Tenant Screenings
The tenant screenings a landlord conducts are important risk assessment tools for business profitability and asset protection. Screening requirements are regulated by legal compliances and business necessity. Tenant screenings relevant to business standards provide key data to evaluate an applicant for potential business risk. With recently passed legislature by some states and local governments, there are now additional restrictions and prohibitions regarding the use of tenant screenings in rental housing decisions.
While the timing and scope of tenant screening practices are changing in different localities, the need for tenant screening remains strong in order to protect the landlord’s business and the safety of his tenants in residence. A landlord will need to correctly understand how such restrictions or prohibitions affect his business and make adjustments in his practices accordingly. To maintain legal compliances, a landlord must incorporate full due diligence as an ongoing risk management practice for his property locations.
One example of new regulations in tenant screening policies and practices is the City Council of Minneapolis, Minnesota approval of an update to the city’s Renter Protection Ordinance. The updated ordinance regulates how landlords conduct tenant screenings of potential tenants. One of the provisions of the ordinance prohibits landlords from rejecting a potential tenant for having an insufficient credit score or insufficient credit history.
Historically a landlord has looked to the consumer credit report as the key document for measurement of an applicant’s qualifications to rental standards. A credit score has been regarded as an objective, measurable, and defensible method of evaluating financial risk to the landlord’s business. The applicant’s use of credit, credit payment history, and debt exposure were set out as indicators of future credit performance. The applicant’s creditworthiness was in practice judged by his credit history and/or credit score. Now, in Minneapolis a landlord should re-examine his rental standards, and as necessary, revise standards to comply with the updated regulations. In some cases, a landlord will need to change his tenant screening policy and practices to remove qualification requirements for credit score and satisfactory credit history. The landlord must assess the potential financial risk of an applicant using various screenings that are in compliance with the ordinance.
A credit score or credit report are not the only screenings available to the landlord for decision making. The landlord retains his ability to operate his business to select a tenant who meets rental qualifications as long as the landlord’s rental standards are legal, non-discriminatory, and applied to all rental prospects, applicants, and tenants. The landlord will control the means and methods of screening potential tenants by choosing legal appropriate screening measures to evaluate applicant qualifications to business standards.
A landlord protects his business by analyzing business risks and implementing practices that reduce risk. The risk of missed rent or late rents is a concern to most landlords. To reduce problems associated with rent defaults, a landlord can screen an applicant for the ability and willingness as a tenant to meet rent obligations. Financial ability and satisfactory credit management is at the center of applicant qualification and approval for tenancy. An important determination in setting business policies is how best to evaluate this requirement. In the past a landlord may have based a housing decision on the applicant’s credit history and/or score. Now a landlord must evaluate screening practices that can collect the type of information to qualify an applicant to rental standards for income and employment that allow an applicant to meet rent, as well as reference sources to confirm payment history of the applicant in his willingness to make rent payment a priority. Consumer credit reports are still a valuable resource and provide critical data for financial analysis and evaluation. The information in the credit report should be considered in context of the source and reporting period of contributing creditors, not as an absolute indication of credit worthiness.
The issue of missed or late rents can raise another concern for landlords. The lease agreement sets out the legal contract terms and conditions for both landlord and tenant. The tenant by signing his lease has agreed to meet contractual obligations for full and timely rents. If the tenant defaults on this material term, what other lease terms and conditions may fall to default? Screening for ability to pay and willingness to pay should be backed up by the applicant’s management of his resources to meet credit responsibilities. There should be adequate history of the applicant’s commitment to meet his financial duties and obligations.
This is an area where the applicant’s credit report can supply information by listing open and closed accounts, the type of credit, the total amount of loans, balances due, and payment history. Additionally a credit report will list any accounts sent for collection or write off.
Financial ability to pay rent can come from various sources of income. Wage earnings are the most common source of income. Proof of current employment and wages or salary income for applicants can be verified by the applicant providing copies of the last several paycheck stubs, and the landlord’s direct confirmation of the applicant’s employment status by a written document from the current employer or as documented in a telephone conversation.
Self-employed individuals can provide copies of previously filed tax returns, or copies of the IRS Form 1099- Miscellaneous as documentation of their earnings. An applicant whose income comes from commissions or incentives will need to provide the landlord with copies of appropriate documents that support the sources of income. A landlord may need to review copies of tax returns, bank statements, 1099s, or other supporting documents for verification purposes.
Verification of non-earned income, such as interest, dividends, annuities, Social Security or disability benefits, IRA/401(k) pension distributions, other retirement plan distributions, court-ordered agreements for spousal support, child support or as awarded by lawsuits, and other investment cash flow and entitlement items, may be verified through copies of official statements available to the applicant.
In general, a landlord can request whatever financial information is required to confirm the applicant’s ability to pay under the landlord’s legal, business supported rental criteria, provided the same financial information is requested from all applicants.
Renters who meet their financial obligations will have a record of timely payment. The credit report provides summary data of payment history. Additionally landlords can contact rental references to confirm the renter paid as agreed while a tenant at former rental address. Credit references can be contacted for those creditors who have extended credit or otherwise established a financial relationship with the renter but who do not report payments or payment history to the major credit reporting bureaus.
When an applicant has an insufficient credit history or credit score, it can be as a result of a voluntary lifestyle decision to not utilize credit or that credit has not yet been established over a sufficient period of time to generate a credit history, a landlord must determine how best to evaluate his qualifications to rental standards.
Many landlords have experience in evaluating applicants with thin credit files or otherwise appear to be credit invisible to credit reporting bureaus. Those landlords have found that an applicant considered credit invisible may actually have a strong history of debt repayment according to terms and conditions of non-reporting creditors. Being invisible does not mean an applicant is not credit worthy. An applicant whose credit report file comes back as thin is not automatically a person who has made poor credit decisions and missed payments. In some ways a thin file applicant is credit neutral. Some applicants – whether their credit file is visible, invisible, or thin – are credit worthy, while others are not.
An applicant interview is a screening tool that can also provide information about credit usage and money management. The interview allows the applicant to tell his story and explain how he manages his financial obligations, i.e., pays his bills. The landlord has the opportunity to ask the applicant questions that clarify information on the application form or as furnished by references from the employer, previous housing providers, and credit references.
Additionally a landlord should be knowledgeable of legal requirements in some jurisdictions and in certain circumstances for individualized assessment of the applicant’s background history, including criminal, eviction, and credit history.
The terms and conditions for tenancy are set by the landlord. The landlord has the right to offer conditional approval for tenancy such as requiring a co-signer or different lease terms. The above discussion can serve as an example to landlords of changing rules and regulation of landlord-tenant issues and the need to monitor such changes and adjust as necessary for compliances. Tenant screenings are comprised of various types of verifications and fact checking that contributes to the final decision to offer tenancy.
The restrictions and prohibitions made by the Minneapolis City Council change tenant screening practices in that jurisdiction. Landlords are always required to review practices, revise practices as necessary and comply with current legal requirements. The process of tenant selection decisioning remains the landlord’s business decision. Proponents of the ordinance view the new changes as tenant protections to make the screening process a more inclusive process. The new tenant screening regulations are effective in June 2020 for landlords who own 15 or more rental units. Landlords with fewer rental units have until December 2020 to comply with the new regulations.
Note: Landlords are cautioned that information, as presented in this article, is for discussion purposes only and should not be construed as legal writings, or as legal advice. The topic of discussion, however, is representative of some the changes in landlord-tenant issues that are effective this coming year; that are being proposed for future consideration; or that are pending in the next state and local legislative sessions.