Need to Know!

Tenant Screening 101 – Rental Criteria

December 30, 2015 7:38 pm

Indecision conceptThere has never been a more hostile legal and regulatory environment for landlords and tenant screening companies.  It is more important than ever, therefore, that we know what we are doing – that we take the proverbial high-road in our effort to strike a balance between carefully underwriting prospective tenants and minimizing the risk of legal and regulatory problems.

Step 1 is to take the time necessary to develop, refine and formalize your rental criteria.  “How to Develop Landlord Rental Criteria” addresses the steps necessary to develop your criteria and the benefits associated with consistent application of those criteria as part of the tenant screening process.  A Criteria Worksheet (including  sample criteria document) is available at no charge under Landlord Resources on MyScreeningReport.com®.

A critical step in developing criteria is deciding what is acceptable in terms of credit, rental history, criminal and eviction history, length of employment and income – within the context of what is “reportable”.   “Tenant Screening 101 – Report Content” describes in detail limits imposed by the Fair Credit Reporting Act (FCRA).  State law may further limit what is reported.  Washington and California, for example, limit reporting of criminal convictions to those where the date of final disposition (release from prison, parole, etc.) is no more than seven years old.

Few landlords intend to discriminate.  It is not only illegal, it is dumb.  It is the unintentional or so-called disparate impact form of discrimination that poses the greatest risk.  Denying tenancy based solely on records of arrest is perhaps the best example of a practice that is neutral on its face – but that has a well-established and disproportionate impact on certain groups.  But a blanket policy regarding criminal convictions – one that ignores the nature of the offense and when it occurred – can also form the basis of a disparate impact discrimination claim.

It is likely that disparate impact claims will target additional practices going forward.  It might be argued, for example, that use of credit scores and eviction history have a disparate impact on some groups.

There is, of course, no way to eliminate risk entirely and stay in business.  But there are a couple tests you might apply to minimize risk while providing you with the information you truly need to make good decisions.  The first is the business necessity test.  Simply ask yourself, is there a relatively direct relationship between the practice and running a successful business?  A good example of such a practice is use of credit scores by lenders.  The relationship between credit scores and underwriting prospective tenants is less direct – since consideration of rent payment history is typically not part of popular credit scoring algorithms.  Certainly, there are those with poor credit that have excellent rent payment history.  People often pay rent first.  Ultimately, while use of credit scores poses some risk – use of credit detail – such as rental related debt (collections) and eviction judgments (reflected on the credit report) are clearly applicable.

Apply a simple reasonableness test.  Is it reasonable, for example, to deny tenancy to someone who committed a violent felony 25 years ago – who was released from prison 10 years ago and has been clean ever since – and who is otherwise well qualified?  Probably not.  If that person is protected in some way – you are vulnerable.

So… what exactly is the rental criteria high-road?  How do I configure my criteria to balance risk and business necessity?

Rental Criteria Best Practices

  1. Credit – focus on the detail versus a score.  Consider denying for rental related debt (collections), eviction judgments and open bankruptcies.  Approve or approve conditionally (with an increased deposit or co-signer) those not otherwise disqualified.
  2. Criminal records – limit consideration to convictions for serious offenses (with the possible exception of serious sex offenses) the date of
    final disposition of which, antedate the tenant screening report by no more than seven years – whether or not state law limits reporting in that way.  If someone has been clean for seven years, the likelihood they will re-offend is typically low.
  3. Eviction records – eviction records are more complicated.  The vast majority of filings are dismissed – not because they are without merit – but because the resident paid or moved out – and because there is very little likelihood of recovery.  Still, denying tenancy based on filings feels a bit like denying tenancy based on arrest records.  Consider asking your tenant screening service to use filings to conduct rental verifications – as an alternative to basing your decision on the filing itself.  That way there is no question as to what occurred and little or no risk of a disparate impact claim.
  4. Employment & income verifications – the very definition of business necessity, since it is hard to pay rent if you have no income.
  5. FINALLY – share your criteria up front, before taking an application or screening fee – whether required by state law or not.  Attach your criteria to the application or post it on your web site – ahead of your online application.  Why?  It is the right thing to do.  Those who will not qualify will appreciate knowing up front – before parting with yet another application fee – a real problem in the low income housing space.

Taking the time to think it through – taking the rental criteria high-road will serve you very, very well – improve decision making and minimize the risk of expensive and time consuming legal problems.

Visit MyScreeningReport.com® for more tenant screening best practices and resources.

 

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