How to Properly Use Credit Reports to Screen Tenants

Experienced landlords and property managers understand the importance of carefully screening prospective tenants and anyone who has had to go through the process of evicting a tenant knows how cumbersome the eviction process could be. The ability to screen tenants based on their credit report and/or score is an important tool for landlords to better understand the character of the individual or individuals you intend to rent to, and to assist in identifying potential risks of doing so. Moreover, information from credit reports can be used to verify or confirm information provided by the prospective tenant in their rental application. For these reasons, I recommend running credit checks on all prospective tenants, but keep in mind that there are rules imposed by Federal (and possibly state) law that must be followed when a decision is being made based on credit history, which includes the following requirements under federal law:

1. Landlord must obtain the prospective tenants written consent to obtain a credit report or credit score.
2. If the Landlord intends to take adverse action based in any part on information in a prospective tenant’s credit report or credit score, the landlord should provide a notice of adverse action to the tenant in writing. Examples of potential adverse actions that would require an adverse action notice if based on credit history or score include:

• Requiring a larger security deposit;
• Requiring a co-signer or guarantor;
• Requiring advance payment of rent; or
• Rejecting a prospective tenant.

If the adverse action is not based in any way on information on a credit report or credit score, then no adverse action notice is required.

1. An Adverse Action Notice, under federal law, must contain the following information:

• A statement that the landlord’s decision was based in whole or in part on information contained in a consumer credit report;
• The name, address and telephone number of the consumer credit reporting agency which furnished the report to the landlord;
• A statement that the prospective tenant has a right to obtain, within sixty days, a free copy of the applicant’s report from the credit reporting agency identified in the notice; and
• A statement that the applicant has the right to dispute the accuracy or completeness of any information contained in the report from the credit agency.

1. If the adverse action is based on a credit score, the notice must contain the following:

• The numerical credit score used to make the decision;
• The range of possible scores used by the ratings agency;
• Up to four key factors that adversely affected the credit score;
• The date when the credit score was created; and
• The name of the person or entity that created or provided the credit score.

States may have additional or more stringent requirements than the above. For example, in California, if a prospective tenant paid a “application screening fee,” they are entitled to a copy of the credit report upon request. Under federal law, a landlord that willfully fails to comply with these requirements could be liable for actual damages sustained by the prospective tenant, or statutory damages between $100 to $1000 in addition to possible punitive damages, legal costs and attorneys’ fees (15 U.S.C. § 1681n). Moreover, federal law also gives the Federal Trade Commission and/or state attorney general authority to enforce compliance with the law. Additional information about landlords using credit reports can be obtained from the Federal Trade Commission website at www. ftc.gov. Having a uniform set of guidelines, standards and procedures during the tenant screening process, and properly using credit reports and scores as a tool to evaluate prospective tenants are important steps to choosing the most qualified and stable tenant for your rental.