By Nate Van Duzer, 2022 Summer Law Clerk.

Have you checked your credit score lately? Do you know how it can affect your life? A lot of us probably do not think about our credit until it becomes a problem.

In theory, our credit score tells a potential lender how likely we are to repay a loan based on our history of repaying past ones. But credit scores are often inaccurate and poorly predict the very thing they’re designed to measure–the likelihood that we will repay a loan. And access to credit–and thus a higher credit score–are possible for some, and out of reach for others, because of decades of discriminatory lending decisions in areas like housing, farming, and even disaster relief.

As a result, credit scores both reveal and perpetuate serious inequities in our economic life. Early credit reporting systems relied on accumulating personal, subjective and frequently biased observations about someone’s trustworthiness. Early credit reporters were mostly white males, who sometimes explicitly demeaned a business based on the race of its owner. Today’s credit scoring systems still contain many of the same flaws. Due to racism in a multitude of financial systems, the different inputs for credit scoring calculations lead to lower scores on average for communities of color. For example, predatory lending practices like subprime mortgages and overpriced auto loans have specifically targeted Black and Hispanic communities, leading to higher foreclosure rates and lower credit scores. And Black and Hispanic people suffer from health disparities and are more likely to incur medical debt that can lower their credit score.

Likewise, the choice of which inputs to consider in the credit score calculation can have a disparate impact. For example, you can earn better credit through regular mortgage payments, but not regular rent payments. This unwarranted preference for mortgage payments disproportionately affects Black and Hispanic consumers, who have long been excluded from housing markets and have much lower home ownership rates as a result. The average credit score of a homebuyer varies widely by race, with Black and Hispanic home buyers having much lower scores than white and Asian home buyers. In turn, those lower credit scores make it harder for Black and Hispanic people to become homeowners, lowering their credit scores and perpetuating the cycle of inequity.

Even more troubling, credit scores have experienced “mission creep”: Companies now use credit scores to determine eligibility for benefits or services that are unrelated to financial risk. The National Consumer Law Center recently published a report about these inappropriate uses of credit scores. Drivers with bad credit may face higher car insurance premiums, even though credit history has nothing to do with driving habits. Many employers conduct a credit check during the hiring process, despite no evidence that credit impacts job performance at all. Utility companies might check credit before connecting necessary services. The Trump Administration even proposed folding credit scores into visa and green card decisions for immigrants, though this rule was vacated in 2021.

Checking your credit won’t necessarily reveal all the ways your credit score is used. Credit reporting agencies and other companies that purchase access to credit score information create customized “products” that claim to predict how reliable a tenant, driver, or employee is likely to be—and they sell those predictions to landlords, employers or insurers. In an amicus brief filed with the Supreme Court in 2021, Public Justice highlighted for the Court how these forms of data mining have become an estimated $200 billion industry.

Under the legal theory of disparate impact, anti-discrimination laws can be invoked when a neutral policy or practice leads to discriminatory effects. While assumed to be objective and neutral, credit scores often serve as a proxy for race, deepening racial and economic inequality. Public Justice is exploring how it can bring disparate impact challenges to these unnecessary and harmful uses of credit scores. There are several important laws under which such challenges can be brought.

Fair Housing Act

The Fair Housing Act prohibits discrimination in any real estate-related transactions, which includes “the making or purchasing of loans or providing other financial assistance.” The act recognizes disparate impact discrimination claims, although lenders may be able to defend against such claims if they can establish a “valid interest” behind their use of credit scores. In May 2022, several individuals who were denied rental housing and advocacy organizations filed a disparate impact claim under the Fair Housing Act against SafeRent, which uses an algorithm that takes into account credit scores and other factors to generate a tenant screening “score” that it sells to landlords. The lawsuit argued, among other things, that SafeRent’s use of credit scores has a disparate impact on Black and Hispanic applicants while not predicting whether those applicants will pay rent. SafeRent filed a motion to dismiss the complaint, which is currently pending. The U.S. Department of Justice filed a Statement of Interest in January 2023 in support of the tenants.

Civil Rights Act

For the reasons described above, Black and Hispanic job applicants are more likely to have lower credit scores than white non-Hispanic applicants, so when employers use credit scores to decide whether someone is suitable for a job, it can have a disparate impact on those groups. At the same time, studies have shown that credit scores do not predict employee outcomes.  As a result, the use of credit scores in employment decisions may violate federal employment protections under Title VII of the Civil Rights Act. In 2010, the Equal Employment Opportunity Commission (EEOC) sued Kaplan Higher Education Corp. for its use of credit checks in hiring, which it alleged had a disparate impact on Black applicants in violation of Title VII. Unfortunately, the case was dismissed in 2014 after the testimony of the EEOC’s expert was excluded. But the case indicated that disparate impact claims based on credit score could be viable with a more reliable statistical methodology. More recently, at least 11 states have passed laws limiting the use of credit scores in hiring decisions.

Equal Credit Opportunity Act and Consumer Financial Protection Act

Another possibility for challenging the disparate impact of credit scores is the Equal Credit Opportunity Act (ECOA), which prohibits any lender from discriminating on the basis of race, color, religion, national origin, sex, marital status, age, or source of income.

Ten years ago, the Consumer Financial Protection Bureau (CFPB), which enforces ECOA, investigated the discriminatory effects of “dealer markup” practices on communities of color. Dealer markup is when an auto dealership takes a loan rate offered by a lender, increases it before passing it along to the customer, and then pockets the difference. Because dealers had unlimited discretion in applying these markups, the CFPB expressed concern about the increased potential for discrimination, noting that research suggests African American and Hispanic customers may be charged higher rates than white customers. Applying a disparate impact theory of liability under the ECOA, the CFPB filed complaints against the auto lenders who supported these practices.

Ultimately the courts never had the opportunity to weigh in on the question of whether the ECOA supports a disparate impact theory of liability, because the. lenders agreed to settle these complaints before legal proceedings began. In the aftermath of these settlements, Congress began to attack the CFPB’s use of disparate impact liability. In 2018, Congress passed and President Trump signed a resolution stopping the CFPB’s further use of disparate impact claims against auto lenders. Although hamstrung during the last administration, the CFPB has recently begun to assert its regulatory authority again, announcing that it would consider discrimination by lenders and banks–whether covered by ECOA or not–to be an “unfair practice” under the Consumer Financial Protection Act (CFPA). The CFPB expressly noted that “Consumers can be harmed by discrimination regardless of whether it is intentional,” thus endorsing a disparate impact theory.

State Law

Many states also have anti-discrimination laws specific to insurance and credit, or laws that prohibit discrimination in public-facing businesses that can include the services provided by banks or insurance companies. These laws have the potential to be used to challenge the use of credit scores in areas like auto insurance that are not covered by the federal laws discussed above. In particular, Public Justice is looking into the viability of bringing claims under state law in Massachusetts, New York, Oregon, West Virginia, and Washington, DC because their statutes prohibiting discrimination in public accommodations allow for disparate impact liability.

If you have encountered other harmful uses of credit scores in your community, please do not hesitate to reach out to Public Justice’s Access to Justice team at access2justice@publicjustice.net to share your experience.