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Credit History: Is it Any of Your Employer's Business?

Taking Sides in Minnesota

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It targets people who can least afford to have one more reason not to get hired — people that need that extra job, single heads of households, women making less pay, or minorities where the unemployment rate is higher.

In Minnesota, bills were introduced in the house and senate last session that would have amended the Minnesota Human Rights Act to include credit history as a protected class — like race, gender, age, disability and other classes. Currently, the Act does not prohibit an employer from checking an employee or job applicant's credit. However, if it could be shown that such credit checks had a disproportionate impact on race or another protected class, an employer facing a charge of discrimination could be required to prove that its credit screening policy was justified by business necessity. If the employer were to argue that credit scores provide valuable information related to an employee's character, or whether an employee was likely to be dependable, the employer could be required to show that there was no alternative, non-discriminatory way of obtaining the same information.

The bills that would have added credit history protection to the Human Rights Act failed to pass, and no comparable has been introduced in either house yet this session. But the proposal found supporters and opponents, whose arguments echo many of those made in testimony before Congress on the proposed national legislation.

A "Financial Death Spiral"

A simple reason to oppose the use of credit history for job applications is "the sheer, profound absurdity of the practice," noted Chi Chi Wu, a staff Attorney for National Consumer Law Center, in legislative hearings held last September on the proposed federal Equal Employment for All Act. The use of credit reporting in employment can only widen the gap between the haves and have-nots, and has the potential to create a permanent class of the debt-ridden and unemployed, caught in a "financial death spiral: the worse their debts, the harder it is to get a job to pay them off," Wu testified.

"It targets people who can least afford to have one more reason not to get hired — people that need that extra job, single heads of households, women making less pay, or minorities where the unemployment rate is higher," said former state Sen. Jim Carlson, who sponsored last year's bill in the Minnesota Senate to protect credit history under the Minnesota Human Rights Act.

The argument that the use of credit scores unfairly targets minority job applicants, as alleged in the EEOC suit against Kaplan, is one of the cornerstones of efforts nationally and in various states to restrict the use of this data.

Minority reports

A study by Freddie Mac in 2000 found that 48 percent of African Americans were considered to have "bad" credit, compared to 27 percent of white Americans. An earlier study (Freddie Mac, 1996) found that African-Americans were three times as likely to have FICO scores below 620 as whites.

The disparity can be explained in part by the income gap between blacks and whites, according to Adam Klein, a partner in Outten & Golden LLP, who also testified in a legislative hearing on the proposed Act. But outright discrimination is often involved in denying opportunities to people of color, Klein says, citing studies which show that African American borrowers obtain loans less often and on worse terms, even when incomes and other factors are comparable.

Not only is the use of credit history likely to be discriminatory because of its disproportionate impact on minorities, it also provides a convenient pretext for employers who want to engage in discrimination that is clearly illegal under state and federal law, some say. "That's kind of the second layer of discrimination — they're looking for some reason to not hire or not rent to minorities," says Carlson. Jennifer Schaubach, a lobbyist for Minnesota's AFL-CIO, which supported Carlson's bill last session, is also concerned that existing laws allow credit to be used as a tool to weed out applicants employers consider undesirable, for reasons that are legal or not. "They can just say, we really don't want to hire this person, so I bet they have bad credit. Let's pull their credit report."

Continued on next page with: Where's the Evidence?

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Note: The information in this section appeared in the Winter 2011 edition of the Department of Human Rights newsletter, The Rights Stuff. The newsletter includes additional material related to this topic.