Tenant Screening

Tenant screening is a popular topic on the Web and elsewhere. More and more companies provide tenant screening services of increasing sophistication, and we advise our readers to use them. In doing so, however, the landlord subjects himself to the strictures of the Federal Fair Credit Reporting Act, most of which have nothing to do with the landlord if he utilizes tenant screening reports. This article focuses on the requirements that affect landlords who uses screening services or credit reports and explores what they entail. The terms "credit report" and "tenant screening report" will be used interchangeably.

A tenant screening report is undoubtedly subject to the Act. As users of a consumer report, landlords must establish reasonable procedures to assure compliance with the law. Having and observing reasonable procedures will ensure that, in the event of an honest mistake, landlords can avoid liability.

When a Credit Report May be Obtained

The circumstances under which a consumer report may be issued include:

"Any consumer reporting agency may furnish a consumer report under the following circumstances and no other…in accordance with the written instructions of the consumer to whom it relates…to a person which it has reason to believe…intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or …otherwise has a legitimate business need for the information in connection with a business transaction that is initiated by the consumer, or to review an account to determine whether the consumer continues to meet the terms of the account."

What this means to the landlord is that, to obtain a report, he must demonstrate to credit reporting agency that the applicant has requested the report, or the landlord is obtaining a report in connection with an application initiated by the applicant, or the landlord is reviewing the credit of an existing tenant, or a former tenant who owes him money, or the landlord is reviewing the credit of an existing tenant in order to decide whether to renew a lease or otherwise continue the landlord/tenant relationship.

If the landlord misrepresents his interest to obtain a credit report, he probably would be liable both to the reporting agency and the prospect or existing tenant.

Compliance requirements arise in two ways in the landlord/tenant relationship. The first is when the prospect initiates the application process. The second is during an existing landlord/tenant relationship, or in connection with a debt which arose out of it.

At the first phase of the relationship, the prospect has shown his desire to rent an available unit and has filled out an application. At this point, the landlord has the right, without any authorization from the applicant, to obtain a credit report.

The key to the right to obtain a report is that there is an existing transaction. There may be no existing transaction if there is no rental unit available at the time of the application. In the event the landlord accepts applications during periods of no vacancy to have prospects on file in the event of a vacancy, we do not recommend that a credit report be obtained until a vacancy develops and further contact is made by the landlord to assure continuing interest in pursuing the application. There are other reasons for not obtaining such reports, including their cost and the fact that they may become stale quickly. A report should be obtained in connection with such an application only if the prospect has explicitly, in writing, authorized it and instructed the landlord to obtain it and credit reporters to supply it.

Although written authorization is not required, any credit reporting agency will advise that it be obtained. The authorization should be included in the body of the application, in plainly visible type, immediately above the signature line. The language should not only permit the landlord to obtain a report but, instruct him to obtain one, and all credit reporting agencies to provide one. In the event more than one person must be checked, each person should sign.

In the second phase of the landlord/tenant relationship, the parties are in the midst of a business transaction (the lease or rental agreement) or there is a debt owing as a result of it that the landlord needs to collect. Here again the landlord has the right to obtain credit reports without any authorization by the tenant. Obtaining a report without written authorization is not as risky as doing so before the relationship because the ongoing business transaction is demonstrable, but must not be construed as authorization to pull credit reports out of curiosity. The landlord would be well advised to develop a policy defining the circumstances under which a report might be obtained. Here are some examples of things that might be cited as triggers for obtaining a credit report.

• Renewal of a fixed term lease for longer than six months
• Default in rent for a period of more than ten days
• Damage to the rental unit reasonably suspected to be more than the security deposit
• Initiation by the landlord of a legal proceeding arising from the rental agreement
• Vacating the rental unit with money owing

Law concerning rights to privacy exists in all jurisdictions in the U.S. If the landlord obtains a credit report without the ability to define a need to know, he may incur liability for invasion of privacy. Inquiries are reported by credit reporting agencies. Many businesses interpret repeated inquiries without an extension of credit as negative, so such inquiries will damage the tenant's credit worthiness and such damage might give rise to an action against the landlord. The landlord should set up the circumstances under which he will make credit inquiry of existing tenants in writing in advance, and stick to the policy, so he can justify his actions if necessary.

What the User Can and Cannot do with a Credit Report

Credit reports can only be issued to persons who have a legitimate interest in obtaining them. The report should not be distributed or given to others. Credit reports should be kept in a secure location and access to them limited to those with a need to know.

Credit reporting firms require that the landlord keep reports confidential and not distribute copies to others. The landlord's contractual obligation with the company prohibits him from giving a copy of the report to anyone else, even the prospect or the tenant. Unless a specific state law overrides the contract and requires provision of a copy to the prospect or tenant, the contractual obligation must be respected.

The landlord has every right, however, to disclose the contents of the report, as distinguished from giving a copy to the prospect or tenant, and even to show it to the prospect.

If the landlord, based on the contents of the report, takes an adverse action, such as denying the applicant or demanding additional consideration of any sort for the rental, he may disclose the contents of the report. If the landlord does not take adverse action, the company can bind him not to disclose the contents of the report. This is important as, where adverse action is taken, the landlord might wish to discuss the derogatory information with the applicant to obtain an explanation. If the explanation results in a decision not to act adversely after all, this should be noted by the landlord.

What Adverse Action Requires the Landlord to Do

The landlord must do certain things when he takes adverse action against an applicant. In some instances, the information on which the adverse action is based need not even have come from the credit report. An adverse action is defined in the FCRA as an outright denial, or a demand for more security, or any other burden to the prospect, in order to be approved. An example of this might be demand for a higher security deposit, or prepayment of several months rent to compensate for greater perceived risk from a tenant who has undergone an eviction.

The exact action the landlord must take depends on the source of the information that leads to the adverse action. There are three possible sources of such information: credit reporting agencies, third parties who are not credit reporting agencies, and internal records or records of affiliates.

If the landlord takes adverse action in response to information in a credit report, 15 USC 1681m(a) specifies: “If any person takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person shall provide oral, written, or electronic notice of the adverse action to the consumer,” provide to the consumer orally, in writing, or electronically, the name, address, and telephone number of the consumer reporting agency (including a toll-free telephone number established by the agency if the agency complies and maintains files on consumers on a nationwide basis) that furnished the report to the person; and a statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken; and provide to the consumer an oral, written, or electronic notice of the consumer's right to obtain, under section 1681j, a free copy of a consumer report on the consumer from the consumer reporting agency referred to in paragraph (2), which notice shall include an indication of the 60 period under that section for obtaining such a copy; and to dispute, under section 1681i, with a consumer reporting agency the accuracy or completeness of any information in a consumer report furnished by the agency."

If the reporting agency does not provide an appropriate notification letter, the following might be used as a form:

"We regret to inform you that your application to rent 1234 Main Street has been declined. This action was in whole or in part the result of information contained in a credit report. This report was supplied by ABC Screening Services, 8888 Hindenburg Disaster Way, Anytown, MI, (999)098-wxyz, toll free (800)098-xxxx. ABC Screening Service did not make the decision to take this adverse action and is unable to provide the specific reasons why the adverse action was taken. You have a right to obtain a free copy of a report by making demand on ABC Screening Service within 60 days of your receipt of this letter. You also have a right to dispute with ABC Screening Service the accuracy or completeness of any consumer report furnished by them."

Despite what the federal code says, the landlord should make the disclosure in writing, in hard copy, never just orally or electronically. Nothing can substantiate compliance more effectively than a hard copy of a letter with the note “mailed 4/29/99." The landlord should do this whether or not he has discussed the adverse action and the contents of the report informally with the applicant.

The second and third possibilities, information from third parties and information from internal records or third party affiliates, may be dealt with together. Such information could be obtained from previous landlords, employers, personal references, affiliated companies, and internal records of previous transactions. Adverse action based on these sources of information triggers no requirement of notification under the FCRA.

The Federal Trade Commission has already held that a rental agreement is not a credit transaction for the purposes of the act. This is why there is no requirement for notification.

What is the rule when the landlord engages a tenant screening service and the service telephonically interviews the tenant’s references and provides a summary of the interviews in its overall report to the landlord? What if the landlord denies the applicant based on information in the summary of an interview of a previous landlord or a personal reference? The prudent landlord should issue the same notification if he takes adverse action based on third party information developed by a reporting agency as he would issue if they reported an adverse court record or the like, at least until the FTC or a court of record clarifies this issue.

What May Be Considered

The landlord is entitled to consider any information about the applicant he has in his possession under the FCRA. FCRA limits the age of information that may be disclosed by a reporting agency, but has nothing to say about the age of information the landlord may consider in making his decision to rent.

We deal only with the FCRA. The landlord using screening services also must inform himself of state and local laws because, while Congress may have pre-empted the areas with which the FCRA deals, there is still considerable room for state action.