How to Comply with Federal and Local Disclosure Rules When Screening Applicants

Choosing the right tenant is one of the most important decisions an owner can make. The right tenants pay their rent on time, do not cause any legal problems, and keep their apartments in good condition. To choose the best tenant among applicants, an owner should rely on a thorough screening process that includes checking references, verifying employment, and obtaining credit and background reports.

Many owners gain access to this information by ordering screening reports. A tenant screening report is a type of consumer report that includes a person's housing court history. Screening companies will search housing court dockets to see if an applicant has been sued by a prior owner for nonpayment of rent, damage, or other issues.

This practice is the focus of a new law called the Tenant Fair Chance Act (TFCA) that was signed by Mayor Bloomberg on March 2 of this year. The law imposes new requirements on top of those already required by the Federal Fair Credit Reporting Act (FCRA) upon owners who use these screening services. The new law will go into effect on July 2, 2010.

We will go over the new local law's requirements along with the federal rules for using consumer reports to screen tenants. Knowing both the local and federal rules will ensure that you are in compliance with the law and help you avoid any penalties.

What Is a Consumer Report?

A consumer report contains information about your personal and credit characteristics, character, general reputation, and lifestyle. Owners often use consumer reports to help them evaluate rental applications. These reports include:

• A report from a tenant-screening service that describes the applicant's rental history based on reports from previous owners or housing court records;
• A report from a tenant-screening service that describes the applicant's rental history, and also includes a credit report the service got from a credit bureau;
• A report from a tenant-screening service that is limited to a credit report the service got from a credit bureau; and
• A report from a reference-checking service that contacts previous owners or other parties listed on the rental application on behalf of the apartment owner.

Owners often ask applicants to give personal, employment, and previous landlord references on their rental applications. Whether verifying such references is covered by the FCRA and the TFCA depends on who does the verification. A reference verified by the owner's employee is not covered by the laws. However, a reference verified by a consumer reporting agency hired by the owner to do the verification is covered.

Behind New Law's Passage

As soon as a housing court case is put on the calendar by a clerk or lawyer, New York's housing court system sells the names of tenants involved in the cases to screening companies. Although these names may serve as an invaluable tool for supplementing information from references from applicants' recent landlords, they have been attacked as inaccurate and incomplete.

The major criticism is that the database is organized by name rather than by a more accurate identifier such as Social Security number. As a result, it is possible that someone with the same, or almost the same, name as a tenant-defendant could be included. Critics say this practice effectively “blacklists” prospective tenants as high risk, and owners unfairly deny apartments to prospective tenants, especially considering that the housing court cases may have been actually decided in the tenant's favor, dismissed, or filed in error.

A class-action lawsuit from 2004 raised the issue of this screening practice and was cited in a city council statement announcing passage of the new law. According to the facts of this case, a prospective tenant was set to rent a two-bedroom rent-stabilized apartment. But a screening turned up a quarrel between the prospective tenant and his landlord six years earlier.

The tenant alleged that the landlord repeatedly failed to fix a roof leak, so he withheld two months' rent. The landlord sued to evict him, but ultimately dropped the suit and agreed to let the tenant keep part of his withheld rent. The report on the prospective tenant said only that he once had been sued for nonpayment of rent; it did not indicate that the landlord had acknowledged his legitimate basis for withholding the rent.

After he was denied the apartment, the prospective tenant called the screening company to correct the record. But by then, the apartment was gone. He sued the screening company on behalf of all tenants similarly wronged, accusing it of supplying inaccurate information to a landlord.

In 2007, there was a multimillion dollar settlement. The screening company agreed to provide money to those who were harmed and to stop sloppy practices that had led to tenants' screening reports being inaccurate [White v. First Advantage Safe Rent, Inc., March 2006].

The problems of the screening process raised by this lawsuit was the impetus for the new law. For tenant advocates, appearing in housing court is hardly an automatic indication of wrongdoing and according to Council Member Karen Koslowitz, chair of the Consumer Affairs committee, considering the number of renters in New York City, it was important for the city council to pass this legislation.

“With two-thirds of New Yorkers renting, this bill is vital for our city. In a time when many New Yorkers are struggling to pay rent, this legislation will ease the entire process for tenants. This bill gives tenants rights they deserve when trying to find a new home,” she says.

Tenant Fair Chance Act Requirements

The new law requires any owner or manager who requests lease application information from a prospective tenant to disclose certain information. If the application information is requested in writing with an application form, for example, the disclosure notice must also be in writing.

For an example of such a notice, see our Model Form: Give Applicants Required Disclosure Notice, provided by New York attorney Richard Walsh of Horing Welikson & Rosen P.C. You can adapt this notice and include it in your rental applications.

Here are some more specifics of the law's requirements:

Disclosure. The person requesting information from a prospective tenant in connection with an application for an apartment must disclose that:

• A tenant screening report will be obtained and provide the name of the screening service;
• The applicant has a right to obtain a free copy of credit reports annually from each credit reporting agency; and
• The applicant has a right to dispute any inaccuracies or incorrect information in the report with the agency issuing the report.

If the owner does not use a tenant screening service, the application must disclose that the information provided by the applicant will not be used to obtain a tenant screening report [NYC Administrative Code (NYCAC) §20-808(a)].

Placement within form. If a written application is used, the required disclosure language must be located on the application form immediately adjacent to the part of the application where personal information is requested, and must be set off in a box in type that's in a different and contrasting color; if the application is taken orally, the person requesting the information must give written copies of the required statement to the applicant [NYCAC §20-808(b)].

Office signs. The new law also requires owners to post a sign with the disclosure notices in their rental office. The signs must display the names and addresses of all consumer reporting agencies used, plus a statement that each person is entitled to a free credit report annually from each agency and has the right to dispute any inaccurate or incorrect information in the report directly with the agency [NYCAC §20-809(a)].

Fair Credit Reporting Act Requirements

New York owners and managers checking credit by using tenant consumer reports to evaluate rental applications must also comply with the federal provisions of the Fair Credit Reporting Act (FCRA). The FCRA is designed to protect the privacy of consumer report information and to guarantee that the information supplied by screening companies is as accurate as possible. The FCRA requires owners who deny a lease based on information in the applicant's consumer report to provide the applicant with an “adverse action notice.”

An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. Common adverse actions by owners 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; and
• Raising the rent to a higher amount than for another applicant.

When an adverse action is taken that is based solely or partly on information in a consumer report, the FCRA requires you to provide a notice of the adverse action to the consumer. The notice must include:

• The name, address, and telephone number of the company that supplied the consumer report, including a toll-free telephone number for credit reporting agencies that maintain files nationwide;
• A statement that the company that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it; and
• A notice of the individual's right to dispute the accuracy or completeness of any information the consumer reporting agency furnished, and the consumer's right to a free report from the company upon request within 60 days.

The FCRA's goals are in line with the goals of the TFCA. Disclosure of this information is important because some consumer reports contain errors.

The adverse action notice is required even if information in the consumer report was not the main reason for the denial, the increase in security deposit or rent, or other adverse action. In fact, even if the information in the report plays only a small part in the overall decision, the applicant still must be notified.

While oral adverse action notices are allowed, written notices provide proof of compliance. For an example of what to include in the notice, see our Model Letter: Give Applicant Appropriate Adverse Action Notice.

Penalties for Noncompliance with TFCA and FCRA

Owners who fail to provide required disclosure notices face legal consequences. Under the TFCA, for a first violation, a civil penalty of between $250 and $500 may be imposed. And for subsequent violations, the penalty ranges from $500 to $700 per violation.

Consequences under the FCRA are not so prescribed, but they may hurt owners more financially than those under the TFCA. The FCRA allows individuals to sue owners for damages in federal court. A person who successfully sues is entitled to recover court costs and reasonable legal fees. The law also allows individuals to seek punitive damages for deliberate violations of the FCRA. In addition, the Federal Trade Commission (FTC), other federal agencies, and the states may sue landlords for noncompliance and get civil penalties.

Five Adverse Action Scenarios Requiring Disclosure

The following are real-life scenarios you may find yourself in after ordering a tenant screening report. In each of the following cases, you must give the prospective tenant the name and address of the company that reported the negative information or furnished the insufficient report.

Scenario #1: A person with an unfavorable credit history, like a bankruptcy, but no other negative indicators, applies for a market-rate apartment. Rather than deny the application, the owner offers to rent the apartment, requiring a security deposit that is double the normal amount.

The applicant is entitled to an adverse action notice because the credit report influenced the owner's decision to require a higher security deposit from the applicant.

Scenario #2: An applicant with an unfavorable credit history, like past-due credit card accounts, is denied an apartment. Although the credit history was considered in the decision, the applicant's poor reputation as a tenant in his current location played a more important role.

The applicant is entitled to an adverse action notice because the credit report played a part, however minor, in the denial.

Scenario #3: An owner orders a consumer report from a tenant screening company. Information contained in the report leads to further investigation of the applicant. The rental application is denied because of that investigation.

Since information in the report prompted the adverse action in this case, an adverse action notice must be sent to the applicant.

Scenario #4: An owner hires a reference-checking service to verify information included on a rental application. Because the service reports that the applicant does not work for the employer listed on the application, the rental application is denied.

The applicant is entitled to an adverse action notice. The report is a consumer report from a credit reporting agency, which influenced the owner's decision to deny the application.

Scenario #5: An owner who makes it a practice to approve an application if the applicant shows an adequate income or has a favorable credit report is dealing with an applicant who has an inadequate income and a bad credit report.

The applicant is entitled to an adverse action notice because the credit report influenced the denial, even though income was another factor.

Sidebar

Local Law 2 of 2010 Excerpts: Tenant Screening Report Disclosure

§20-808 Disclosure.

a. Any user of a tenant screening report shall disclose to the prospective tenant or tenants who is/are the subject of such report and applying for housing that (i) application information provided by the prospective tenant or tenants may be used to obtain a tenant screening report; and (ii) the name and address of the consumer reporting agency or agencies from which the user will obtain such report.

b. Any user of a tenant screening report shall also notify such potential tenants that, pursuant to federal and state law:

(1) if a user takes adverse action against a prospective tenant on the basis of information contained in a tenant screening report, such user must notify the tenant that such action was taken and supply the name and address of the consumer reporting agency that provided the tenant screening report on the basis of which such action was taken;

(2) any prospective tenant against whom adverse action was taken based on information contained in a tenant screening report has the right to inspect and receive a free copy of such report by contacting the consumer reporting agency;

(3) every tenant or prospective tenant is entitled to one free tenant screening report from each national consumer reporting agency annually, in addition to a credit report that should be obtained from http://www.annualcreditreport.com; and

(4) every tenant or prospective tenant may dispute inaccurate or incorrect information contained in a tenant screening report directly with the consumer reporting agency.

c. If application information is requested in writing, the statements required by subdivisions a and b of this section shall be in writing, located immediately adjacent to where personal information is requested, and set off in a box and printed in a color that sharply contrasts with the print surrounding it. If application information is requested orally, the user shall provide written copies of the statements required by subdivisions a and b of this section.

§20-809 Posting of signs.

a. Any user of a tenant screening report shall post a sign, the form and manner of which shall be determined by rule of the commissioner, in any location at which the principle purpose is conducting business transactions pertaining to the rental of residential real estate properties. Such sign shall be posted in a location visible to potential subjects of such reports and shall disclose in conspicuous size type the name and address of all consumer reporting agencies used. Such sign shall also contain a statement that consumers are entitled to one free tenant screening report from each consumer reporting agency annually and may dispute inaccurate or incorrect information contained in such tenant screening report directly with the consumer reporting agency.

b. A user of a tenant screening report who has the right to rent or lease housing units in one building with five or fewer housing units that is owned and occupied by such user shall not be required to post a sign pursuant to subdivision a of this section in such building.

§20-810 Violations.

Any user of a tenant screening report violating sections 20-808 or 20-809 of this subchapter shall be subject to a civil penalty of not less than two hundred fifty dollars nor more than five hundred dollars for the first violation. Subsequent violations shall be subject to civil penalties of not less than five hundred dollars nor more than seven hundred dollars for each violation.