Is Saying ‘Nay’ to Tenant Applications OK?

By Shamontiel L. Vaughn

When a landlord signs a lease with a new tenant, both parties are crossing their fingers while shaking hands. Tenants hope they have contractually agreed to work with an attentive, responsible landlord who will handle any rental and repair concerns in a timely manner. Landlords are hoping to have responsible tenants who will pay rent on time and take care of the property.

But as with the filtering process for anything, sometimes glorious tenants on the surface don’t turn out to be that way in the end. And once a landlord gets a bad apple, it can leave a long-lasting bitter taste in their mouths when renewals and new tenants come along. However, for legal reasons, landlords cannot just turn down tenants on a whim.

The Office of Fair Housing and Equal Opportunity makes this clear when it comes to discriminatory behavior related to housing and community development programs. This includes protected classes attempting to rent or buy a home, get a mortgage, seek housing assistance, or engage in other housing-related activities; and protected classes under the Fair Housing Act, which includes race, color, national origin, religion, sex, familial status and disability.

Developers, homeowners associations, insurance providers, mortgage lenders, property managers and owners, and real estate agents can all be at risk of having complaints filed against them for alleged discrimination. For this reason, landlords must be particularly careful when it comes to the filtering process for new tenants.

Top Reasons that Rental Denials are Made

Landlords renting their units, as well as property managers and homeowners associations selling multi-units, can run into the same problems when trying to find new renters (or buyers). The Mortgage Reports confirms the top reasons for mortgage denials are the following:

✓ Credit history

✓ Collateral (assets used to secure a loan)

✓ Credit application incomplete

✓ Debt-to-income ratio

✓ Employment history

✓ Insufficient cash

✓ Unverifiable information

While leasing denials differ from buyer denials due to the longevity and ownership options of one versus the other, both agreements have similar reasons for denials.

Landlords, What’s the Score?

Landlords have the right to run at least one credit report from any of the three credit bureaus: Equifax, Experian and/or TransUnion. To do so, they will need a potential tenant’s name, mailing address, and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). This report details everything from late or delinquent rent or bill payments (including car loans and student loans), arrests and conviction rates, prior evictions, personal injury claims, and/or whether the potential tenant has a credit history at all.

Credit reports cover the past seven to 10 years, and they include a Fair Isaac Corporation (FICO) score. Out of a total of 850, an excellent credit score is 720 to 850. A good score is 690 to 719. A fair score is 630 to 689. A poor score is 629 and below.

“Landlords can choose one tenant over the other on the basis of credit score—as long as the credit score analysis is not applied in a discriminatory manner,” said Johnetta Paye, Esq. of J. Paye & Associates. “For example, a landlord requiring a higher credit score for African-American versus Caucasian applicants would be against the Fair Housing Act.”

But is a tenant with an excellent or good score a surefire sign that (s)he will be problem-free? Not necessarily. While financial stability may mean landlords will get their rent on time, that doesn’t always equate to treating the property with care, getting along with neighbors and/or not being dif ficult when access is needed to the unit (for repairs, renovations, exterminations, etc.). This is one of many reasons why reference letters are nice to have as well.

While the average rate for credit checks is somewhere between $30 to $50, some states have very specific rules regarding what can and cannot be collected. For example, California has a maximum screening fee and requires an itemized receipt from landlords. In states like New York, which are supposed to have a $20 maximum rental fee, there have been cases where a “processing fee” was $400, plus $100 for the application fee. The average rate in Florida is $50, and Texas charges anywhere between $15 to $50 but has no cap. Tenants should know ahead of time that this charge does not guarantee them a rental though. It is solely to understand the financial history of the rental applicant.

When Tenants Want Proof of Refusal

It may be overwhelming for a potential tenant to have to pay this rental application fee multiple times, so a landlord’s refusal is understandably frustrating. This is why tenants will often just obtain their own report and make copies of a recent one for landlords to peruse. While federal law does not require landlords to accept their copies, generally speaking, unless there’s a valid reason not to, refusal could also look suspicious. (In states like Wisconsin, landlords are forbidden from a credit report charge if the current one was run in less than 30 days.)

“The landlord does not have to provide the potential tenant a reason for a denial,” said Paye. “The landlord just has to make sure the screening process is not applied in a discriminatory manner.”

However, when an applicant is denied, Go4Rent sends a form to the applicant in accordance with the Fair Credit Reporting Act (FCRA). Tenants must be informed that, within 60 days, they have the right to obtain a free copy of their credit report from the credit bureau that disclosed negative results.

Typically, landlords should keep these records on file for the length of time the potential tenant has to bring legal action on the issue. Some rental agencies also keep the credit report on file should the tenant miss that deadline and the landlord need access to the report again later on. Go4Rent confirms that the realtor rule is four years for all documents obtained from or for an applicant.

However, landlords should be aware that if they’re going to pull a credit report for new applicants, it should be for all of them. By choosing to obtain credit reports for some tenants versus others, that can put a landlord at risk of illegal discrimination. Additionally, the “Disposal Rule” requires landlords to only keep what is needed for a credit report and discard unnecessary information such as aggregate information or blind data (information that does not contain personal identifiers such as account numbers, names or addresses).

By understanding state laws when it comes to property management and renters, and carefully following all guidelines in accordance with the Fair Housing Act, landlords will save themselves from being at risk of accidental discriminatory practices.

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