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Warner Angle Hallam Jackson & Formanek PLC


landlord-tenant law

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 following:

  • 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 decision.

  • 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 reporting agency.

  • 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 ever alleged).

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.


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