Credit Peeping Toms: Here Comes the Law

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Consumer advocates seem ready to score a big victory for job-seekers: a bill winding its way through Congress that would prohibit potential employers to check your credit report before making a job offer.

The lean-and-mean economy has triggered the need for such a bill, proponents say.

According to a 2004 survey by the Society for Human Resource Management, more than 40% of employers have used credit checks as part of a potential employee’s background check. That’s up from 25 percent in 1998.

With a recession raging across the U.S. employment landscape since 2007, that number figures to be even higher.

Still, companies that use credit reports as part of the due diligence process may have a point. Employers figure they can evaluate a job applicant’s potential by checking their personal finances. If, for example, a potential employee has $70,000 in debt, and the job up for grabs only pays $45,000, then the employer may justifiably wonder how long the employee would stick around with a paycheck that doesn’t come close to paying off that kind of debt load.

Critics also say the new bill would expose businesses to lawsuits and leave them vulnerable to hiring problematic employees. Says California Gov. Arnold Schwarzenegger, who recently vetoed a similar bill: “This bill would significantly increase businesses’ exposure to civil actions over the use of credit checks. Further, the bill would increase administrative costs to those employers who must legitimately use credit reports as a screening tool by requiring that the employer first abide by its onerous requirements.”

But advocates reject those arguments, saying that a riveter with a river of debt doesn’t make him or her any less of a riveter. Plus, credit reports aren’t always accurate. The Los Angeles Times reports that one in three credit reports include errors and other inaccurate information.

The new bill in Congress aims to sort this mess out – and make sure that employees get a fair shake on background checks. The bill, called The Equal Employment for All Act (H.R. 3149), would amend the Fair Credit Reporting Act (FCRA) to prohibit the use of consumer credit checks against prospective and current employees during hiring or firing processes, thus preventing employers from using credit reports as part of pre-employment background checks. 

Here is the specific language in H.R. 3149: “A person, including a prospective employer or current employer, may not use a consumer report or investigative consumer report, or cause a consumer report or investigative consumer report to be procured, with respect to any consumer where any information contained in the report bears on the consumer’s creditworthiness, credit standing or credit capacity.”

Exceptions to the proposed rules – and there are a few – include a job applicant who needs national security clearance, a person applying for a federal, state or local post that requires a credit check or managerial jobs on Wall Street (or at any financial institution). Even so, these applicants still have to be notified that their credit report is being reviewed, and if they are rejected because of a credit issue, the applicant must be given a specific reason why.

The bill is sponsored by Rep. Steve Cohen of Tennessee and Rep. Luis Gutierrez of Illinois. Check it out for yourself here.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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