Privacy Bills in the Senate, a First Look: Jesse Ulibarri Moves for a Credit Privacy Law

by Eileen | 12:42 pm, January 22, 2013 | Comments Off

WHAT: SB 13-018, Banning employers and prospective employers from asking for credit reports, with exceptions

WHO: Sen. Jesse Ulibarri (D-21) and Rep. Randy Fischer (D-53)

WHY: Because credit reports as hiring tools are ineffective and have a high privacy cost.  Also, mission creep

Following several other states, Colorado is considering severely limiting the extent to which employers may use credit reports in making decisions about hiring, firing, promoting, and demoting.  SB 018 would create the Employment Opportunity Act and charge the Colorado Department of Labor and Employment with overseeing compliance. That would give DoLE, the agency with the most fitting acronym in the state, one more thing to bungle, but we can worry about that later.

Employers would no longer be allowed to require permission to pull a credit report on employees or potential employees, with exceptions made for some financial workers and for jobs requiring a security clearance. In those cases, employers would have to inform individuals if their credit was the reason for adverse action. Finally, employees would gain a right of action if they are asked to permit a credit check or are wrongly denied employment because of credit.

Below, at some length, I am going to tell you why you like this idea regardless of whether you’re looking for work or for workers.

The complaints about credit reports are legion. Most of them are substantive. Here, though, I want to concentrate on the applicability of credit scores to employment decisions. I am making a pro-market argument. Credit scores used to make employment choices are pointless for that purpose and cause harm to both employee and employer. It’s a market distortion.

The two biggest problems are accuracy and applicability, or, really, the lack thereof.

Credit reports are inaccurate in two ways. The first is a, hopefully, temporary effect of a bad economy; according to a study released by FICO, 25.5% of Americans had credit scores below 600 as of April 2010, contrasted to a historical average of 15%. That people with bad credit have limited or non-existent chances to gain employment and work with poor terms for repaying existing debts is a further cloud on clearly seeing the extent of a consumer’s core credit situation.

The second effect is a problem endemic to the current framework for credit scores, one that won’t change without changing the incentives by which the credit agencies play. American credit agencies are private, for-profit corporations. There’s nothing wrong with any of that. I like private business, I like profits, and I like corporations. However, their stock in trade is other peoples’ data, data manipulated into scores by methodology that runs the gamut from opaque to utterly and totally impenetrable.

The weighting and methodology of any given score varies by the length of the individual’s credit history, the purpose of the score, and who knows what else. Consumers are currently unable to know the full details of how their scores are calculated. In fact, consumers don’t even know their actual score, as the present legal landscape allows credit agencies to provide actual scores to people asking about you while only giving you something called an ‘educational score’. The two numbers may be quite different.

Already saddled with a lack of knowledge about how scores are calculated and used, consumers also have a limited right of access. Owing to the last round of FCRA updates, referred to as FACTA, each of the three major credit bureaus owes you a peek at your report once a year. And don’t think they didn’t fight that tooth and nail. You also have the right to see your score in some instances when it’s used adversely. Overall, though, you don’t have access to your own data; you pay the people who hold it to provide a bastardized version without context.

Charging for access your own report beyond once a year is also the reason we have so many credit-monitoring services, more than a few of which are scams, one of which runs endless trite television spot where a doughy white man with an pseudo-Afro sings about ‘score alerts’, all of which are yet another layer of people profiting by charging you to know you own data.

Why? For one thing, you aren’t their customer. All the companies making decisions about you are the clients. You, dear, are the product. As a sentient product, you enjoy a theoretical grievance process, one so arduous and haphazard that many consumers choose not to contest inaccurate information. As one report worded it:

…as a practical matter, disputing an error can be a time consuming, nearly impossible three-party negotiation between the credit bureau, the creditor and the individual—a negotiation for which the outcome is ultimately controlled by the sometimes arbitrary decision of the agency.

The reality of filing a grievance with a credit agency is that the bureaus rely on automated processes to make decisions. Thorough investigations are time and money. None of us spend our own resources if we can avoid it and the credit agencies are no different. Inaccurate as their product is, business is still booming. They’re allowed to be so maddeningly coy about how they cook up the numbers they do get to, that the best most consumers can do is point to obvious errors without having a handle on systemic flaws that led to inaccurate or improper information showing up on a report.

Credit bureaus face no liability for failing to correct mistakes on reports and are under no requirement to take diligent action in advance to prevent those mistakes. This is what we call a misalignment of incentives.

That disincentive to get it right is screwing people over. A 2008 pilot study by the the FTC found that 31% of people found items on their report they wanted to contest. 11% of reports had items the FTC classified as ‘material errors’ – incorrect information that could substantially harm someone.

Credit industry representatives dismissed the findings pointing to a low sample size and methodological issues. Three years later, the Policy & Economics Research Council repeated the study and found 19.2% of reports were contested by their subjects and 12.1% were materially inaccurate by PERC standards. If these numbers are accurate, 20 million Americans risk being judged for employment, among other matters, based on misleading data.   That report has certainly been criticized, and the FTC has announced a new, much larger, study incorporating all the improvements from methodology after the first two studies.  (It’s a longterm project, but the already published reports are here, and here, and also here, and finally, here.  Don’t say I never gave you anything.)

Still. 12.1%.  For an industry that provides sensitive information used to make major decisions, an error rate of 12.1% is utterly unacceptable, too high by a factor – at least.

The second big point I want to make here is that using credit report for hiring is as sensible as deciding to offer employment to all applicants in loafers but not to anyone is lace-ups. Even the credit agency admits there’s not a single shred of data linking value as an employee to credit.

First, though, a very brief historical sketch, for context and an understanding of whence cometh this mission creep. Until the mid-twentieth century, credit was offered through individual merchants and through relatively small cooperatives. Starting in the 1950s, bureaus began buying one another up, leading us to the current situation, where three agencies tower. The passage of the Fair Credit Reporting Act (1970) and the Equal Credit Opportunity Act (1974) further solidified that framework where three groups enjoy national stature and have the lion’s shared of credit reporting business.

The Fair Isaac Corporation (FICO) dominates the market for credit scores, boasting upwards of 75% of the trade. They sell the right to use their proprietary methodology for calculating scores to credit bureaus. In a bid to avoid paying those royalties, the credit bureaus have instituted something called the VanGuard Score, using their own methodology. As yet, Vanguard is the scrappy upstart, with a little under 10% of the market for actual scores. But, in the name of undercutting FICO, credit agencies are fighting their own battle with your data.   (Because they’re totally suing one another over whose algorithm is the most-bestest.)

In addition to having a FICO score and a VanGuard score, you have scores with numerous, rapidly proliferating, niche credit agencies. These agencies only exist because of credit reporting mission creep. Purely dedicated to selling reports to insurers, employers, hospitals, and other people who have no need to know about your loan repayment ability, they assign you scores computed by methodologies arcane enough for a conspiratorial History Channel program.

The 2008 financial meltdown provided some political will to change things, but, as yet, it has not been enough to bring sanity back to the credit report. If anything, politicos are focused on their own agendas and on growing state power. Something so heavily about the privacy considerations of consumers is a distant also-ran at the federal level. In 2011, Tennessee Democrat Steve Cohen introduced the Equal Employment for All Act (HR 3149). It died in committee, with credit industry lobbyists cackling and waving pitchforks, I’m sure.

And that bounces us right back to that laboratory of democracy, the states. California, Connecticut, Hawaii, Illinois, Maryland, Oregon, and Washington have passed credit privacy laws in relation to seeking employment. More than 20 other states have considered such a bill in recent sessions. Looking at the states that have passed credit privacy, it’s a ‘blue’ issue. It shouldn’t be. Allowing the left to do all the work on privacy only means they get all the credit (pun very much intended) and paint the right as people who don’t care about privacy.

Also, Colorado is now a blue state.

Legislatively, the wind bodes well for this push. So, too, go the courts. In 2010, the Department of Labor won a case against Bank of America for using credit reports to make entry level hiring decisions. Just think about that for a moment – a bank. If ever there were an industry that might make a claim that they need credit reports on entry level workers, it would be the one where entry level workers stand at a window and hand out money. That case was won (or lost, depending on your perspective) under Title VII of the Civil Rights Act. Declining to hire people with low credit scores meant minorities were disproportionately getting rejected and Bank of American couldn’t provide a compelling interest as to why they needed an exception to CRA to continue a practice shown to limit job offers for non-whites.

I offer this detail to make a point. A large pillar of a lot of left-leaning arguments against credit reports rests on the fact that minorities and low-income Americans have lower scores. They make it out to be an instance of discrimination. And I am asking you to set that aside. You don’t need to believe in affirmative action or white guilt or never holding anyone accountable for anything in his past to see that there is a market distortion in applying a credit report to a purpose for which it was never intended. But it is wise for anyone observing privacy law or legislation in Colorado to know that these efforts have a racial element and, thus, have people backing them for those reasons. Think of it this way: even offensive groups largely dedicated to procuring special privileges for some groups may occasionally get it right.

And that’s the one reason credit reports don’t belong in hiring decisions. It’s mission creep. Credit agencies have all the reason in the world to tout their product as indispensable to do anything, including picking out your shoes in the morning. If they have everyone who has ever met you clamoring for a report and you buying reports twice as fast to know what’s being said about you, they’re well on their way to being able to dive, Scrooge McDuck like, into piles of cash. Like good little public choice theorists, we recognize that’s just the way people are and we correct the incentives.

The credit report is a very specifically designed tool meant to tell a lender whether or not you are willing and able to pay back a loan on time. It’s tempting to think financial responsibility is a good proxy for all manner of other valued traits. But it ain’t necessarily so.

Jerry Palmer and Laura Koppes, at Eastern Kentucky University compared employees who were considered good workers and employees who had been fired for cause, a total of 178 subjects, looking at credit reports. They couldn’t find any correlations between performance and credit rating. A team composed of researchers from L.S.U., Northern Illinois University, and Texas Tech duplicated the study with a much larger n and also failed to find any correlation.

Grudgingly, the credit industry admitted to as much. Testifying before the Oregon legislature, Eric Rosenberg, Director of State Government Relations for TransUnion, said:

At this point we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.

He was echoed by Richard Tonowski, the Chief Psychologist for the Equal Employment Opportunity Commission, who, in 2010, reported that there exists:

…very little evidence that credit history is indicative of who can do the job better [and it is] hard to establish a predictive relationship between credit and crime.

The one thing that does predict which employees will steal is very simple – which employees have the chance to do so? For that reason, it makes some sense to consider the financial predicament of candidates who would be handling significant amounts of cash or who would have authority to move money. However, for employees not working in finances, a credit report won’t tell employers anything valuable.

It will provide a false sense of security, making it seem HR has done something to earn their keep and to head off lawsuits related to hiring a bad egg. It’s debatable if courts will consider the reactionary default to a credit score as adequate when it comes to CYA in a bad hire lawsuit for much longer. Too, conditioning employment on a credit check could bring its own lawsuits. Employers could face something in the model of the Civil Rights Act lawsuit that Bank of American lost, or they could be open to privacy torts.

One example goes to the nature of a great deal of data reported to credit agencies. The Federal Reserve Board found 52% of accounts sent to collections are for medical bills, making healthcare expenses the top cause of unpaid debt that affects consumer credit. Number two is divorce. This puts HR between a rock and hard spot; employers can offer candidates the chance to explain a low credit score and risk violating the ban on asking about medical conditions or marital status. Or, they can let a candidate go and risk losing an action on that count. Plus, they’re risking passing over strong candidates.

Actually, given this, I am wondering why employers aren’t pulling away from credit reports. It’s useless and invites litigation. But that hasn’t happened and job seekers are in a Catch-22 – being unable to pay bills owing to unemployment and being unable to get work owing to unpaid bills. We might as well tell people to come back and apply for work just as soon as they no longer need an income. Although Barack Obama would like to throw money at problems until they go away, most economists agree this is a sub-optimal policy.

As such, people need to be generating their own income, paying their way, and settling their debts. Companies need good employees with hiring decisions based on relevant information. The mob knows that when someone owes you money, you don’t make it difficult for that person to work. Has this really not occurred to the 60% of employers who routinely use credit reports to make hiring choices? That’s a little unfair, as employers who won’t touch applicants with low scores aren’t holding the notes that aren’t getting paid when debtors can’t find work. They’re people who probably do largely think their current practice is a good for them. Although, I think we can now say something about why credit privacy sailed though the Illinois legislature with relative ease.

But can Colorado pass it? SB 018 is assigned to Business, Labor, and Technology, with a 3-2 tilt to the Democrats. It could easily be a party line bill. It’s also ripe for capture. Credit industry representatives will rail at any version of this bill. So too will data aggregation and consumer tracking interests. On the other hand, civil liberty groups and minority interests could expend effort if it looks like it would pay off. It’s hard to see how the GOP can stop this if the bill is a Democratic priority. However, this could be something leadership gives up on to win concessions elsewhere. Dems aren’t feeling particularly cooperative right now, so my guess is that bill moves at least out of committee. At that point, it may become a screaming contest among lobbyists.

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