There is an element of financial risk to the landlord’s business in the installation of a new tenant. Tenant screenings provide risk management tools to assess credit risk by estimating the probability of tenant default on rent obligations. With credit risk analysis, the landlord can make an informed decision acceptable to the landlord’s business model. With adequate due diligence using screenings for a credit report and credit score, a landlord can reduce potential financial business risk by objectively analyzing the applicant’s credit history and credit management.

There is good reason for the landlord to protect his business from credit risk. Credit risk occurs when a tenant fails to meet his debt obligations. Rent defaults disrupt the landlord’s cash flow and can increase operational costs if the debt is sent for collection.

Credit risk analysis uses credit scoring models as marketed by the three national credit reporting companies, Equifax, Experian, and Transunion. The credit reporting companies analyze information in the consumer’s credit file as of the date of the credit score request. The analysis estimates the probability of a credit default triggered by an event such as consumer failure to pay as agreed. The probability of default is expressed as a three-digit number that represents creditworthiness. A lower score indicates a more likely credit risk while a higher score indicates a lower risk of credit default. A landlord may utilize credit scores to help evaluate an applicant’s ability to meet rent obligations in compliance with lease terms and conditions.

Credit Risk Scoring Models

How a credit score is calculated is dependent upon the credit scoring model used and the applicable version of the scoring model. There are many different credit scoring models targeting various credit populations, industry applications, and specific credit products.

Each credit reporting company generates its own scores by running the consumer’s credit data through a proprietary modeling process. Credit risk analysis models are predictive tools that can be based on either financial statement analysis, default probability, or machine learning.

As a basic discussion of a conventional scoring model, model development takes into consideration a sample population of consumer accounts large enough to make the model statistically valid yet characteristic of the population to which the model’s scorecard will be applied. Accounts in the selected population would be statistically analyzed to identify the characteristics and attributes that relate to creditworthiness. These characteristics would then be further refined into a smaller group of predictive variables which could best indicate how a credit applicant could be categorized as a credit risk. Predictive variables could include, but would not be limited to, prior credit performance, current level of debt, amount of time that credit has been in use, and new credit. Any characteristic or attribute that is prohibited by law for credit decisioning or that lacks predictive value would be excluded from scoring.

The scoring model would summarize the relevant available consumer credit data into a set of ordered categories that predict an outcome. This ordered set, a numerical score, is a snapshot of estimated credit risk at a specific date in time. The credit score is a statistical assessment of the consumer’s risk within the context of the total risk for the credit population being scored.

However there are limitations in the effectiveness of any credit scoring model. Models are developed, calibrated, and validated using lengthy historical data. If relevant un-modeled conditions change, models may not correctly predict credit behaviors out of sample. And, while a model forecasts the probability of credit default, it is not necessarily a predictor of the level of risk, i.e., the magnitude of loss. For tenant screening purposes landlords, as a matter of business policy for risk reduction, still need to assess the amount of risk posed by the rental applicant in relation to the amount of risk the landlord is willing to absorb.

The sample population size, changing economic conditions, global and domestic business environments, and the reactive nature of consumer credit behaviors can also be constraining factors influencing model effectiveness.

This has led developers to refresh credit scoring models periodically to reflect changes in the industry, consumer behavioral data, and product trends to provide relevant data for credit modeling.

As part of this relevancy, credit scoring models have been optimized to align with the National Consumer Assistance Plan (NCAP) to make credit reports more accurate, transparent, and easier for the consumer, including consumer ability to correct errors on the consumer’s report. As examples, tax liens and public records data reporting were historically used for conventional scoring. Now, tax liens and public records data have been removed from consumer credit files if they failed to meet the enhanced data quality standards as set out in the NCAP guidelines.

While there are many credit risk scoring models and many versions of the scoring models, the scoring models most commonly used to determine credit scores are FICO and VantageScore Solutions.

The current versions of FICO and VantageScore models incorporate trended credit data in their modeling process. Trended data is credit data that reflects patterns in a consumer’s behavior, as example, how the consumer borrows credit and repays credit over time. This is different than conventional credit scoring models that captured static credit events, e.g., looking to the most recently reported utilization rate to calculate the credit score.

FICO and VantageScore use a point credit scoring scale from 300 to 850. The scoring scale has five credit score ranges which determine the likelihood of creditworthiness and what credit products could be made available to the consumer, such as loans and interest rates.

The ranges differ between the two models, and also have different descriptive labels associated with each range. For example, a credit score range above 780 may be labelled exceptional by the FICO model and excellent by the VantageScore model. Other credit scoring models such as those of Experian and Equifax have their own proprietary scoring models and likewise credit scoring scales and descriptive credit range labeling.

The most common credit behaviors that influence credit scores are:

• Payment history
• Credit utilization
• Length of credit history
• Type of credit
• New credit

A FICO scoring model may assign score factors such as:

• 35% Payment History
• 30% Credit Utilization

• 15% Credit History

• 10% Credit Use

• 10% New Credit

A VantageScore scoring model may assign score factors such as :

• 40% Payment history
• 21% Age and type of credit
• 20% Percentage of credit limit used
• 11% Total balances
• 5% Recent credit behavior
• 3% Available credit

Differences in scoring models will affect only a credit score, not a credit report. Information on a credit report is based on data contained in the consumer’s credit file at the consumer reporting company as of a specific date. The credit report is not a calculated report derived from a credit scoring model. The credit report contains only information about the consumer’s credit usage such as:

• A summary of the applicant’s positive and negative credit accounts
• Payment history
• Prior credit inquiries by date
• Total estimated past due and monthly debts
• Listing of credit accounts

A credit score is not an absolute statement of a consumer’s credit risk, financial strength, or stability. However credit reports and credit scores when used in conjunction with other tenant screenings and risk reduction policies may help a landlord to become more confident in tenant selection decisions.

Landlords are advised to conduct their own research and due diligence regarding credit risk analysis and credit scoring models. Those landlords utilizing third party tenant screening services may wish to consult with their screening partner to determine how the screening process is conducted, including the source of credit reporting, the type of credit report, and the availability of credit scoring.

April 2022 marks the 54^th anniversary of the Fair Housing Act (FHA). During Fair Housing Month the Department of Housing and Urban Development (HUD), fair housing organizations, and fair housing advocates host fair housing activities in local communities to enhance public awareness of fair housing rights.

The federal Fair Housing Act (FHA) prohibits discrimination in the sale, rental and financing of housing on the basis of race, color, religion, sex, national origin, familial status and disability. In 2021 the Biden Administration issued Executive Order 13988 which directed all federal agencies to interpret protections against discrimination based on sex to include discrimination based on sexual orientation, gender identity, and gender expression. In the sale and rental of housing, no one may take any of the following actions based on the federal protected classes:

• 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.

It is illegal for anyone to:

• Threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right.
• Advertise or make any statement that indicates a limitation or preference based on race, color, national origin, religion, sex, familial status, or handicap. This prohibition against discriminatory advertising applies to single-family and owner-occupied housing that is otherwise exempt from the Fair Housing Act.

Fair Housing Law exemptions

The Fair Housing Act covers most housing. In very limited circumstances, the Act exempts owner-occupied buildings with no more than four units, single-family houses sold or rented by the owner without the use of an agent, and housing operated by religious organizations and private clubs that limit occupancy to members.

Fair Housing Trends Data for 2020

The annual report released by the National Fair Housing Alliance (NFHA) provides an overview of housing discrimination complaint data by type of agency, protected class, and type of transaction. There were 28,712 fair housing complaints received in 2020. There were 15,664 complaints of discrimination against a person with a disability, or 54.56 percent of all housing complaints.

Disability

Federal nondiscrimination laws define a person with a disability to include any (1) individual with a physical or mental impairment that substantially limits one or more major life activities; (2) individual with a record of such impairment; or (3) individual who is regarded as having such an impairment.

Examples of disability may include mental or physical impairment such as hearing loss, restricted mobility, visual impairment, chronic mental illness, chronic alcoholism, AIDS, AIDS Related Complex, and mental retardation that substantially limits one or more major life activities.

Applicants and tenants with disabilities have rights and protections under the Fair Housing Act to ask for reasonable accommodations or reasonable modifications in rental housing.

Reasonable accommodation

Under the Fair Housing Act, a reasonable accommodation is a change, exception, or adjustment to a rule, policy, practice, or service that may be necessary to afford persons with disabilities an equal opportunity to use and enjoy a dwelling, including public and common use areas. Each accommodation request should be evaluated on a case-by-case basis. There must be an identifiable relationship, or nexus, between the request and the individual’s disability. A request may be denied if providing the accommodation is not reasonable – i.e., if it would impose an undue financial and administrative burden on the landlord or it would fundamentally alter the nature of the landlord’s operations.

A reasonable accommodation is a request to make an accommodation or change in rules, policies, practices, procedures or services to allow an individual with a disability an equal opportunity to use and enjoy a rental unit. Some common reasonable accommodation requests are for assistance animals or for a parking space close-in to the rental unit.

An accommodation must be requested by the disabled tenant or applicant. The accommodation request must be related to the tenant’s or applicant’s disability. A landlord does not have the obligation to ask applicants or tenants if they need reasonable accommodation or to determine what a reasonable accommodation might be.

A tenant or applicant may request a reasonable accommodation at any time, including at the time of application, at the time of lease signing, or after the tenant has moved into the rental unit.

Federal and state fair housing laws give tenants and applicants who have disabilities the right to request reasonable accommodations in landlord rules, policies, practices, or procedures if the changes make it possible for them to:

• Complete an application,
• Qualify for tenancy,
• Have full use and enjoyment of the unit, and
• Comply with rental or lease agreements.

Reasonable modification

A reasonable modification is a physical change to the public or common use areas of a building or a physical change to the structure of a dwelling unit. The most common examples of reasonable modification are requests to install grab bars in a bathroom or to install a wheelchair ramp.

A reasonable modification if approved would make the rental unit a more comfortable and safe home for the disabled tenant. All modifications are subject to the landlord’s approval. The landlord may ask for a description of the proposed modification and any necessary building permits.

If the modification will create a problem for the next tenant, the landlord may require the disabled tenant to restore the rental unit to its original condition at the end of the lease term.

A landlord cannot impose the expense of providing a reasonable accommodation on to the tenant, either directly or indirectly. The landlord assumes the costs for reasonable accommodations. The cost of a reasonable modification as approved would be borne by the tenant or applicant.

Hoarding

Hoarding is a recognized disability under the Fair Housing Act as Amended. The Fair Housing Amendments Act (FHAA) defines a person with a disability to include (1) individuals with a physical or mental impairment that substantially limits one or more major life activities; (2) individuals who are regarded as having such an impairment; and (3) individuals with a record of such impairment. The diagnostic criteria of hoarding include:

• Persistent difficulty discarding or parting with possessions regardless of actual value;
• A perceived need to save items and distress associated with discarding them;
• The accumulation of possessions that congest and clutter living areas and substantially compromises their intended use; and
• Clinically significant distress or impairment in social, occupational or other important areas of functioning (including maintaining an environment safe for oneself and others).

A hoarder tenant has the right to request a reasonable accommodation from the landlord to modify the landlord’s rental policies to minimize or eliminate the threat of hoarding in order to cure his default and bring his lease into compliance.

Harassment

In 2020, 1,071 complaints of harassment were reported, the highest number of harassment complaints reported since NFHA began collecting detailed harassment data in 2012.

Harassment is illegal under the Fair Housing Act, both in the provision of housing and in a housing setting. There has been a significant increase in the number of complaints alleging harassment on the basis of disability and sex. Harassment based on protected class may take the form of coercion, intimidation, threats, or interference.

The Fair Housing Act prohibits sex discrimina­tion that impacts the terms or condi­tions of housing; is used as a basis for housing decisions; or otherwise has the purpose or effect of unreasonably interfering with housing rights, or creates an intimidating, hostile, or offensive environment.

Sexual harassment includes any unwanted sexual advance, request for sexual favors, or other unwelcome verbal or physical contact of a sexual nature. It also can take the form of offensive remarks, derogatory statements or expressions of a sexual nature, or other hostile behavior because of a person’s sex. Harassment can consist of oral, written, or other conduct and does not require physical contact between the harasser and victim. Harassment can be directed to any person, male or female, by someone of the same sex or the opposite sex. Sexual harassment does not have to be motivated by sexual desire in order to violate the Fair Housing Act. Sexual harassment could be motivated by hostility toward a particular sex, even if the harasser is the same sex.

HUD Anti-harassment Rule

HUD has issued” Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices under the Fair Housing Act”, (the Rule), as the standard to evaluate complaints of quid pro quo (“this for that”) harassment and hostile environment harassment under the Fair Housing Act.

Quid pro quo sexual harassment occurs when a landlord, property manager, employee, or agent conditions access to housing or retention of housing or housing-related services to an applicant or tenant’s submission to an unwelcome request or demand to engage in sexual conduct or sexual favors. .An unwelcome request or demand may constitute quid pro quo harassment even if a person acquiesces in the unwelcome request or demand.

Hostile environment sexual harassment refers to unwelcome sexual conduct that is sufficiently severe or pervasive as to interfere with the terms and conditions of tenancy or deprives the tenant of his right to use and enjoy the housing, resulting in an environment that is intimidating, hostile, offensive, or substantially less desirable.

Hostile environment harassment can also occur when a tenant is sexually harassed by another tenant and the harassment is not addressed by the housing provider.

State and Local Fair Housing Laws

State and local fair housing laws also provide protections from housing discrimination. State and local city and county fair housing laws often provide broader coverage for additional protected classes such as sexual preference, gender identity, occupation, source of income, Section 8 voucher participation, educational status, medical status, marital status, military service, political affiliation, or other classes as noted by statue. Fair housing compliance should always be to those fair housing laws providing the greatest protections against discrimination.

Additional Information

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