The Laws and Regulations Regarding Pulling and Using Credit and Consumer Reports for Selecting Tenants

Most, if not all, property managers and landlords in Southern California will conduct a background check on prospective tenants. This background check usually includes the landlord ordering a credit check and/or a consumer report. When conducting background and credit report checks, owners, landlords, and property managers must remember to comply with both Federal and California Fair Housing Laws. Additionally, they must also comply with the Federal Equal Credit Opportunity Act and the Fair Credit Reporting Act (FCRA), which may be applicable whenever a landlord or property manager orders a consumer report on a tenant.

What is a Consumer Report?

The FCRA defines a consumer report as any report that contains information about an applicant’s rental, credit, and/or criminal history. Consumer reports are commonly prepared by credit reporting agencies, which are in the business of assembling consumer reports for businesses. Examples of a consumer report include a credit report from one of the three major credit bureaus (Transunion, Experian, or Equifax), any tenant report from a tenant screening company that details a tenant’s rental history, any report from a reference checking service that contacts a tenant’s previous landlords and  any report from a reference checking service that contacts previous landlords or a background check report that includes a tenant’s criminal history.

What is the Equal Credit Opportunity Act (ECOA)?

Implemented across the county on April 1, 1990, the Equal Credit Opportunity Act (ECOA) includes four major provisions.   

  1. The Act specifies what is categorized as credit discrimination.
  2. It requires that creditors send applicants written notice of the credit decision together with any information which affected their credit decision. 
  3. The Act mandates that the applicant receive a notice regarding its credit decision, regardless of whether it’s an approval or denial.
  4. Requires certain record-keeping by the entity offering credit.

Keep in mind that the ECOA applies to all types of commercial and residential rental transactions.

Example of a Violation of ECOA

No applicant can have a credit application denied based on race, color, religion, national origin, marital status, age, etc.

What is the Fair Credit Reporting Act (FCRA)?

The FCRA is a federal law implemented in 1970 to ensure the privacy, accuracy, and fairness of consumer reports. Primarily the FCRA oversees how credit reporting agencies can share and collect information about consumers.

When accessing consumer reports to make tenant decisions, landlords and property managers must comply with the Fair Credit Reporting Act (FCRA). The Federal Trade Commission (FTC) enforces the FCRA.

The FCRA gives prospective tenants certain rights as it pertains to their credit report. One of these rights includes access to one free credit report each year. The FCRA also allows prospective tenants to dispute inaccurate information on their credit report with the three credit bureaus. 

A prospective tenant or a landlord can order a credit report from one of the credit-reporting agencies, TransUnion, Equifax, and Experian.

What is the Law Regarding Credit Reports?

Obviously, landlords across the country are permitted to run credit reports for prospective tenants to evaluate their credit history, payment history, and creditworthiness. However, they must remember the ECOA rules if and when they decide to do so. So, for example, if you as an owner/landlord/property manager deny an applicant housing due to information contained within their personal credit report, you are required to send them an “adverse action letter.”

What is included in an Adverse Action Letter?

The Adverse action letter that you send to tenants that you deny must include the following:

  1. the reasons you rejected the prospective tenant
  2. the contact information of the credit reporting agency that reported the negative credit information.
  3. A notice to the applicant that they are entitled to a free credit report within 60 days by requesting it from the credit reporting agency

To run a credit check on a prospective tenant, you will have to ask the tenant for their legal name, current address, an Individual Taxpayer Identification Number (ITIN), or  Social Security number.

Can a Landlord Deny Tenants Who Are Not US Citizens?

It is outright illegal to deny housing to someone based on their national origin. However, that doesn’t mean that the landlord or property manager doesn’t have to properly vet those tenants. In most states, including California, landlords are permitted to ask applicants for proof of their eligibility to work in the US. You can also ask for a naturalization certificate or a passport. If an applicant cannot provide this information, it is not illegal to deny these applicants housing under the ECOA, FCA, or Fair Housing Laws.

Should Landlords in California Use a Written Rental Application?

There is no law stating that landlords must use a written rental application. However, there isn’t really any good reason not to. Specifically, it’s best to have a paper trail in case an applicant claims discrimination. For example, it would be challenging to prove that a tenant was discriminated against because of their race when their FICO score is low, and their credit report show multiple tax liens, bankruptcies, judgements, collections, or unpaid bills.

Responsibility of the Landlord to Keep Tenant’s Data Safe

When a landlord or property manager screens potential applicants, they gain access to extremely sensitive personal data. This data includes employment information, tax returns, social security number, etc.

While there are no federal privacy laws that directly apply to real estate property managers and landlords, it is still important that they protect prospective tenant’s information. Also, keep in mind that if your real estate management firm collects information through a website, some privacy laws will apply to those transactions directly. As such, to error on the side of caution, you should implement a reasonable data security policy to ensure that your current or potential tenants’ data is not compromised.

We recommend speaking with your local landlord attorney to go over any questions and the details of your local laws to ensure you’re in compliance with all local, state, and federal laws.

Need Help? Contact us!

If you are busy or you own several properties and it has become difficult for you to manage, hire an experienced Los Angeles and Orange County property manager like AllView Real Estate. Give us a call and let us show you how to get the most out of your property. You can reach us at (949) 400-4275 or send us an email at info@allviewrealestate.com.