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Archive for July, 2011

EEOC continues to consider background checks and FCRA

July 29, 2011 Leave a comment

I noted a few months ago that the EEOC – the federal agency that interprets and enforces federal anti-discrimination law – had dipped its toe into the FCRA pool (how’s that for a vivid analogy?).  The EEOC filed a lawsuit which claimed that an employer’s use of accurate FCRA reports was sanctionable if the use had a disproportionately negative impact on African-American job applicants.

That lawsuit was not an isolated incident.  The EEOC recently held a symposium of sorts on “Striking the Balance Between Workplace Fairness and Workplace Safety.”  It doesn’t seem to have reached any earth-shaking conclusions.  Everyone seems to agree that there is a tension between:  a) giving people who were convicted of crimes a chance to rehabilitate themselves by finding and keeping a good job; and b) keeping people who are prone toward violence or theft – as demonstrated by past commission of crimes – out of situations in which the public could be at risk.

This is not an easy tension to resolve.  I think of one case I had in which an employer declined to hire a potential employee whose job would have entailed going into people’s homes to do work.  The employer denied the potential employee because he had been convicted of sexual assault over a decade earlier.  Was that a just decision?  The employer was understandably fearful of liability:  suppose this person had been hired, had sexually assaulted someone in her home, and it later came out that the employer knew of the assaulter’s prior criminal history but hired him anyway.  On the other hand, the assault had happened a decade earlier, and it did not appear to have involved a stranger:  the odds of the potential employee’s assaulting anyone were slim, and declining to hire him kept him unemployed.

Employers will probably continue to be gun-shy about hiring convicted criminals until and unless they get some legal assurance that they won’t be liable for the results if those people commit further crimes while at work.  But I don’t know how such an assurance could work, and I don’t suppose victims’ rights groups would be particularly supportive of it.

As I say, there is a tension here, and it’s probably unresolvable.  But it’s nice to see the EEOC talking about it.

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The FCRA and the “fourth bureau”

July 22, 2011 Leave a comment

The Washington Post had an interesting article this week about what it calls “the fourth bureau” – which consists of all of the consumer reporting agencies not named Experian, Equifax, and Trans Union.  The gist of the article is that consumers are now, by and large, savvy enough to know that their credit will be checked before they attempt to finance a purchase, and to know that Experian, Equifax, and Trans Union will be the three bureaus doing the checking.

The article suggests, persuasively, that most consumers are not yet savvy enough to know that credit and other background information (e.g., criminal records) will be checked in a number of contexts outside of the financial world:  by employers, landlords, insurance companies, et cetera.  And these checks are typically not performed by the three bureaus, but instead by some “fourth bureau” that is not yet a household name.

Having represented some of these “fourth bureaus,” I think the article is accurate as far as it goes.  But there’s a tone of suspicion that, in my experience, isn’t justified:  the article focuses on the rare consumer who was harmed by an allegedly inaccurate “fourth bureau” report to an employer, and pays less heed to the benefits that such reports provide to typical consumers and typical employers, landlords, and insurers.

It’s worth noting that the article doesn’t suggest that the “fourth bureau” phenomenon requires any changes to the FCRA.  To the contrary, when discussing whether the standard disclosure that any bureau – first, fourth, or otherwise – is required to send to a consumer who might be adversely affected by a report, the article notes that “even consumer advocates do not agree on one standard” disclosure.

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Credit scores: what they aren’t

July 15, 2011 1 comment

Last week I wrote about what a FICO credit score is and how it is used by banks to make decisions about whether and on what terms to lend to a consumer.  This week I’d like to write about two legal issues that the credit score system can present.

The first legal issue with using FICO credit scores to make lending decisions is that it makes credit reports incredibly important to consumers.  Because the FICO score is derived from an Experian, Equifax, or Trans Union report about a consumer, the consumer will want to be sure the report is accurate so that the score is, too.   If a consumer met with a bank officer, the consumer could look at the credit report along with the bank officer and point out any errors before the officer made his or her decision to lend.  Because most lending decisions are now automated, it is very important for consumers to have accurate credit reports when they apply for credit.  The fact that some credit reports aren’t accurate is what drives a great deal of FCRA litigation:  consumers will allege that an inaccurate report prevented them from getting a mortgage on a dream house, or caused them to pay exorbitant interest rates.

The second legal issue involving the credit score system is that it makes consumers want to know their credit score in advance.  Consumers who know their credit scores can predict (to some extent) whether they will get credit before they apply for it.  Consumers can also try to improve their scores (by improving their credit history) before applying for new credit.

And here, we run into a quirky sub-issue:  most lenders use the FICO credit score created by Fair Issac & Co. to make lending decisions, but consumers who want to know their credit score before applying for credit may or may not see that FICO score.  After they noticed the attention that FICO was getting (and the money it was making) for its credit scores, Experian, Equifax, and Trans Union decided to get in on the act by creating their own credit scores.  Each of these three bureaus now uses its own algorithms to look at its own raw credit data and to create a score, and they also have a joint product called VantageScore that uses algorithms to create a different score based on all three bureaus’ collective data.  These scores will differ from the FICO score in that:  1) they have different algorithms; and 2) they have different scales.  For example, the FICO scale is 300-850, but the Experian scale is 330-830, and the VantageScore scale is 501-990.

The existence of multiple credit scores means that a consumer who is planning to apply for a loan may decide to check her credit score through Experian, in which case she will likely get an Experian score on the Experian scale.  However, when that consumer applies for credit, the bank might decide to pull raw data from Trans Union and get a FICO score based on that data.  The bank will therefore be using different data and a different score than the consumer anticipated.

In short, credit scores that consumers obtain from the three credit bureaus aren’t necessarily the credit scores that a bank will use in deciding whether and how to extend them credit.  A smart consumer will know this and plan accordingly, by (for example) obtaining 3 FICO scores in advance (one using each bureau’s data), asking a bank which score it uses, or just ignoring scores altogether and focusing instead on whether the raw credit data on each bureau’s report is accurate.

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Credit scores: what they are

July 8, 2011 Leave a comment

I’ve decided that it’s time to write about credit scores.  This week’s post will discuss what credit scores are; next week I’ll discuss what they aren’t.

Most readers will may already know that “credit scores” are numbers ranging from 300-850 that are intended to estimate the risk that a particular consumer will fail to make payments on existing debt at some point in the next two years, to the point that the consumer has failed to make a payment for 90 days.  If a consumer is likely to become 90 days late on existing debt, he or she will have a lower score; if a consumer is unlikely to become late, he or she will have a higher score.  Consumers with low credit scores may find that some lenders won’t lend to them at all, or that lenders will charge a high interest rate to compensate for the perceived risk of late payments or default.

The first credit scores were developed by Fair Issac & Company and are therefore called “FICO” scores.  Creating credit scores is an art as well as a science:  FICO, or anyone else who creates credit scores, must devise a series of algorithms that take the raw data on a consumer’s credit report (i.e., the fact that consumer A has a credit card with Bank B that has a credit limit of C, an existing debt of D, and has (or hasn’t) made timely payments in months X, Y, and Z) and translate it into a number between 300-850 that does the job it’s supposed to do (i.e., predicts whether consumer A will become late in making payments on that credit card or on other debt).

Back in the mists of time, consumers who wanted a loan would meet with a bank officer who would read through their credit report and then, after assessing not just the report but also the consumer (does she seem honest?  does he have a firm handshake?  etc.) decide whether to extend a loan and on what terms.  This system had obvious problems.  For starters, different bank officers would read credit reports and people differently, so that the same person could meet with two different officers at the same bank and get different decisions on whether and how a loan would be made.  The fact that the bank officers assessed borrowers as individuals had a nice homey quality, but it also opened banks up to allegations of racism and sexism.  In addition, bank officers were expensive:  their salaries and benefits cut into a bank’s own profits.

So, for a while now banks have been using credit scores to make lending decisions instead of bank officers.  Just about every bank uses a FICO score, in which Fair Issac & Co. scans raw data on a consumer’s Experian, Equifax, or Trans Union credit report, and then uses FICO algorithms to translate that data into a number from 300-850.  The bank then uses its own algorithms to match the credit score, the proposed new debt, and the consumer’s income (income doesn’t appear on credit reports and therefore isn’t considered when creating credit scores!) and decide whether and on what terms to lend.  Banks like this system is cheaper (it involves computers and not people); more predictable (same); and less open to accusations of racism and sexism than the old personal approach to lending.

That’s what credit scores are.  Next week I’ll discuss what they aren’t.

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