Consumer Reports and Adverse Action Notices
Consumer Reports and Adverse Action Notices
Tenant screening is a process of investigation, analysis, and selection/rejection of rental applicants. Not everyone can be your next tenant and not everyone should be your next tenant. Your decision to accept or reject an application will be based upon information you obtain from various sources and by qualification under sound business criteria. The circumstances of a rejection determine what you must do by law to notify an applicant that his application has been rejected. Handling the situation in an appropriate manner and doing so legally is the subject of this article.
Landlords using consumer reports for evaluation of rental applicants must follow the provisions of the Fair Credit Reporting Act (FCRA). A consumer report contains information about a person’s credit characteristics, character, general reputation, and lifestyle. A report also may include information about someone’s rental history, such as information from previous landlords or from public records like housing court or eviction files. 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 is designed to protect the privacy of consumer report information and to guarantee that the information supplied by consumer reporting agencies (CRAs) is as accurate as possible. To be covered by the FCRA a report must be prepared by a credit reporting agency (CRA). The most common type of CRA is the credit bureau.
Landlords often ask applicants to give employment and previous landlord references on their rental applications. Whether verifying such references is covered by the FCRA depends on who does the verification. A reference verified by the landlord’s employee is not covered by the Act; a reference verified by an agency hired by the landlord to do the verification is covered.
The FCRA requires landlords who deny a lease based on information in the applicant’s consumer report to provide the applicant with an “adverse action notice.”
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 a landlord’s action that imposes a burden not required of all tenants. Common adverse actions by landlords include
- Denying an application
- Requiring a co-signer on the lease
- Requiring a deposit that would not be required for another applicant
- Requiring a larger deposit than might be required for another applicant raising the rent to a higher amount than 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 its 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.
As examples, landlords must send an adverse action letter to applicants who are denied a lease if the following describes the decision related to denial even if other factors also played a part.
- A tenant screening company is hired which gives the landlord a report that includes negative information leading to rejection of this applicant,
- A consumer screening agency is used that supplies only a credit report and the applicant is rejected on the basis of information in the report,
- A local landlord or owner association has an arrangement with a tenant screening company that provides a member with a report on an applicant that results in the landlord deciding that the applicant is unacceptable,
- The landlord pays someone on a contractual basis (as an independent contractor rather than an employee) to do tenant screening and the contractor’s report leads the landlord to conclude that he shouldn’t accept the applicant,
- The landlord contracts with a property management company to investigate applicant and the landlord rejects an applicant based on what the management company says,
An adverse action report is generally not required if the basis for the rejection is one of the following:
- Information obtained from applicants themselves on the application form or in conversations with them or
- Oral or written information provided by an applicant’s reference.
Furthermore, landlords usually needn’t send a formal adverse action letter if the following describes the situation.
- The applicant is not accepted because the landlord, when asked by the applicant, won’t vary a rental term such as the rent or deposit amount or the pet policy,
- Information supplied on the rental application indicates that the applicant cannot meet the landlord’s criteria – e.g., no income,
- The landlord learns from a conversation with the applicant that he has to move in by a certain date because he’s being evicted and the eviction is considered to indicate a poor risk,
- The landlord or his employee calls the applicant’s past or current landlord, employer, or personal reference and which provides information that leads to rejection, or
- A self-employed applicant provides tax returns that show an income below the landlord’s qualifying criteria (e.g., “3 times the rent”),
- Upon analyzing an employed applicant’s pay stubs the landlord discovers that the applicant was untruthful regarding place of employment or income when filling out the application form.
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. In particular the law requires landlords to provide tenant applicants with a notice that informs them about the adverse action, identifies the consumer reporting agency that provided the report that contributed to the landlord’s action, and
specifies consumers’ rights under the FCRA.
When an adverse action is taken that is based solely or partly on information in a consumer report the FCRA requires the landlord to provide a notice of the adverse action to the consumer. The notice must include:
- The name, address and telephone of the CRA that supplied the consumer report including a toll-free telephone number for CRAs that maintain files nationwide,
- A statement that the CRA 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 CRA furnished, and the consumer’s right to a free report from the CRA upon request within 60 days.
Although the law can be interpreted to allow oral adverse action reports, it is best to mail an adverse action letter to rejected applicant. Although emailing is probably better than a phone call, it really does not provide the paper trail that might be needed if the applicant claims he never received a letter. It is best to send the letter Certified Mail return receipt requested, providing proof that the letter was received by the applicant on a specific date. At a minimum send it with a
Certificate of Mailing proof of mailing, as this will at least prove when it was mailed.
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 has legal protections, so long as 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 abide by any more restrictive consumer credit laws that might exist in their particular states.