Credit Reporting Laws You Need to Know

Any time you use a consumer credit report to decide whether to accept a rental applicant or renew a lease with a current tenant, the Fair Credit Reporting Act (FCRA) legally requires you to take some important steps to remain in compliance with the law. From credit freezing laws and procedures to adverse action notice requirements – here is everything you need to know about credit reporting laws for tenant screening.

What is a Consumer Report?

A consumer report is any written, oral, or other communication with information on a consumer’s (in this case, the rental applicant’s) credit characteristics, rental history, eviction records, or criminal history. Credit reporting agencies – commonly known by property managers as tenant screening companies – prepare the report for rental property owners and property management companies like yours and are covered by the FCRA.

If you use consumer credit reports to make tenant decisions, you should take measures to comply with the FCRA, which is enforced by the Federal Trade Commission (FTC).

Quick Tip!

A credit reporting agency (aka your tenant screening company) is very different from a credit bureau (such as Experian, TransUnion, and Equifax). A credit reporting agency can supply an applicant’s rental, eviction, or criminal history, while the credit bureau supplies the credit report. Your tenant screening company compiles all this information into a tenant screening report.

How to Get your Tenant’s Credit Report

Before you can even obtain your tenant’s consumer report, you must have permissible purpose. The rental housing industry is one of the few industries that can obtain consumer reports on the basis that the report is being used for tenant screening purposes.

To access a consumer report for tenant screening, property owners and managers must:

  1. Only access a report from a current tenant or rental applicant who is applying to rent from you or renew a lease.
  2. Get permission from the tenant or applicant to obtain their consumer report. You can get written permission via your rental application either in print or using e-signature.
  3. Certify with the tenant screening company you’re using that the report is for housing purposes. Once again, you are prohibited from using consumer reports for any other purpose. Certifying you have permissible purpose is typically done when you agree to the terms of service when signing up with a tenant screening service.

The Tricky Business of Credit Freezes

Since Equifax’s 2017 data breach, many consumers have placed freezes on their credit to help protect themselves from identity theft. Credit freezes enable a consumer to restrict outside access to their credit report and will stop a consumer reporting agency (i.e. your tenant screening company) from releasing their credit report without their consent. While this makes it difficult for an identity thief to wreak havoc on the rental applicant or tenant, it prevents landlords and property managers like you from accessing the necessary credit reporting information you need to process an application or lease renewal.

If you run into a rental applicant or current tenant with a freeze on their credit, here’s what you can do.

The Adverse Action: What is it and What is Required

If you decide to take any action that is considered ‘unfavorable’ towards the tenant or rental applicant based on the information within their consumer credit report, it is considered an adverse action. According to the FTC, common adverse actions 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
  • Raising the rent to a higher amount than for another applicant

If a rental housing provider makes an adverse action, they must notify the applicant or tenant with an Adverse Action Notice. This notice tells the consumer about their rights to see the information that’s being reported about them and to correct inaccurate information.

Your adverse action must include:

  • The name, address, and phone number of the consumer reporting company that supplied the report
  • The applicant’s credit score, regardless of whether it was a factor in the rental decision.*
  • A statement that the company supplied the report did not make the decision to take the unfavorable action and can’t give specific reasons for it
  • 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.

*If you have co-applicants, each applicant will need to receive their own adverse action letter.

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.

Quick Tip!

While the Fair Housing Act (FHA) allows adverse action notices to be delivered orally, we recommend you stick to written or electronic notices. This allows you to maintain a paper trail and stay clear of any unwanted legal trouble if your FCRA compliance comes into question.

Disposing Consumer Reports

The FTC requires that you securely dispose of any consumer reports (and the rest of the background screening report.

“Any person who maintains or otherwise possesses consumer information for a business purpose must properly dispose of such information by taking reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal.”

Code of Federal Regulations 682.3 Tweet

For physical documents, secure disposal can include burning, pulverizing or shredding. For digital documents, electronic information must be destroyed in a manner in that it can’t be read or reconstructed. Presently, the industry standard is that consumer reports and tenant screening reports must be kept on record for 7 years, however, this rule can change depending on your state’s laws.

Click here for more information on how to properly (and legally) destroy documents

As you continue to use your rental applicants’ credit reports within your tenant screening process, schedule some time to perform an annual compliance audit. This ensures that your rental properties not only stay FCRA compliant, but up-to-date on the latest credit reporting laws.

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