Risks and Limitations of Using Credit Reports and Other
Methods of Screening Potential Tenants
The Federal Fair Credit Reporting Act imposes limitations
and obligations on landlords who use credit reports and other information to
screen potential tenants. The Act imposes strict procedures on using credit
information and provides for fines as high as $2,500 per violation. Landlords
must proceed with extreme caution in obtaining credit reports, evaluating
potential tenants, and notifying potential tenants of any adverse actions. The
requirements may make form rejection letters obsolete.
Landlords have historically been permitted to obtain credit
reports on potential tenants, since landlords were "extending credit" to
tenants. In Arizona, landlords were not required to provide a tenant with the
basis for rejecting their tenancy application or charging a higher rental rate
or security deposit unless the tenant expressly requested such information.
Revisions to the Federal Fair Credit Reporting Act changed that process.
Many landlords use credit information to evaluate potential
tenants. Although the law does not technically appear to require an applicantís
written consent in order for a landlord to obtain credit information or a credit
report, it is nonetheless a safe and prudent practice to obtain the applicantís
written consent. Additionally, the landlord should obtain written consent from
each applicant, including both the husband and wife, if the landlord
desires to obtain credit information on each of them.
If a landlord obtains a credit report on a prospective
tenant, and if the landlord decides to take any adverse action against
the prospective tenant based on their credit information (including, but not
limited to rejecting the tenant, charging the tenant a higher rental rate
because of their higher credit risk, imposing a larger security deposit, etc.),
the landlord must provide a detailed notice to the tenant, either orally
or in writing, providing detailed information as stated below (for the
landlordís protection, written notice is recommended). A form letter will no
longer suffice. At a minimum, the notice from the landlord must contain the
Informing the applicant of the
adverse action being taken (such as that their tenancy application has been
rejected or that the rental rate or deposit will be higher, etc.) because of
the information contained in the report.
Identifying the source from which the landlord obtained
information to base the rejection or adverse action. If the source was a
consumer credit report, the landlord must identify the name, address and
telephone number of the credit reporting agency, including the toll‑free
telephone number of the agency if the agency compiles and maintains files on
consumers on a nationwide basis.
If the credit report does not contain sufficient
information on which the landlord can determine the applicantís
creditworthiness, a statement to that effect must be made along with
identifying the name, address and telephone number of the credit reporting
agency from which the report was obtained.
Informing the applicant that the credit reporting agency
did not make the decision to take adverse action and that the credit
reporting agency cannot provide them with the reasons for the landlordís
Informing the applicant of their right to obtain a copy
of their consumer report from the reporting agency, their right to dispute
the accuracy of the report, and their right to have a consumer statement put
into their report to explain a debt or credit problem.
Informing the applicant that they have only sixty (60)
days to obtain a free copy of their consumer report from the credit
Informing the applicant that they may have additional
rights under the laws of the State of Arizona (even though the Fair Credit
Reporting Act does not require this particular notice item to be given, a
landlord may be acting more fairly to the applicant if any violations are
Even if a landlord does not obtain
a credit report or base adverse action on a credit report, notice requirements
may still be imposed on a landlord. If the landlord obtains information from a
third party other than a credit reporting agency (such as a prior landlord), and
if the information from that third party forms the basis for the landlordís
adverse action, either in whole or in part, the tenant must still be given the
foregoing notice and also informed that upon their written request within sixty
(60) days after notice of the adverse action is received by them, they will be
provided with the nature of the information obtained from the third party.
However, if a third party reference, such as a prior
landlord, provides you with information based on their own experience
with a tenant, such as informing you that the potential tenant was always late
in making payments, that they caused specific damage to the landlordís premises,
etc., the Fair Credit Reporting Act may not apply and may not require additional
notice to the prospective tenant. But, if the prior landlord were to provide
additional information on the applicant based on other than first-hand
knowledge, such as the applicants personal characteristics or general reputation
(i.e., "Iíve heard that Mr. Smith has been causing problems in the
neighborhood"), the Fair Credit Reporting Act might then apply and require
disclosure of such information if adverse action is taken by the landlord.
The Fair Credit Reporting Act is tricky. The foregoing is
merely an informative overview and is not intended to provide a comprehensive
legal analysis of tenant screening issues, the application of the Act, and the
notices to be given. Landlords that are using credit reports or other
information to evaluate potential tenants would be well advised to consult legal
counsel on these issues to prevent potential fines and penalties.
This article was originally published in 2008.