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Lenders Get a Break on Background Checks

APR 14, 2014 10:37am ET
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The rock and hard place between which lenders have found themselves in regard to the use of hiring screens and disparate impact (in hiring) just got a bit softer.

The Sixth Circuit—the first federal circuit to consider the issue—dismissed the EEOC’s (Equal Employment Opportunity Commission) lawsuit against an employer’s use of credit checks as a hiring screen, finding no basis for the assertion that credit checks have a disproportionately adverse effect on the hiring of minorities. A logical extension could similarly be applied to the use of criminal background checks.

For the moment, it appears employers (lenders in particular) have a little less to worry about in terms of hiring screens that involve criminal background and credit history.

As many lenders know, the CFPB now requires background checks (including criminal and credit) for licensing loan officers. Of course, other employees who have access to highly personal borrower information are routinely subjected to criminal and credit background screens for obvious reasons.

While a win for the EEOC would not have doomed such practices due to the fact that they may be alternatively justified as a business necessity, the fact that the EEOC could not even get past the threshold issue of showing such hiring screens create a disparate impact, is certainly good news. It prevents lenders from even having to attempt to affirmatively prove the necessity of the practices, and makes it far more likely a court would be sympathetic to the lender’s position.

In addition, the decision could have an impact on another EEOC initiated case, this time involving criminal background checks, that is under consideration at the Fourth Circuit Court of Appeals.

Overall, employers should recognize that notwithstanding this decision, it is imperative that there be written protocols for the use of hiring screens. Subjective and inconsistent applications of hiring screens—notwithstanding the Sixth Circuit’s decision—can still be the basis for a lawsuit. This case merely supports the proposition that using criminal background checks and credit checks does not per se amount to a discriminatory hiring practice.

Ari Karen is an attorney at Offit Kurman.

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