Owner and Agent Responsibilities When Using Consumer Reports
Property owners who use background checks to screen potential residents must comply with the Fair Credit Reporting Act (FCRA) and the Federal Trade Commissions (FTC) Disposal Rule.
Any report that contains information about a person’s credit, rental history, or criminal history is considered a consumer report. These reports are generally prepared by a credit-reporting agency (CRA). Examples of such reports include:
- A credit report from a credit bureau, such as Trans Union, Experian, and Equifax;
- A report from a tenant screening service;
- A report from a reference checking service; and
- A report from a background check company about the criminal history of an applicant or resident.
Owners may obtain consumer reports on persons who apply to rent housing or renew a lease. In order to request such reports, the owner must have written permission from the subject of the report, and the report may only be used for legitimate business purposes.
Anytime an “adverse action” is taken against a person due to a consumer report, certain steps must be taken. An adverse action is any action by an owner that is unfavorable to the interests of a rental applicant or tenant. Examples include:
- Application denial;
- Requiring a lease co-signer;
- Requiring a higher than normal security deposit; and
- Charging higher rent than that charged for other residents.
When an adverse action is taken due to information on a consumer report, the person must be given notice of the action either orally, in writing, or electronically. This notice must include:
- The name, address, and phone number of the consumer reporting company that supplied the report;
- A statement that the company that supplied the report did not make the adverse decision and cannot give specific reasons for the decision; and
- A notice of the person’s right to dispute the accuracy or completeness of any information in the consumer report, and their right to obtain a free report from the company if requested within 60 days.
The adverse action notice is required even if information in the consumer report was not the primary reason for the adverse decision.
As mentioned above, oral notices are allowed. However, I strongly recommend that written notices be provided, since this will provide proof of FCRA compliance.
Some owners obtain “investigative reports,” which are reports based on personal interviews concerning a person’s character, reputation, personal characteristics, and lifestyle. If such reports are obtained, there are additional requirements. These include (1) giving written notice that you may request or have requested an investigative consumer report; and (2) provide a statement that the person has a right to request additional disclosures and a summary of the scope and substance of the report. These requirements are covered under 15 U.S.C. §1681d(a) and (b) and are very strict. Landlords rarely use reports of this type and they are not generally recommended.
Disposal of Consumer Reports
The FTC Disposal Rule (“Disposal Rule” of the Fair and Accurate Credit Transactions Act of 2003, known as the FACT Act, 69 Fed. Reg. Reg. 68690) requires that when you are done using a consumer report, the report, and any information obtained from it, must be securely disposed of. Any business or individual who uses a consumer report for a business purpose is subject to the requirements of the Disposal Rule. Under federal law, landlords must take special care that consumer reports are stored in a secure place where only those who “need to know” have access.
In addition, landlords must carefully dispose of consumer reports when they are done with them. Disposal can include burning, shredding or pulverizing paper reports and destroying or erasing electronic files. This portion of the FACT Act was passed in order to deal with increasing identity theft. It applies to every landlord who obtains a consumer report, no matter how small the rental operation may be.
Recommendations for Handling Consumer Reports
- Maintain applicant, tenant, and employee files in a locked cabinet. Only employees who need to know the information should have access to the files.
- Develop a policy regarding the point at which a consumer report is no longer needed. The Act requires that the reports, and any information obtained from them, be disposed of when they are no longer needed. Many landlords are unaware of this requirement. The question for landlords is “When is the report no longer needed?” Such reports may be essential in refuting a fair housing claim, and under federal law, such claims must be filed within two years of the claimed discrimination, but some states set longer periods. I recommend that the credit reports be retained for at least two years after a resident moves in, but check with your attorney before actual disposing of the records.
- Establish a system for destroying old consumer reports. Establish a purge date for every applicant for whom a consumer report is pulled and set up a tickler system to remember the deadline.
- Choose an effective disposal system. The Disposal Rule requires you to choose a level of document destruction that is reasonable in the context of your business. For example, a landlord with a few rentals is probably fine with an inexpensive shredder, but a multi-property operation may want to contract with a disposal service.
- Decide how to deal with computer files. Reports stored on your computer, BlackBerry, IPhone, or other device, or information derived from them, must also be kept secure and deleted when no longer needed. There are utility programs that can completely remove, or “wipe” the data; such programs remove not only the directory, but the text as well.
The Disposal Rule has significant penalties for landlords who willfully disregard the law – i.e., those who know the law but refuse to follow it. Landlords may be liable for a tenant’s actual damages (e.g., the cost of covering a portion of a credit card’s unauthorized use), or damages per violation of $100 to $1,000, plus attorney’s fees and costs of suit, plus punitive damages. The FTC and state consumer agencies can also enforce the Act and impose fines.
The key for landlords is to develop a company-wide disposal plan and make sure all properties are aware of how it should be implemented. While enforcement actions in this area of law are rare, it is still a good practice to ensure the security of applicant/tenant information.