Consumer Credit Reports for Residential Rentals

By
Real Estate Agent with VRI Realty, Inc.

Consumer Credit Reports for Residential RentalsI've always thought (and still think) that requests for consumer credit reports for residential rentals is an abuse of the Fair Credit Reporting Act (FCRA).

Why do I hold an opinion that seems to be contrary to common practice?

First, I'm no stranger to holding opinions that contradict popular positions. So, this one shouldn't really surprise anyone who actually knows me. But, unlike many, I don't hold opinions based on "feelings." I form opinions based upon facts as I understand them.

And, my opinion that requesting consumer credit reports for residential rentals is, 1) a violation of the FCRA, and 2) unnecessary. Here are the facts in support of my opinion.

A Violation of the Fair Credit Reporting Act?

What I believe is most important of my reasons, is that requesting credit reports for residential rentals is a violation of the Fair Credit Reporting Act because no credit is being extended.

Yes. I understand there are those who argue that a lease is a contract, and for THAT reason alone, a landlord is entitled to obtain a consumer credit report from a tenant applicant.

However, if you actually READ the Fair Credit Reporting Act, you'll find that the entire law is intended to restrict the use of a consumer credit report to its use for commercial business purposes.

Additionally, if you read § 604. Permissible purposes of consumer reports [15 U.S.C. § 1681b], you'll find absolutely no mention of using a consumer credit report for residential lease or rental purposes. The issue of residential leasing isn't even eluded to in theAct.

But, what I see as the most overwhelming evidence that the use of consumer credit reports for residential rentals is a violation of the FCRA, is the indisputable fact, that when reviewing a consumer credit report, you will NEVER find any information regarding the person's performance on a residential rental lease contract in their consumer credit report.

The fact that there's never any information in a consumer credit report that addresses a person's performance on a residential lease contract speaks directly to the fact, that the FCRA is not, and was never intended to be used as a tool in renting residential real estate.

Consequently, it's my opinion, that there is absolutely no legal basis upon which a landlord (or their licensed real estate agent) may either demand, or even request that an applicant for tenancy provide a credit report as a required condition for consideration to become a tenant.

Should Applicants Give Permission?

Consumer Credit Reports in Residential RentalsSince the only way a consumer credit report may be obtained, as outlined in § 604. Permissible purposes of consumer reports [15 U.S.C. § 1681b] which (in part) says:

(a) In general. Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other:

(1)  In response to the order of a court having jurisdiction to issue such an order, or a subpoena issued in connection with proceedings before a Federal grand jury.

(2)  In accordance with the written instructions of the consumer to whom it relates.

the question that begs an answer, is:

Should a tenant applicant give their permission to obtain their credit report to a landlord?

In light of the fact, that it's my opinion that the use of consumer credit reports are NOT a legal use of those credit reports, I would have to say, NO.

HOWEVER - let's explore this issue further based solely on the hypothesis that the use of a consumer's credit report is a legal use under the FCRA in considering a tenant for a residential rental.

Based solely upon that hypothetical, I would advise ALL tenant applicants to obtain and review a written copy of the landlord's credit requirements policy BEFORE deciding whether or not to authorize access to their credit report.

If the landlord's written credit requirements (a standard to which all applicants are equally considered) were clearly stated and were reasonable, the applicant would then have sufficient information to make the decision regarding whether or not to give their permission.

HOWEVER - if the landlord does NOT have a written outline of credit requirements, or if those requirements are unreasonable, a tenant prospect should refuse to provide permission since they don't have sufficient information to ensure that their credit report will be viewed properly and and evaluated equitably. 

UNFORTUNATELY, landlords typically do NOT have written credit requirement standards, AND tenant applicants are never provided professional advice to ask for a copy of such credit requirement standards.

Thus, the cycle of the improper (and, I would argue - illegal) use of consumer credit reports in residential rentals continues.

The Impracticality Credit Reports in Residential Rentals

Let's suppose a hypothetical in which there has been a legally enforceable determination (e.g. a court decision) that says, the use of consumer credit reports is NOT a legal use for considering a tenant for residential rentals.

Would such a ruling damage or inhibit a landlord's ability to adequately vet a tenant applicant?

Absolutely not!

Landlords have many other means of evaluating a tenant applicant that are far more important than a consumer credit report. These other methods include a criminal background check (which I believe is far more relevant to a landlord than is a consumer credit report), employment verifications, as well as personal and business references.

Common sense dictates, that:

1. People need a place to live as much as they need to eat. Therefore, while they may miss payments on their credit card or a car payment here and there which will lead to a poor consumer credit rating, those same people are far less likely not to pay their rent. So, what good it is it to use a consumer credit report to vet a prospective residential tenant? None, in my opinion.

2. The majority of residential tenants would not be renting if they had "good" credit. They'd probably be buying. So, logic dictates that using a consumer credit report as an indicator of how good (or bad) a prospective tenant may be in the future is totally useless.

Potential Legal Liability

Consumer Credit Reports for Residential RentalsSomething that few, if any landlords and their real estate agents ever consider, is by refusing a tenant prospect based on their consumer credit report, both the landlord AND agent open themselves up to significant legal liability.

The problem of legal liability stems from the circumstance being, that if they're sued by a tenant prospect who was refused tenancy based upon the results of their consumer credit report, and if neither the landlord nor the agent can produce the credit standards policy by which the applicant was evaluated BEING THE SAME ONE that they use to evaluate ALL applicants, AND if they cannot also prove that they've provided a copy of this credit standards policy to every prospective tenant applicant, BOTH the landlord and their agent may face some very serious legal and financial consequences.

In the end, the use of consumer credit reports are very likely a legal abuse of the Fair Credit Reporting Act, as well as an creating an unnecessary potential major legal liability.

My advice . . . Don't use them.

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Rainmaker
888,864
Carol Williams
U.S.: I specialize in helping agents who have been in the business 2 years or less create a thriving business. - Wenatchee, WA
"Customized Mentoring & Marketing Services"

What a great article Ken.  As a retired Property Manager I concur with almost all of your article.  I do know, however, there are many reasons (other than bad credit) that people choose to rent.  Otherwise, I say BRAVO to your article!  

Have a great day.  

Dec 04, 2016 07:25 AM #1
Rainmaker
641,475
Annette Lawrence , Palm Harbor, FL 727-420-4041
ReMax Realtec Group - Palm Harbor, FL
Making FLORIDA Real Estate EZ

It like real estate clients trolling Zillow. Even though they KNOW the data is wrong, misleading, misrepresented, and stolen, they still want more information.

Landlords also want more information. This alleviates, for some, the need to call all those references, making the use of the Consumer Credit Report and crimial check an EASIER option. We all like easier.

When some population that represents 0.0000000007 percent of the population brings a discrimination suit, the law will be enforced.

Dec 04, 2016 07:52 AM #2
Rainmaker
1,319,712
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Ken Jones I see your point and it is a valid one. However, a criminal background check, employment verification, or personal and business references is not an indicator that a potential tenant pays their bills on time. A lease is upwards of 25% of the total income. A landlord should have some form of relevant indicator as to whether or not a tenant has a good payment history. Maybe the landlord should look at the payment history vs. making the determination solely on the FICO score.

 

Dec 04, 2016 09:40 AM #3
Rainmaker
1,044,669
Ryan Huggins - Thousand Oaks, CA
www.HugginsHomes.com - Thousand Oaks, CA
Residential Real Estate and Investment Properties

Ken, congratulations on the feature.  I must offer a contrary opinion though.  In California, our state's rental applications have wording regarding the usage of the credit report.

 

From the CAR rental application form LRA:

"Applicant represents the above information to be true and complete, and hereby authorizes Landlord or Manager or Agent to: (i) verify the information provided; and (ii) obtain a credit report on applicant and other reports, warnings and verifications on and about applicant, which may include, but not be limited to, criminal background checks, reports on unlawful detainers, bad checks, fraud warnings, employment and tenant history. Applicant further authorizes Landlord or Manager or Agent to disclose information to prior or subsequent owners and/or agents."

 

This has been reviewed by our state's lawyers, so I'm confident in the use of credit reports as one of many deciding factors.

Dec 04, 2016 11:37 AM #4
Rainer
258,735
Ken Jones, SCGREA, CRES
VRI Realty, Inc. - Metuchen, NJ
Residential and Commercial Brokerage

Ryan Huggins - Thousand Oaks, CA I understand the rules and regs in CA.

Frankly - and, with no disrespect intended toward you or other honorable real estate professionals in CA - I don't think very much of the record of legal interpretations in CA. Particularly considering the popular view in flaunting federal immigration law.

While one law has nothing to do with the other, it's the manner in which federal law is viewed, as a general issue.

As for the Fair Credit Reporting Act, it would be very interesting for a test case to be brought in hopes of resolving what I see as a very controversial issue.

Thanks for your usual thoughtful contribution.

Dec 04, 2016 12:00 PM #5
Rainmaker
2,561,346
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

Ken Jones - I left a comment on your question in the Q&A this morning.  While I do understand your point here ... I don't see anything changing until ... like Annette Lawrence , Palm Harbor, FL 727-420-4041 suggests ... that until 

0.0000000007 percent of the population brings a discrimination suit, nothing will change. 

Dec 04, 2016 12:01 PM #6
Rainmaker
639,713
David Alan Baker Laveen & South Phoenix Realtor
HomeSmart - Laveen, AZ
Your local Expert

Great article, and glad it was featured.  Very great points

Dec 04, 2016 12:09 PM #7
Ambassador
2,657,397
Anna Banana Kruchten CRB, CRS, Broker
Phoenix Property Shoppe - Phoenix, AZ
Arizona's Top Banana of Real Estate!

Ken there is a lot of food for consideration in this well written post.  I am quite certain our AAR attorney has not considered your points as it's quite common here (as I am sure you know) for landlords to get credit reports. Hmmmmm I will have to pursue this further - thank you for bringing it to our attention.

 

PS do you have some free time tomorrow to talk thrive stuff?

Dec 04, 2016 03:52 PM #8
Rainmaker
293,125
Melissa Jackson
Riverside Homebuilders - Sales Consultant - Springtown, TX
Your New Home Sales Consultant in Parker County

Congratulations on the featured post.  Very interesting points for both sides. 

Dec 04, 2016 07:01 PM #9
Rainer
56,690
Ari Taylor
Century 21 North Shore - Peabody, MA
Realtor with Century 21 North Shore!

I have stopped doing rentals because of this issue-with the exception of 1 landlord who uses credit reports reasonably-he checks for judgements, and overall credit.

I think it would be great to enforce this law with rentals-many landlords use credit to deny renters with assistance and I have seen many an applicant who would be given a mortgage but be denied an apartment based on credit. The area I am in rentals are near impossible. 

Dec 04, 2016 09:01 PM #10
Rainer
408,000
Sham Reddy
H E R Realty, Dayton, OH - Dayton, OH
CRS

You got to do what you got to do to protect your investment!!!

If you actually READ the Fair Credit Reporting Act, you'll find that the entire law is intended to restrict the use of a consumer credit report to its use for commercial business purposes.

Dec 05, 2016 04:29 AM #11
Rainmaker
2,246,614
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

I have been in the property management for decades and have not used credit reports. I may ask about the credit score but it is only a small part of the whole vetting procedure. After several key quick questions, we both arrive to the obvious i.e. whether this will work. I prefer simplicity over regulations

Dec 05, 2016 07:07 AM #12
Rainer
258,735
Ken Jones, SCGREA, CRES
VRI Realty, Inc. - Metuchen, NJ
Residential and Commercial Brokerage

Richie Alan Naggar I'm pretty much in total agreement with your methodology.

Having been a landlord, I've NEVER used a consumer credit report.

I meet the prospect(s), discuss their general situation (family size, age of children - if any, where they work, etc.). I explain to them what I expect from a tenant and make some initial judgments based upon this discussion.

If we both want to go further, I have them fill out my standardlized application which authorizes me to verify their employment and criminal background, and asks for 3 local business and personal references.

I verify their employment, do a criminal background check through a service, check the county court records where they've lived in the past for eviction judgments, and follow-up with their references.

Frankly, I've never had to evict a tenant in over 40 years of renting my own homes, or those of others.

Thanks for sharing your experience.

Dec 05, 2016 07:39 AM #13
Rainer
283,574
Jim Smith
The Property Management Company - Round Rock, TX
Broker,CRS,GRI,RMP,CNE,TRLP

As a professional Property manager, Instructor, and Speaker, I must respectfully disagree.  I would love to have a one-to-one dialog with you to better understand your point of view. Their is not enough room (nor is it the right forum) to address your blog in it's entirety; however, I do wish to address one aspect that I believe you have mis-stated.  The Landlord is, in fact, extending credit to the Tenant.  The Lease is a contractual agreement for a defined amount of money.  For example: a one year Lease for $12,000.00.  Understanding most people do not have that kind of cash laying around, then a credit payment is established allowing the Tenant to pay that out on the terms of $1,000.00 per month, in advance, over the 12 month period.  If the Tenant fails to maintain their payment schedule, the Landlord may (in most states), not only sue for past due rent and possession (known as an eviction), but may also receive the remaining balance of the $12,000.00, as agreed to in the Lease, less any future rents received, if leased prior to the end of the original Tenant's term.  Additionally, many property management companies DO report rent payments to the credit bureaus, and we DO see them within the detailed credit reports.  We are charged with the fiduciary responsibility of our clients; and therefore, are expected to use ALL the available tools to best vet perspective Tenants.

Dec 06, 2016 07:20 AM #14
Rainmaker
4,146,532
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks Ken.  This is very interesting and makes me relieved that I don't work with very many rentals.

Dec 24, 2016 04:52 PM #15
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