Federal Reserve Board Issues New Report

The Federal Reserve Board has issued a new report entitled “Does Credit Scoring Produce a Disparate Impact?” The use of credit reports in employment decisions has recently become a controversial issue. Legislatures, regulatory agencies, and employers have debated whether or not making hiring decisions based on credit history could have a disparate impact based on race or gender.
What makes the new report interesting for employers is:

1. The report found no evidence that credit scores create a disparate impact based on race or gender. Since credit scores generally add information not available on the face of an employment-purposes report, a reasonable inference is that credit history does not create a disparate impact either.
2. The report did find limited evidence that credit scores create a disparate impact based on age. Usefully, it identified the variable that caused the credit scores to create a disparate impact. That variable was the average age of the person’s credit accounts on file. Inclusion of this variable lowered credit scores with age, causing younger people, foreign nationals, and recent immigrants to have high credit scores and older people and native-born citizens to have lower scores. This means that the average age of credit account is potentially misleading and might cause a disparate impact if used in employment decisions. For users of employment-purpose credit reports, a reasonable precaution would be to avoid placing any weight on any available information about the age of accounts. (The age of the oldest account appears on sample reports we reviewed; average age did not.)