FTC Issues Screening Guidance for Owners

Screening for credit and rental history are among the list of permitted screening criteria commonly used by owners [HUD Handbook 4350.3, par. 4-7(F)]. The Fair Trade Commission (FTC) recently issued new guidance for owners who use background checks to screen tenants to help them comply with the federal Fair Credit Reporting Act (FCRA), which the FTC helps enforce. If part of your applicant screening process involves running a tenant background check through a company that compiles background information, you must take certain steps before utilizing such services and after taking an adverse action based on a report.

These companies may provide a report that includes a variety of information, including rental and eviction history, credit, or criminal records. They also are known as consumer reports. When you use consumer reports to make tenant decisions, you must comply with the FCRA. We’ll go over what a consumer report and an adverse action entail. And we’ll discuss the steps you need to take before you get a consumer report after you take an adverse action against an applicant.

What Is a Consumer Report?

A consumer report may contain information about a person’s credit characteristics, rental history, or criminal history. Consumer reports are prepared by a credit reporting agency (CRA), a business that assembles such reports for other businesses, and are covered by the FCRA. Examples of these reports include:

• A credit report from a credit bureau, such as Trans Union, Experian, and Equifax or an affiliate company;
• A report from a tenant screening service that describes the applicant’s rental history based on reports from previous landlords or housing court records;
• A report from a tenant screening service that describes the applicant’s rental history, and also includes a credit report the service got from a credit bureau;
• A report from a reference checking service that contacts previous landlords or other parties listed on the rental application on behalf of the rental property owner; and
• A report from a background check company about an applicant or tenant’s criminal history.

Before You Get a Consumer Report

You can obtain a consumer report only if you have a permissible purpose. Owners may obtain consumer reports on applicants and tenants who apply to rent housing or renew a lease. And you should obtain written permission from applicants or tenants to show that you have a permissible purpose.

You must certify to the company from which you’re getting the consumer report that you’ll use the report for housing purposes only. You may not use the consumer report for another purpose.

It’s also a good idea to review other applicable federal and state laws related to consumer reports. For example, in Best Practices for Complying with HUD’s Guidance on Criminal Background Guidance, in the Insider’s December 2016 issue, we discussed HUD guidance on criminal background checks and evaluation standards for applicants with criminal records. HUD’s guidance clearly states that records of arrest should not be used to deny housing or terminate a lease. There may be circumstances where a criminal event has occurred and the arrest record might justify further research into the behavior, but an arrest alone can’t be used to deny housing eligibility. Also, resident selection criteria should not include a blanket exclusions for all convictions or all felonies. Those policies are likely to be challenged by disparate impact claims.

What Is an Adverse Action?

An adverse action is any action by an owner that’s unfavorable to the interests of a rental applicant or tenant. Examples of common adverse actions by landlords include:

• Denying the application;
• Requiring a co-signer on the lease;
• Requiring a deposit that would not be required for another applicant;
• Requiring a larger deposit than might be required for another applicant; and
• Raising the rent to a higher amount than for another applicant.

After You Take an Adverse Action

If you reject an applicant or take any other adverse action based partly or completely on information in a consumer report, you must give the applicant or tenant a notice of that fact either orally, in writing, or electronically.

An adverse action notice tells people about their rights to see information being reported about them and to correct inaccurate information. The notice must include:

• The name, address, and phone number of the consumer reporting company that supplied the report;
• A statement that the company that supplied the report didn’t make the decision to take the unfavorable action and can’t give specific reasons for it; and
• A notice of the person’s right to dispute the accuracy or completeness of any information the consumer reporting company furnished, and to get a free report from the company if the person asks for it within 60 days.

The adverse action notice is required even if information in the consumer report wasn’t the primary reason for the decision. Even if the information in the report played only a small part in the overall decision, the applicant or tenant must be notified.

While oral adverse action notices are allowed, written notices provide proof of FCRA compliance. Copies of adverse action notices denoting the date it was delivered to the applicant can help you avoid unjustified legal claims for angry applicants.

The FTC guidance provided the following scenarios in which an adverse action notice must be sent to the applicant:

1. An owner orders a consumer report from a CRA. Information contained in the report leads to further investigation of the applicant. The rental application is denied because of that investigation. Here, since information in the report prompted the adverse action in this case, an adverse action notice must be sent to the applicant.
2. In another scenario, an owner hires a reference checking service to verify information included on a rental application. Because the service reports that the applicant doesn’t work for the employer listed on the application, the rental application is denied. Here, the applicant is entitled to an adverse action notice. The report is a consumer report from a CRA (the agency checking the references provided by the consumer on the application), and its report influenced the owner’s decision to deny the application.

In another situation, an owner orders a criminal history report on a prospective tenant. Because the report shows that the applicant has a felony conviction, the landlord denies the rental application. Here, the applicant is entitled to an adverse action notice. The report is a consumer report, and it influenced the owner’s decision to deny the application.

Investigative Reports

Owners who use “investigative reports,” reports based on personal interviews concerning a person’s character, general reputation, personal characteristics, and lifestyle, have additional obligations under the FCRA. These obligations include giving written notice that you may request or have requested an investigative consumer report, and giving a statement that the person has a right to request additional disclosures and a summary of the scope and substance of the report. (See 15 U.S.C. Section 1681d(a), (b)).

Disposing of Consumer Reports

When you’re done using a consumer report, you must securely dispose of the report and any information you gathered from it. The FTC’s Disposal Rule requires disposal practices that are reasonable and appropriate to prevent the unauthorized access to or use of information in a consumer report. For example, reasonable measures for disposing of consumer report information could include establishing and complying with policies to:

• 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 report information so that the information cannot be read or reconstructed; or
• Conduct due diligence and hire a document destruction contractor to dispose of material specifically identified as consumer report information consistent with the rule. Due diligence could include reviewing an independent audit of a disposal company’s operations and/or its compliance with the rule; obtaining information about the disposal company from several references; requiring that the disposal company be certified by a recognized trade association; reviewing and evaluating the disposal company’s information security policies or procedures.