The Most Valuable Screening Tool
The biggest cost in the landlord business is the cost of vacancies. This includes the amount of time necessary to get the property ready, advertise the rental property, arrange showings of the property, and screen applicants. During this period of time there is usually no income from the property. Selecting good tenants usually offsets a part of those costs. In the extreme, failing to select a good tenant can cost much more than all costs of the vacancy put together.
A credit report is the single most valuable tool for evaluation of rental applicants. A credit report provides the landlord with information regarding the applicant’s credit history. Past behavior tends to be indicative of future behavior. A prospective tenant that pays many of his or her bills late will likely pay the rent late. The applicant’s pattern of credit management coupled with employment verification, previous rental housing history, and reference checking allows the landlord to make an informed tenant selection.
Credit reports should be utilized in screening no matter what other screening procedures might be used. The recommendation is to run credit reports as soon as possible after receiving the applications. However, it is usually best to run reports only after reviewing the applications to determine if the applicants meet your minimum income-to-rent ratio. A separate credit report should always be run on each adult of any group that will occupy the unit.
The cost of a credit report is minimal compared to the wealth of information obtained from the report. Furthermore, in most states applicants may be charged a fee to run credit checks. In some states there are specific requirements regarding procedures for collection, the amount that can be charged, and return of collected fees if a credit report is not run. A landlord should always consult his state’s landlord tenant laws regarding such requirements. As for all screening procedures, the fees must not be selectively charged but must be applicable to all applicants.
The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, was designed to promote accuracy and ensure the privacy of the information used in consumer reports. Enacted in 1970 and substantially amended in the late 1990s and again in 2003, the FCRA regulates how credit reporting agencies use credit information, restricts access to that information, and regulates the manner in which that information can be used. The amended Fair and Accurate Credit Transactions Act (FACTA), passed in December 2003, added new regulations for identity theft protection, credit report access, and data privacy.
The term ”consumer report” as used in the FCRA means any written, oral, or other communication about an individual’s personal credit worthiness, character, and general reputation. Permissible purpose is a prerequisite to requesting credit reports. Permissible purpose guidelines are defined in the FCRA. Landlords may obtain credit reports under the guidelines of the Fair Credit Reporting Act (FCRA).
A consumer credit report is prepared from buying and payment histories as reported from credit grantors such as banks, savings and loans, credit unions or other commercial lenders; charge card issuers; and merchants who provide credit. In this credit snapshot a landlord will see the consumer’s bill payment history – that is, whether payments have been on-time, late, or are delinquent.
In addition, the report contains personal information such as employment data and other identifying information such as date of birth, past and current residence, spouse name, and Social Security number. Public records information for local, state, and federal court filings, such as court judgments and liens, foreclosures, bankruptcy filings, tax liens, and criminal convictions, is contained in a separate section of the report.
Some landlords find credit reports hard to read and understand. This issue can be remedied with the help readily available from the credit reporting agencies (credit bureaus) and the tenant screening companies offering credit services.
Each credit reporting agency has its own reporting format and to aid in understanding line items provides a sample report on its web site. Most tenant screening companies also offer help and support in understanding credit reports through customer service and sample reports. Once familiar with the reporting format it will become apparent what items need clarification or, possibly more important, what information is not there and must be investigated.
It is important to understand that information contained in a consumer credit report can be inaccurate, incomplete, or outdated. While some landlords may consider this a limitation of credit reports, this in itself does not negate the value of using credit reports to evaluate applicants. It does mean, however, that landlords remain cognizant of this possibility and take steps to ask questions of the applicant or verify through additional sources any information that requires clarification. With millions of data being reported, it is very possible that data could be misapplied, particularly with common surnames or typographical errors. Despite the possibility of errors, the credit report remains the “gold mine” of information that can be obtained with reasonable costs and timely accessibility.
The issue of outdated information is easily resolved with verifications and applicant interviews. If a consumer does not have credit activity, the consumer file may not be updated. Those applicants who choose to minimize their credit exposure by limited credit card usage, have no installment contracts, change jobs infrequently, and do not have outstanding debts or liens will not only have an outdated credit report, but even a file that is essentially blank. With no monthly activity, the report will be static and very old credit information will eventually drop off their reports. A blank file could also be true for those persons just beginning their credit history. A landlord will need to take this into account and use additional screening tools to evaluate the applicants.
The currency of a credit report is good through the time when last updated. Keep in mind that, with monthly reporting of credit data, the consumer may have significantly changed his financial obligations since that report was updated. For example, the applicant could have lost his job, been served with divorce papers, or diagnosed with a life-threatening medical condition just prior to his application submission. There may be no reason to assume that any of these events should be a cause to reject an application, but any of these events could have financial significance. Here again, with applicant interviews and with additional screenings and verifications, a landlord can better determine credit risk.
For those applicants who have placed a hold on their credit file (a credit freeze) and fail to authorize permission for the landlord to run a credit report, the landlord will not be able to run a report. Accordingly, the application can be considered incomplete and the landlord can (and usually should) reject the application.
It is customary and advisable to include in your application documentation a form requesting the applicant/tenant’s consent to run a credit report. Although some rental applications incorporate a consent statement within the application, most landlords find that a separate consent form is a better option. If it becomes necessary to provide written documentation of the applicant’s consent, it is much easier to send just the form.
An important point for written authorization of credit checking, sometimes overlooked by landlords, is that the wording of the consent should be such that the consent can be used to update the tenant’s file at a later date. A landlord should reserve the right to run a report to determine if the tenant is still qualified before allowing a lease extension or renewal or periodically if the tenant is on a month-to-month lease. The consent form should also allow the landlord to run a report even after termination of the tenancy if related to the tenancy. This can be particularly important if the landlord must locate a skipped tenant or file court papers.
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