional disclosures if the employer intends to take adverse action based on that information.

Employers who consider credit scores in hiring decisions must update all adverse action forms to include the new credit score disclosures. These must be provided to the employee/applicant in writing or electronically.

These disclosures include:

  • The numerical credit score used in making the decision;
  • The range of possible scores under the model used;
  • Up to four key factors that adversely affect the credit score;
  • The date on which the credit score was created; and
  • The name of the person or entity that provided the credit score.

FCRA imposes liability for willful and negligent noncompliance, but also provides a safe harbor for employers who can show that at the time of the alleged violation they maintained reasonable procedures to ensure compliance.

If such procedures aren’t maintained, however, an aggrieved individual can sue for remedies including actual damages, costs, and attorney fees, as well as punitive damages in the event of a willful violation.

Take advantage of the safe-harbor provisions by updating hiring policies on the use of credit reports and credit scores, updating adverse notice forms, training human resources staff, and double checking compliance.

Some state legislatures (including Oregon, Washington, California, Connecticut, and Illinois) have tried to limit the impact of bad credit on hiring decisions as well. These states have imposed specific advance notice requirements of an employer’s intent to conduct a credit check, plus prohibitions on the use of credit reports as a hiring tool.

Subject to certain exceptions, these state workplace credit check bans make it unlawful to obtain or use information contained in a credit history to discharge, demote, suspend, retaliate, refuse to hire, or otherwise discriminate against an applicant or employee with regard to promotion, compensation, or the terms, conditions, or privileges of employment.

Some states, such as Oregon, specifically exempt federally insured financial institutions from the restrictions. Other states’ laws require the employer to establish that the credit information is “substantially related” to each applicant’s or employee’s position.

State statutes provide little guidance on how to determine whether the information is substantially related to an applicant’s or employee’s job. Simply working for a financial institution may not be enough to meet the standards under the state laws.

Proceed with caution if obtaining credit reports on job applicants and employees. Have legal counsel confirm your credit union falls into an exception permitting it to use credit reports to update job applications and other documents, and to update adverse notice forms to advise employees if an adverse action is due to a credit score.

KELLY TILDEN is a shareholder at Farleigh Wada Witt, Portland, Ore.

Post a comment to this story


What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory ( will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive