New HUD Report for Tenant Screening and Credit Checks - Part 1

On April 29th, HUD released new guidelines for screening tenants and being compliant with the latest fair housing laws. I am writing this post in two parts. This is part 1 and will go into a summary of their 24-page guidance and what it means. Please note I am not an attorney, and thus, I strongly recommend that you consult with yours before making any changes to your screening practices. This step is crucial to ensure you are fully compliant and protected. In part two, I will respond that no one in HUD will read it, but I hope they see it. Let’s dig into my interpretation of the 24-page guidelines and what landlords need to know about their tenant screening process.

Why Did HUD Come Up With These Guidelines In The First Place?

Congress passed a law last year called the Fair Housing Act. However, like the norm with our government, it needed more clarity. So, HUD decided to give us some of that clarity and go over how they will deal with the people responsible for housing discrimination in their minds.

Liability for Wrongfully Denying a Tenant

The first question HUD had to answer was who was liable for wrongfully denying a tenant. At the same time, there may be secondarily liable parties such as the screening provider, real estate agents who help the property owners and property managers who screen a prospective tenant, or anyone considered an agent of the housing provider. So, this means the buck stops with you if you are a housing provider. If you don’t know why a tenant screening report is saying no or a realtor tells you not to accept someone, it can come back to bite you. You are ultimately liable for all decisions if your name is on the lease as the housing provider.

Choosing a Screening Company

When choosing a screening company, HUD gives us the following guidelines:

“In selecting a tenant screening company, housing providers should inquire into how the company ensures its screenings are accurate and nondiscriminatory. Housing providers should select screening services that (a) offer customizability; (b) frequently update their data; (c) monitor for unjustified discriminatory effects; (d) report clear and specific reasons for denials; (e) allow individuals to correct inaccuracies; (f) publicly disclose key details about their screening systems; and (g) comply with all applicable Federal, state, and local laws.”

Link to HUD Guidelines

Prohibited Practices in Screening Applications

So, what can we not do when reviewing a screening application per the new guidelines? First, intent has no bearing on whether you can be found to be discriminatory or not. Discrimination is either denying based on a protected class (i.e., is the application a minority Yes/No) or making a decision based on that and/or denying something that, per HUD, categorizes a protected class. 

Also, HUD clearly states that the housing provider has the burden of proving that the action had a legitimate purpose beyond discrimination. Even if that is proven, if HUD can show that the same info could have been gotten in a less broad form, it can still be discrimination. 

HUD also goes into discrimination not just being the final decision but also any questions or advertisements of your rental properties that may discourage a protected class from applying. The article goes deeper into denying based on proxy for a protected characteristic and choosing relevant criteria and questions.

Eviction Report

While HUD did not take away the ability to deny because of an eviction, it did limit it quite a bit:

1. They must have complete eviction records, and the eviction must be fully awarded to the previous landlords.
   • If you can’t see that the judge ruled against them in the court records or if a landlord made a deal for them to move out without the judge granting the eviction, you can not deny it based on an eviction.
2. Eviction cause must be taken into account.
   • HUD states, for example, that if a tenant loses their job and is evicted, you can not use that against them.
   • I would extrapolate that example to apply to medical and possibly criminal reasons (e.g., being evicted because of being arrested). This is not clearly stated, but if you read between the lines, I can see a judge agreeing.
   • This can also be extended to rental history and should not be considered when things like a bad relationship or a job loss cause the potential tenant not to pay their rent.

Income Requirements

Income verification and requirements must not be discriminatory.

1. Use all sources of income when determining who qualifies.
   • i.e. Section 8 vouchers or SSID
   • They are not saying the source of income is protected at a federal level, but they are making sure via a proxy that it could be.
2. Using income when irrelevant to a tenant's ability to pay.
   • If a tenant receives aid for payment, their income does not matter. i.e. if the tenant gets Section 8 payments, they already qualify for HUD, and their portion was decided by HUD.
   • Furthermore, if the responsible party qualifies for income and credit, the rest of the household must be approved. This means that if the father qualifies but the mother has poor credit and no income, that cannot be used against them.

Guide on using tenant credit checks and scores to screen tenants

1. Credit invisibility: Minorities are far more likely to be credit invisible, otherwise known as having a score of 0, meaning they have not built a credit score. If the credit score shows as 0, then per HUD, the tenant must pass the credit score portion of the screening.
2. Excuses for Poor Credit: The guidelines recommend not relying on credit scores compared to the information on the report; a score can be considered discriminatory, as a TransUnion credit report does not report all on-time payments, especially payday loans, which Minorities primarily use.
   • If a tenant had something like a medical emergency, family emergency, or was a domestic abuse victim, their scores may be lowered due to the circumstances, and thus, that must be taken into account.
   • A landlord should give them the chance to explain the low credit score and look at the full credit report not just the score.
   • The personal information of a tenant must be complete and accurate information, meaning if a record shows for A. Scott, you can not assume it applies to Andrew Scott.
3. A Cosigner is a Reasonable Accommodation: If the applicant has a co-signer that passes the qualifications for credit and financials, then the applicant's credit becomes irrelevant.

Using Criminal Records to Screen Tenants

The criminal justice system targets minorities and people with disabilities, so broadly denying for criminal history would be discriminatory.

1. The tenant must be able to commit the crime again; if someone was convicted of assault on their criminal report, that normally would be a danger to the neighboring tenant, but if that person is now in a wheelchair, it is less likely they could assault a neighbor; thus, they should not be denied.

2. The crime on the criminal background check must be relevant to housing and show a danger to another tenant or the property itself.

3. It must not be circumstantial; if the tenant held up a liquor store because their ex-boyfriend made them, you can not deny them for the crime.

So there you have it HUD’s new guidelines on how to screen for a tenant, but wait, there is more.

Transparency in Denials

HUD requires transparency when denying a tenant. You must give a reason, and the reason must be particular. For example, if denied for a credit score, you must state that the credit score needed is 600, and yours was 450, so you are being denied. If you think anything used to determine your score is inaccurate or due to extenuating circumstances, please reach out to appeal.

Asking the Wrong Questions

HUD explicitly says intent does not matter and that deterring someone from applying is as discriminatory as denying them. This means that questions on the rental application form about a protected class can be considered discriminatory even if not used in the decision. This includes questions such as what do you do for a living? Or are you married? Thus, you can only ask questions to reveal necessary information. I would also be careful in advertising criteria that go against fair housing, i.e., no convictions, no evictions, etc., as these now must be taken case by case.

Conclusion

In conclusion, the new Fair Housing Act will make thorough tenant screening much more complicated, and landlords will have a ton of landmines to walk through to find the right tenant. If you are looking for peace of mind when finding a new good tenant, I would highly suggest looking for a property manager with concrete screening criteria and knowledge of federal and state laws. If you're in Chicago Land, call us to discuss our management services and how we can help find qualified tenants for your rental unit. 

Read our Part Two, where I give my opinion on the ruling and its effects on the housing community. Above is a breakdown of the 24 pages HUD released on the Fair Housing Act and how they relate to landlords.