In July 2023, the Federal Trade Commission (FTC) released important guidance for landlords, property managers, and other housing providers who utilize tenant background checks for making housing decisions. Landlords often require a deeper understanding of their applicants than employers do, requiring in-depth background checks. This guidance aims to ensure clarity and compliance.
It also seeks to clarify adverse actions, and when tenants should be notified of them. The FTC appears to be concerned that tenants are not always receiving the notices they are entitled to by law.
Understanding Tenant Background Checks
When landlords evaluate housing applications or decide on lease renewals, they often use tenant background checks. Such checks can reveal information ranging from rental and eviction history to credit records and criminal backgrounds.
These background checks are, in essence, consumer reports. When landlords use these reports for decision-making, they must adhere to the Fair Credit Reporting Act (FCRA), which the FTC oversees.
Essentials of the Fair Credit Reporting Act
What is a Consumer Report?
Consumer Reporting Agencies (CRAs) compile these reports for businesses, including landlords. They can encompass:
- Credit reports from major bureaus like Trans Union, Experian, and Equifax.
- Rental history reports from tenant screening companies.
- Criminal history from background check companies.
- Comprehensive reports that combine rental and criminal histories and include credit reports.
- Risk scores from tenant screening firms based on selected criteria.
- Reference checks from services that reach out to previous landlords, employers, or other entities listed on rental applications.
Defining Adverse Actions
An adverse action is a decision that isn’t in favor of a rental applicant or tenant. Examples include:
- Denying the application.
- Mandating a co-signer.
- Asking for a deposit that wouldn’t be necessary for another applicant.
- Requiring a larger deposit.
- Charging a higher rent than for another applicant.
Note that this is an expansive list. The FTC seems to focus on adverse actions in this document. If you think an action taken as a result of a background check might be an adverse action, it’s safest to assume that it is.
Compliance with FCRA
Before Obtaining a Consumer Report
Landlords can only access consumer reports if they have a valid reason, such as screening potential tenants or renewing leases. It’s mandatory to get written consent from applicants or tenants to showcase a valid reason.
Moreover, landlords must assure the CRA that the report will only be used for housing purposes. Being well-acquainted with other federal and state regulations concerning tenant screening is also recommended. For instance, a policy that outrightly rejects anyone with a criminal record may breach the Fair Housing Act.
After the Adverse Action
If a landlord takes an adverse action based on a consumer report, they must notify the affected individual. It is allowed to do this in writing, electronically, or orally. That said, written notices are highly recommended. They offer proof of FCRA compliance and facilitate applicants and tenants in asserting their rights.
This adverse action notice should inform individuals about:
- Their rights to view the reported information and challenge its accuracy.
- The CRA’s details that supplied the report.
- A declaration that the CRA wasn’t involved in the adverse decision and can’t provide specific reasons for it.
- The individual’s right to a free report from the CRA if requested within 60 days.
Even if the consumer report played a minor role in the decision, notification remains mandatory.
Examples of Adverse Actions
- Case of Further Investigation: If a consumer report leads to additional scrutiny of an applicant resulting in a rental application rejection, an adverse action notice is necessary.
- Higher Security Deposits due to Bankruptcy: If a bankruptcy on an applicant’s credit report results in them having to pay a higher security deposit, they should receive an adverse action notice.
- Reference Verification: If a reference checking service finds discrepancies between the application and their findings, leading to application denial, an adverse action notice is required.
- Multiple Negative Factors: If both an inadequate income and a poor credit report lead to an application’s rejection, the applicant deserves an adverse action notice.
- Criminal History Implications: If a felony conviction on a criminal history report from a CRA leads to a rental application’s rejection, the applicant must be given an adverse action notice.
Take note of the “multiple negative factors” provision. If a background check played even a small role in the adverse action, and even if it was supplemented by other data, an adverse action notice is required.
Additional Provisions for Investigative Reports
For landlords leveraging “investigative reports” (those based on personal interviews about an individual’s character, reputation, etc.), there are extra FCRA obligations. These include providing a written notice about the potential or actual request for an investigative consumer report and a declaration of the person’s right to ask for additional disclosures and a summary of the report.
Disposal of Consumer Reports
Once a consumer report’s purpose is served, landlords must ensure its secure disposal. This includes the destruction of paper documents and the deletion of electronic data to a point where reconstruction is impossible.
Reporting to a Consumer Reporting Agency
Landlords who relay information to CRAs, like eviction details or delayed rent payments, have additional legal responsibilities under the FCRA and its Furnisher Rule.
For more comprehensive details on the FCRA, landlords can delve into specific sections of the U.S.C. such as
- Getting consumer reports (see Section 604(a)(3)(F), 15 U.S.C. § 1681b(a)(3)(F), and Section 604(f), 15 U.S.C. § 1681b(f));
- Taking an adverse action (see Section 615(a), 15 U.S.C. § 1681m(a));
- Using investigative consumer reports (see Section 606, 15 U.S.C. § 1681d).