Consumer Reports and Adverse Action Notices

For tenant screening purposes, landlords may collect information from a variety of data sources including applicant supplied information, verifications, reference checking, and screening reports ordered through outside service companies. The collected information is analyzed to produce a profile of applicant behaviors in areas of interest to most landlords, namely, income/employment records, credit history, rental housing history, criminal conviction history and public records. Using a decision matrix the landlord advances or rejects the applicant on the basis of the applicant’s screening results compared to the landlord’s pre-determined minimum qualification standards.

When using consumer reports to evaluate applicants, landlords must comply with all requirements under the provisions of the Fair Credit Reporting Act (FCRA).  A consumer report contains information about an individual’s credit, character, general reputation, and lifestyle. Consumer reports include:

• credit reports from a credit bureau, such as Transunion, Experian, and Equifax or  an affiliate company,
• reports  from a tenant screening service that describe the applicant’s rental history based on reports from previous landlords or housing court records,
• reports from a tenant screening service that describe the applicant’s rental history and also include a credit report the service got from a credit bureau,
• reports from a tenant screening service that is limited to a credit report the service got from a credit bureau; and
• reports from a reference checking service that contains previous landlords or other parties listed on the rental application on behalf of the rental property owner.

The FCRA was enacted to promote accuracy, privacy, and fairness of consumer information as collected by consumer reporting agencies. Subsequent amendments included disclosure requirements for users of consumer credit reports in rental decisions, specifically adverse action notification. Next, the Fair and Accurate Credit Transactions Act (FACT Act) addressed issues of identity theft and gave additional protections to consumers regarding their credit standing. The most
recent change to FCRA requirements was the passage in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank amends Section 615(a) of the FCRA to require the disclosure of the credit score when adverse action is based in whole or in part on a numerical credit score contained in a consumer credit report.

As a review from our previously published article regarding “adverse action,” Section 615(a) of the FCRA requires landlords, when they take an “adverse action” against a rental applicant based in any way on a “consumer report” from a “consumer reporting agency.” to provide an adverse action notice to that consumer. The law requires landlords to provide rental applicants with a notice that informs them of the adverse action, identifies the consumer reporting agency that provided the report that contributed to the landlord’s action, and specifies the consumer’s rights under the FCRA.

An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. It includes not only a landlord’s denial of a rental application but also an action by the landlord that imposes a burden not required of all tenants.  Common adverse actions by landlords include:

• denying a rental application,
• requiring a co-signer or guarantor on the lease,
• requiring a higher security deposit (that would not be required for another applicant), and
• requiring an increased rent amount (that would not be  required for another applicant).

The landlord must provide the notice if the adverse action in any way is based on a consumer report that played a factor in the landlord’s action, even though the action is based primarily on an applicant’s income or prior reputation as a tenant. In fact, even if the information in the report plays only a small part in the overall decision, the applicant must be notified. This means that the landlord must usually send a notice if you hire a tenant screening company or even if just looking at a credit report. Disclosure of this information is important because some consumer reports contain errors. By being made aware of the information contained in the report, the applicant can take steps to correct errors.

The Notice of Denial Based on Credit Report or Other Information sent to the applicant advises them of rights under the Fair Credit Reporting Act and Fair and Accurate Credit Transactions (FACT) Act of 2003, (15 U.S.C. §§ 1681 and following. The notice must include:

• the name, address and telephone of the credit reporting agency that supplied the consumer report including a toll-free telephone number for credit reporting agencies that maintain files nationwide,
• a statement that the credit reporting agency that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it, and a notice of the individual’s right to dispute the  accuracy or completeness of any information the credit reporting agency furnished, and the consumer’s right to a free report from that agency upon request within 60 days.

The Dodd-Frank amendment now (effective 2011) requires additional disclosure information if the denial was based upon the consumer credit score. The additional information includes:

• the applicant’s credit score  (the credit score found on the credit report),
• the name of the entity that created the credit report (e.g. Experian,  Transunion),
• the date of the credit report,
• the range of possible scores within the model used for the report (Experian credit score range 300-900), (Transunion credit score range 350-900),
• the key factor(s) – not exceeding four – that affected the credit score ( key factors may be found on the applicant’s credit report),  and
• a statement that a credit score is a number that takes into account information in a consumer report and a credit score can change over time to reflect changes in the consumer’s credit history.

The adverse action disclosure may be made in oral, written, or electronic form.

A credit score as reported by a credit reporting agency is not the same as a risk score as supplied by some tenant screening companies. Questions regarding screening information or scoring models should be directed to the tenant screening service company that provided the report.

Landlords who fail to provide required disclosure notices potentially face legal consequences.  The FCRA allows individuals to sue landlords for damages in federal court.  A person who successfully sues is entitled to recover court costs and reasonable legal fees.  The law also allows individuals to seek punitive damages for deliberate violations of the FCRA. In addition the Federal Trade Commission (FTC), other federal agencies and the states may sue landlords for non-compliance and get civil penalties. However, a landlord who inadvertently fails to provide a required notice in an isolated case may have legal protections if he can demonstrate “that at the time of the violation he maintained reasonable
procedures to assure compliance” with the FCRA.

The above discussion relates only to federal law. As for many property management issues, landlords must also understand and comply with more restrictive consumer credit laws that may  exist under state laws.

Best Practices for Landlords doing Tenant Screening.

It’s a risky business. Landlords must take appropriate measures to help reduce their exposure to known risks. Non-payment of rent, nuisance disturbances, property damage, or direct threats to the safety and welfare of others are examples of  high risk tenant behaviors that are costly, time consuming, and bad for business. Tenant screening is an important tool for risk assessment of the applicant before he becomes bad business.

Best practices for independent rental owners follow the best practices of multi-unit rental complexes. The most important measure to reduce risk exposure is tenant screening. Failure to screen creates potential future liabilities.

Even if you think you can afford to take some risks, taking on unnecessary risk is foolish.  Best tenant screening practices help reduce unnecessary risks.

Time is of the essence

Time is of the essence to adequately analyze and evaluate applicant information. While a vacancy can be an urgent matter, being in a hurry to install any “body” is false savings and questionable business practice. Applicants may contribute to the sense of urgency with their personal need to move quickly. Landlords should not rush to judgment, but lengthening an application process unnecessarily does not contribute to a “better” tenant. While most applicants are willing to wait for a reasonable amount of time, there is a limit to patience and common sense.  Taking a controlled approach to focus on each step of the screening and selection process provides a better opportunity to objectively analyze and
evaluate each rental applicant.

Systematic Approach

An organized, formal, written business policy provides a systematic process of screening and selecting rental applicants. It is the framework for your business operations – the way you do business – providing you and the applicant definition and description of what to expect from vacancy notice to lease-term end.

Ready to do Business

Be ready to do business when you advertise your vacancy. Your rental policies and practices should already be in place, in writing, and available to interested parties.  You should have pre-determined what types of screenings are adequate for your business and your risk tolerance and set up any third party screening service accounts as needed. Forms and agreements, reviewed for adequacy and legal compliance,  should be readily available. It is important that you yourself or your employee have scheduled time accordingly to conduct showings, screenings, and make your selection.

Landlord-Tenant Statutes

Landlord-tenant statutes cover rights and responsibilities of both landlord and tenant.  Statutes restrict what you can and cannot legally do for almost all aspects of the rental relationship. Keeping current with landlord-tenant law is a landlord duty. It is important to note that local jurisdictions may have additional regulations governing landlord duties and responsibilities such as licensing, inspections, notifications, disclosures, rent revenue reporting, and/or taxation.

Fair Housing Laws

The federal fair housing law prohibits discrimination based on the protected classes of race, color, national origin, religion, sex, disability, or familial status in most public, assisted, and private housing, with a few exceptions.

Housing that may be otherwise exempt from federal fair housing laws is still subject to prohibition against discriminatory advertising. The Fair Housing Amendment Act prohibits making or publishing statements that indicate any preferences, limitation, or discrimination directed toward a member of a protected class.

Some states and local jurisdictions may provide greater protection from fair housing discrimination for additional categories of protected classes. Fair housing compliance must be in accordance with the most stringent requirements.

Qualification Criteria

You can select the tenant you want as long as you’ve based your decision on sound business criteria, each and every applicant has been screened in the same manner under the same criteria, such criteria is applied consistently without
discrimination and in full compliance with all applicable federal, state, and local laws.

Setting high standards can in theory help minimize risk. However standards that are too high can reduce the size of the applicant pool and extend vacancy periods. Standards should be objective, measurable, and relevant
to the applicant’s performance as a tenant.

If any standard you set, despite being neutral and non-discriminatory in its intentions, has a disproportionately adverse effect on any member of a protected class you have violated fair housing laws through a practice known as
“disparate impact.”

Your rental criteria should point to the important items for your business – e.g.  the ability to meet rent, acceptable credit history, satisfactory previous landlord references, no history of evictions, no relevant criminal convictions, satisfactory employment history, and no bankruptcies, liens, or judgments. Your criteria establish the threshold level for qualification to the next level of screening.

To help reduce risk exposure, make your business decisions rationally, objectively, before the need arises. Be sure to document your qualification criteria in writing. Without a written record you may have a difficult time defending yourself against claims of misrepresentation or discrimination.

Consistency in applying your standards is a must. If you deviate from your standards, you open the door to possible liability. Fair, equitable, consistent, legal, and non-discriminatory are the watch words for your qualification standards.

However there may be a time when your standards must be adjusted to changing market conditions or business model. You can change your standards but always document the need for such changes with the date the modification became effective. Be sure the business criteria upon which the change is based is sound, legal, and defensible regarding a possible discrimination claim.

Application Process

Two forms of applicant personal identification, with at least one being a government-issued photo ID, should be required at time of application. Each adult applicant will be required to complete an application.

“The first line of defense against bad tenants is having an adequate application form.” Are you confident your application form asks the right questions, legal questions?

The application form should have a logical flow and purpose. You want to gather the information you need to analyze applicant risk related to tenancy. The collected information may also prove useful if it becomes necessary to track the tenant in order to collect a debt related to his/her tenancy.

Your rental policies and the application form itself should note that failure to provide requested information, or knowingly providing false or incomplete information will be result in the rejection or denial of the application.

Consent to Release Information

The application form itself or a separate “consent to release information” form must contain statements that authorize the landlord to verify credit, employment, and any other information, including that contained on the application, from a
credit bureau, from the creditors directly, from employers, financial institutions, and previous landlords, and from providers of eviction and criminal records. Included should be a statement that the permission includes obtaining updated reports, survives the expiration of tenancy, and can be used for any legal purpose associated with the tenancy.

Credit report

Credit reports are the most often used screening tool. There is a wealth of information contained in each section of the credit report which should correlate to applicant supplied information. Social Security number and previous address
history can be compared with application information. Debt obligations and payment history give indications of credit management. Red flag alerts are late or skipped utility payments, or liens and judgments placed against the
applicant. You may want to consider discussing items of concern with your applicant before rejecting the application out of hand.

Landlord References

Tenants move for all sorts of reasons. What you don’t want is a tenant moving because his current landlord is evicting him. Contacting a previous landlord can provide additional information to include in your risk analysis. Would this landlord again accept your applicant as a tenant?

Documents

Put it in writing!

Documentation is key to defending against charges of discrimination. Any communication with a prospect, applicant, or tenant should be documented and retained for at least the period required by statute. Not only does documentation help refute false claims; it helps to “remind” both parties as the tenancy proceeds of what was said and done. Information may be misunderstood, memories may fail, or there might be misrepresentation of what was said. Without written documentation of policies, practices, forms, interviews, or other public contact, you create potential liability. It will be your word against a claimant’s allegation. Without appropriate documentation, it never happened.

With the need for documents, comes the need for document control. You must have a plan for security of documentation – how it is stored and accessed; retention of documents; and disposal requirements of documents no longer needed.

Summary

In setting practices for your business, consider what works for you with the caveat of compliance with applicable laws, the local market conditions, and your risk tolerance. The best practices will be those practices that deliver adequate
information to help protect yourself and your investment.

Can a Landlord reject potential tenants if the rental properties septic system can only handle 3 people and they have more?

Question

I am renting a duplex that has two bedrooms and an office. It is on a septic system and cannot handle more than three persons living in the house. I am in the process of advertising and screening tenants and want to know if it is allowable to reject a tenant based on the number of persons, including children, that exceeds three people?

Answer

Occupancy issues can be risky because there can be different definitions and standards at federal, state, or local levels.  Various standards in use include number of bedrooms and unit area. However, the floor plan and other issues must be taken into account. For example, absent some physical limitation, a 2-bedroom and office unit may be considered adequate for a half-dozen occupants, possibly even more depending on other issues regarding the floor plan.

However, one of the safest reasons for having a maximum occupancy limit is when some physical issue limits the number of occupants even though the size, number of rooms, and floor plan do not. The capacity of water and septic systems will generally be in this category.

In order to avoid any claims regarding fair housing law violations, it is important to avoid any indication that protected classes are being discriminated against. Protected classes sometimes vary among federal, state, and local jurisdictions, with number of classes and degrees of protection increasing as level of government decreases.

I would strongly recommend that you have some written documentation from an independent qualified expert providing his professional opinion that a maximum of 3 occupants should be allowed. Preferably, this would be one that is licensed by your state regarding septic systems.  Otherwise, considering the number of rooms in the unit you may well have trouble defending against a claim that you are in violation of federal fair housing laws, especially the protected class of “familial status,” although I can imagine other federal protected classes that could potentially be used against you. A fair housing law investigator is unlikely to believe that a septic system of such limited capacity was installed for a duplex unit having
at least one unit with two bedrooms and an office room. The costs of defending yourself and the potential financial and other penalties if unsuccessful would have easily paid for installation of several additional septic systems or one
very large one.

You don’t include details about the entire duplex building, so it might be that the septic originally served a smaller building that has since been modified into a duplex. In this case there might be zoning and/or code violations that could cause additional costly problems if the matter gets out of hand.

Notwithstanding the fair housing issue there is another issue you might want to consider – rating the capacity of the subject septic system below actual capacity. In doing so you would almost certainly limit the size of your potential pool of qualified applicants. Even limiting occupants to 3 rather than 4 has a significant potential impact on number of applicants. Three occupants allow 3 adults or 2 adults & 1 child or 1 adult & 2 children. This disallows 2 parents and 2 children, a common family size, possibly a larger class of applicants than any of the permitted ones, as well as 1 adult & 3 children. Even if each class of occupant groups is of the same size, you will potentially be reducing your pool of qualified applicants by 40 percent if you can’t allow 4 occupants. Fewer qualified applicants usually results in longer vacancies or lowering of qualifying standards.

California Depreciation Information for Landlords and Tenants

Question

This is a clarification of a previously asked question regarding CA depreciation. I am concerned about depreciation as used when deducting damages from a security deposit or when suing for damages.
Answer

The depreciation that is allowed when charging for damaged carpet is not defined by law in most states. However, if the matter goes to court before a knowledgeable judge and with the tenant being knowledgeable or having a competent attorney then the method used must be reasonable. This usually means that when calculating damage the landlord must take into consideration:

• expected life of the carpet when new,
• condition of the carpet when the tenant moved in (if not new),
• length of tenancy,
• condition of the carpet when the tenant moves out, and
• That the tenant cannot be charged for normal wear & tear.

Proration replacement cost – You cannot charge the tenant for the total cost of replacing the entire carpet in the unit. There are two different issues regarding this issue. First, depending on the floor plan and the location of carpeting, it may be acceptable to replace carpeting in only certain rooms. Second, wherever carpeting is replaced you cannot charge for the full cost of carpeting, but must allow for depreciation.  The percentage of cost of replacing damaged carpet (labor and materials) that may be charged against the tenant is determined by dividing the number of years the carpet has been in service (including the period the unit was occupied by the tenant who damaged the carpet) by the useful life of the carpet. There is more than one number that might be justifiable for useful life, but it is usually least arguable to use the number of years warranted by the manufacturer.

As examples, assume a carpet that the manufacturer had warranted for 15 years. If the carpet was 10 years old when the tenant vacated the unit, the tenant can be charged 5/15 = 33.3% of the cost of replacement carpet, whether the entire unit is re-carpeted or only some of the area. If the carpet had been new when the tenant moved in a year earlier, the tenant can be charged 14/15 = 93.3% of replacement cost. If the carpet was 14 years old when the tenant moved into the unit and the tenant remained for one year or more, the tenant cannot be charged for any part of the cost of replacement.

Similar considerations must be given to window coverings, appliances, and other components of a rental that would be considered capital items (have a typical useful life of longer than a year) when they require replacement rather than repair. The tenant can be charged the actual repair cost for anything being repaired due to the actions or inactions of the tenant or his/her guests.

The Mom and Pop Exemption for Landlords.

Question

I own a duplex rental. I’m curious about the Mom and Pop Exemption, including why this exemption exists and is there any reason why I shouldn’t take advantage of the exemption?

Answer

The exemptions exists because they were required in order to get the necessary votes in Congress to pass Title VIII of the Civil Rights Act of 1968 (the Fair Housing Act), as amended by the Fair Housing Amendments Act of 1988. In other words, some Senators and/or Representatives felt it important to exempt landlords in certain categories from certain provisions of the Act. As you will see from the following discussion, the often-called “Mom & Pop” exemptions are very
narrowly defined and have significant restrictions. Accordingly, landlords must be extremely careful when utilizing them.

Furthermore, even if the federal exemptions are properly used and there is not any conflicting state or local law that nullifies the exemption, a landlord is not immune against lawsuits by either tenants or government agencies who think that there has been discrimination. Also, some Federal Fair Housing provisions, most state and local fair housing laws, and other civil rights statutes still apply to “Mom & Pop” landlords. The costs of defending against discrimination claims on
the basis of the exemptions could be extremely costly even if the landlord eventually wins in court.

In review, Title VIII of the Civil Rights Act of 1968 (the Fair Housing Act), as amended by the Fair Housing Amendments Act of 1988, (42 U.S.C. § 3601 et. seq) prohibits discrimination in housing and housing related transactions based on race, color, religion, sex, national origin, disability, or familial status.

The Department of Housing and Urban Development (HUD) enforces the Federal Fair Housing Act. HUD’s regulations state that: “It shall be unlawful, because of race, color, religion, sex, handicap, familial status, or national origin, to restrict or attempt to restrict the choices of a person by word or conduct in connection with seeking, negotiating for, buying or renting a dwelling so as to perpetuate, or tend to perpetuate, segregated housing patterns, or to discourage or
obstruct choices in a community, neighborhood or development. (24 CFR Part 14, Section 100.70(a)).”

A protected class is a group of people who share common characteristics and are protected from discrimination and harassment. Federal Fair Housing laws prohibit discrimination on the basis of these protected classes:

• Race
• Religion – personal beliefs, faiths, practices
• National origin – association of ancestry, culture, accent, spoken language or  surname
• Sex
• Color – characteristics associated with certain races and ethnic groups
• Familial status – having a child under age 18 in the household, whether living with a parent, a legal custodian, or their designee. It also covers a woman who is pregnant, and people in the process of adopting or gaining custody of a
  child or children
• Handicap (Disability) – a physical or mental disability (including hearing,  mobility and visual impairments, chronic alcoholism, chronic mental illness, AIDS, AIDS Related Complex and mental retardation) that substantially limits one or more major life activities, having a record of such a disability or are regarded as having such a disability.

The Fair Housing Act covers most housing. In some circumstances (note underlined words in the 3 exemptions that might be included within the “Mom & Pop” exemptions), the Act exempts:

• Single-family housing sold or rented without the use of a real estate broker or without the use of discriminatory advertising.
• Housing that is intended for and solely occupied by persons 62 years or older or a household with at least one person 55 years or older.  To qualify at least 80% of the units must be occupied by at least one person 55 years or
  older. Qualified senior housing is exempt only from the Familial Status.
• The rental of a unit in a multi-family dwelling with four or fewer units where the owner (or a member of the owner’s family) lives in one of the units.
• The rental of a room or rooms in a private house where the owner (or a member of the owner’s family) lives in the house.
• Lodging owned or operated by private clubs which give preference to their members Religious, charitable, or educational institutions or organizations which are operated, supervised, or controlled by religious institutions or organizations that give preference in real estate transactions to their members, provided the organization does not exclude members of a protected category.

None of the above housing is exempt from Section 804(c) of the Act which states that you cannot make, print, or publish a discriminatory statement. In other words, a landlord cannot advertise their discrimination and the exemption doesn’t apply if a real estate agent is involved in any way. Any exempt housing that violates 804(c) has lost that exemption and can be held liable under the Act.

In the Sale and Rental of Housing, no one may take any of the following actions based on race, color, national origin, religion, sex, familial status, or handicap:

• Refuse to rent or sell housing
• Refuse to negotiate for housing
• Make housing unavailable
• Deny a dwelling
• Set different terms, conditions or privileges for sale or rental of a dwelling
• Provide different housing services or facilities
• Falsely deny that housing is available for inspection, sale, or rental
• For profit, persuade owners to sell or rent (blockbusting) or
• Deny anyone access to or membership in a facility or service (such as a multiple listing service) related to the sale or rental of housing.

Fair housing laws of some states and some local jurisdictions define additional protected classes such as sexual preference, gender identity, occupation, income source, educational status, medical status, marital status, military background, political affiliation, or any other arbitrary reason.