Could We Stop Employers From Running Credit Checks?

Another entry in the annals of regulations that seem like no brainers but aren't:  Kevin Drum wants to target regulations forbidden the use of FICO scores by employers at the credit bureaus, leaving small employers alone.

Does this raise the compliance cost of starting a business? Hardly. If a prospective employer asked my doctor for a copy of my medical records, he'd just say no. The compliance cost is zero. Ditto for credit scores. Until a few years ago no one bothered asking for them, and if releasing these records were prohibited, they'd go back to not bothering. The compliance cost is zero. As for the credit reporting agencies, they've been placed in a privileged position where they're allowed to collect sensitive privateinformation -- just as doctors and banks and census takers are. That privileged position means they have a heightened responsibility for maintaining privacy, not a license to use their databases for anything that can make them an extra buck or two.

Here's the problem:  your doctor will indeed release your medical records if you've signed a release form.  It is already illegal to let anyone see your credit history without your permission, and one hopes it will remain that way--call me un-libertarian, but I don't like the idea of either a government or a corporation maintaining a secret dossier on people that those people can't look at.



Employers get permission to run the credit check the same way they get permission to run a drug test.  No one (except law enforcement) can make you pee in a cup against your will.  But if you don't do it, you don't get the job.

Nor can you just make a law saying "Don't release credit reports to anyone except a lender."  As a homeowner and a private individual, Kevin probably hasn't experienced many of them.  But credit reports are used by non-lenders all the time in ways that I think most of us would agree are legitimate.  Landlords checking to see if you have a habit of rent non-payment.  Potential investors in your small business who would like to know if their cash is going to the business, or Mastercard.  Vendors who want to know if you have a history of stiffing your suppliers.  The federal government, running, erm, background checks on its employees.  How would a credit reporting bureau distinguish employers from any of these?

No, the only way to do it is through enforcement at the employer level:  you have to make it illegal to ask for this stuff.  Which raises the compliance burden even though it requires only passive avoidance; the more regulations there are, the more unknowable the law is, and the costlier it becomes to hire an expert to help you.  Eventually you get to the point that many developing countries (and not a few American cities) have reached:  where there are so many regulations that they necessarily contradict each other, and it is essentially impossible to be in full compliance with the law, both because of those contradictions, and because the law is too unwieldy for even your expert to absorb.  Once you are in a position where an employee who looks hard enough can always find some reason to sue, you have radically raised the cost of hiring in a way that is not good for either workers or the economy.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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