Fraudulent Rental Applications

The number of fraudulent rental applications has increased over the past few years. The increase has been attributed to several factors within the rental housing industry. Rents have risen faster than household incomes creating affordability issues and rental housing supply and demand in current markets has limited housing choices. Factors such as these can put pressure on applicants to lie about their financial ability in order to qualify to rental standards.

Application fraud is deliberate, purposeful misrepresentation of information as a means to manipulate a rental outcome such as tenant screening and selection. Application fraud is not a case of an applicant forgetting a detail or making an innocent mistake, the applicant intentionally lies on the application no matter how small a detail.

Rental processes have transitioned to a more digital presence making it convenient to conduct business online. The use of online rental applications can create opportunities for fraud. An online application provides a level of anonymity that is problematic for a landlord since the landlord has no knowledge of how the application was completed and by whom. An applicant who might not have considered intentionally altering his personal and financial information in the presence of the landlord may be tempted to alter his information through online application and submission.

Risk assessment research of application fraud shows that as many as one in three applications contain some fraudulent information. Even if that risk factor is adjusted to an average of one in five, the risk can be too high for some independent rental housing providers. Even if the risk can be acceptable to some landlords, the fact that the applicant has intentionally committed fraud may be indicative of a troublesome tenancy and potential financial loss.

The reality is that application fraud is a known risk factor for landlords and property managers. Risk mitigation procedures should be incorporated into rental policies and practices to prevent fraudulent acts by applicants and tenants. Surveys of property managers have documented that most managers have experienced application fraud at some point during their property operations. Unfortunately for some managers the discovery happens after the applicant has become a tenant and the situation then requires legal action to regain possession of the unit and file a judgment for lost rents and damages. The success of the legal action may be harmed by the fraudulent information given by the applicant.

Application fraud can be easy to commit and hard to detect. Without sound business policies and practices enforced to safeguard business operations and to protect current residents, the landlord can incur business liability and financial damage. Risk mitigation of application fraud relies upon recognizing fraudulent applications backed by comprehensive tenant screenings to protect against fraud.

Accordingly, landlords must increase their due diligence efforts, strengthen their tenant screening practices, and keep vigilant against tenant fraudulent acts. Complete tenant screening should be conducted for every applicant. Screenings should include identity verifications, credit report, background check, rental history, eviction history, and references to protect against rental fraud. Utilizing a documented system of checks and balances to verify tenant information allows early discovery of potential fraud. Discovering fraud after a tenant has skipped a rent payment is too late to prevent loss.

A landlord must be alert to discrepancies, omissions or inconsistencies in information in the application itself, as discovered during applicant interviews, background checks, or revealed in reference verifications. Any document used in support of a rental application should be independently verified at the appropriate source or level of agency that purportedly issued the document.

The timing of the investigation and verification process is critical to identify fraud before advancing the applicant to consideration for tenancy. Once a tenant is installed, a landlord must use the legal system to remove the tenant from the property, which may take several months and at great expense.

Application fraud is generally of two types to either inflate or adjust income to qualify to the landlord’s rental standards or to hide an applicant’s negative information on their credit report, background check, a history of eviction, or other evidence of unsatisfactory rental behaviors, such as property damage, skips, and pending legal actions.

Inflating income can be accomplished by altering financial documents to support the landlord’s income requirement. By inflating their income, applicants appear to be qualified for a rental unit that otherwise they could not qualify for. Many type of documents used for financial verification can easily be edited to add or delete information as needed to intentionally commit fraud. As examples, pay stubs and bank statements can be altered to show adjusted income sufficient for qualification. Financial documents can be altered to show name changes, current and past addresses, or other personally identifying information.

Identity theft and manufactured identity documents are used to conceal true identity in committing rental fraud. Identity fraud prevents discovery of true credit history, previous rental addresses, criminal background, bankruptcy, judgments and liens. Identity verification is a critical screening practice to prevent this fraud. A landlord should require the physical presence of the applicant to check identity against a government issued photo identification document or a similar identification process using an online application tool.

Types of Identity Application Fraud

Individual (First Party) Fraud

First-party fraud is when the individual committing the fraud uses their own identity to commit fraud. The individual is not misrepresenting his identity but is intentionally being deceptive about his qualifications, such as using altered financial documents or fake documents for application submission.

True Identity (Third-Party) Fraud

True identity fraud is fraud which occurs when an individual’s personal information is used without their knowledge by another individual to commit a criminal act (identity theft). An imposter applicant uses the identity theft victim’s personal information, such as the victim’s name, date of birth, or Social Security number, as his own information on the rental application Qualification and selection of the incoming tenant is based upon fraudulent use of the identity theft victim’s information.

Unless the landlord discovers red flag issues or obvious discrepancies, the applicant may be approved for tenancy based upon the qualifications of the identity theft victim. When the fraudulent tenant defaults on his lease, the landlord will discover that his tenant was never who the landlord thought he was.

Synthetic Identity Fraud

Synthetic identity fraud is manufactured identity fraud. Applicants create a fictitious identity by combining real and fake information. If a landlord approves this applicant, the person using the false identity now has the means to use this identity and rental address to obtain credit or commit other types of fraud. The fraud may not be discovered until the tenancy is well along and may only be discovered if there is a material default of the lease. The landlord will likely suffer financial damage since the only information on file is a fictitious identity.

A landlord should be aware of the risk posed by professional tenants who never intend to pay rent. Identity theft and synthetic identity fraud can make it possible for an applicant to qualify for tenancy based on false information, occupy the unit but never pay rent, and finally skip out.

Application fraud can take other forms of false and misleading information used to qualify an applicant. An applicant may provide false references, using friends and family to act as a former landlord or employer to give previous rental and employment income information to the landlord calling to verify references on the application. Care should be taken to verify the identity of the reference and the source of information through appropriate independent sources. The check and balance system established by the landlord to help cross-reference information helps to identify this type of application fraud before harm is done to the landlord’s business.

Rental application fraud is costly and can have long lasting negative outcomes on business operations. Financial damage, property damage, increased evictions, increased operating expenses, and damage to the landlord/rental community’s reputation are some of the issues that can result from rental application fraud. Best practices for business operations must include strong tenant screenings and risk mitigation policies and practices.

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