Applicant and Resident Rights Under the Fair Credit Reporting Act

person A.J. Johnson today 08/26/2023

Screening for credit and rental history are common in multifamily rental housing - including affordable housing. The Fair Trade Commission recently issued new guidance for owners who use background checks to screen prospective residents. This guidance is intended to assist owners in complying with the requirements of the Fair Credit Reporting Act (FCRA). Many apartment communities run screening checks through third-party companies that compile background information. If adverse action is taken against an applicant due to a background check - also known as a consumer report - there are specific steps required of management.

Consumer reports contain a variety of information about people. This may include rental history, credit history, and criminal history. Examples of such reports include -

  • A credit report from a credit bureau such as Trans Union, Experian, and Equifax;
  • A report from a tenant screening service that describes an applicant’s rental history based on reports from prior landlords or court records;
  • A report from a reference checking service that describes an applicant’s rental history; and
  • A report from a background check company about an applicant or resident’s criminal history.

There are some companies that provide all these services under one umbrella request.

In order to obtain a consumer report, the permission of the person being investigated is required, and the report may be used for housing purposes only.

Under the FCRA, there are certain requirements that must be followed when using credit reports or other consumer reports to make decisions about housing applications. Here are some key points to consider:

  1. Adverse Action Notice: If you decide to reject an applicant’s housing application based on information from a consumer report, you are required to provide them with an "adverse action notice." This notice informs the applicant that their application was denied or negatively affected due to information in their consumer report.
  2. Contents of Adverse Action Notice: The adverse action notice must include specific information, including (i) the name, address, and phone number of the consumer reporting agency that provided the report; (ii) a statement that the agency did not make the decision and cannot explain why the decision was made; (iii) the applicant’s right to obtain a free copy of the report from the reporting agency within 60 days; and (iv) the applicant’s right to dispute the accuracy or completeness of information in the report.

The adverse action notice is required even if information in the report is not the primary reason for the decision.

The FTC provided examples of when adverse action notices are required:

  • An owner orders a consumer report from a Credit Reporting Agency (CRA). Information contained in the report leads to further investigation of the applicant. The subsequent investigation led to a denial of the applicant. Since the information in the report led to the investigation, an adverse action notice must be sent to the applicant.
  • An owner hires a reference checking service to verify information included on a rental application. The service reports that the applicant does not work for the employer listed on the application and the rental application is denied. An adverse action notice is required.
  • An owner orders a criminal history report on a prospective tenant, and the report shows a felony conviction. If the landlord denies the applicant due to the felony conviction, an adverse action notice is required. Don’t forget that in the case of applicant rejection due to a criminal record, applicants must also be informed of their right to an individual assessment.

After using a consumer report for its intended purpose, it must be securely disposed of. Options for disposal include:

  • Burn, pulverize, or shred papers containing consumer report information so that the information cannot be read or reconstructed.
  • Destroy or erase electronic files or media containing consumer information.

We still see credit and other consumer reports in tenant files that we review. Landlords should be aware of the fact that maintaining such reports in tenant files is a violation of the law. DO NOT KEEP THESE REPORTS IN TENANT FILES!

Bottom Line: The Fair Trade Commission has issued new guidance for owners of multifamily rental housing, including affordable housing, regarding background checks on potential residents. These checks, often conducted by third-party companies, involve credit, rental, and criminal history. If adverse action is taken based on these checks, specific steps must be followed, including the provision of an adverse action notice with details about the reporting agency and the applicant’s rights. Such notices are required even if the report is not the primary reason for rejection. After use, consumer reports must be securely disposed of, and landlords must not keep them in tenant files to comply with the law.

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