Tenant Screening: Navigating Adverse Actions and Compliance Essentials

By: Ariel S. Holzer, Esq. and Brice A. Wilkerson, Esq., MBA

Introduction: The Importance of Adverse Action Under the FCRA in Tenant Screening

Residential[1] tenant screening (“Screening”) is vital in property management. But what if a residential landlord in New York (“Landlord”)[2] needs to deny a prospective tenant (“Applicant”) based on Screening results? This is where "adverse action" (“Action”) under the Fair Credit Reporting Act (“FCRA”)[3] comes into play.[4] Understanding Actions and their related compliance burdens is crucial. This article explores what constitutes Actions in Screening, related scope, and the importance of timely, proper notices to Applicants.

What Does "Adverse Action" Mean in Tenant Screening as Under the FCRA?

An Action under the FCRA is any action taken by a Landlord unfavorable to an Applicant based on information obtained during Screening. This can include denying the Applicant, requiring a co-signer, or even charging a higher deposit – In short, any response other than unconditional approval may be an Action. The FCRA mandates Landlords must issue an "adverse action letter" (“Notice”) to Applicants when an Action is taken. Notice must be timely and contain all statutorily required information. Defective and/or late Notices sent to Applicants during Screening can result in civil liability under the FCRA.

Beyond Denials: The Expansive Scope of Adverse Action

The term "adverse action" may seem straightforward, but its application is surprisingly broad. Again: Any response other than unconditional approval may be an Action. Even seemingly minor decisions, like demanding additional documentation, can trigger the Notice requirement.

Here are some examples to underscore how easily a Landlord can trigger the Notice requirement:

• A Landlord has two Applicants for a unit. Both have similar incomes but different credit scores. If the Landlord chooses based on the higher credit score – That’s an Action.
• A Landlord offers a lease but, based on Screening, stipulates the Applicant must make all payments with certified funds – That’s an Action.
• A Landlord asks a self-employed Applicant to provide a tax return in addition to the W-2s the Applicant has already provided – That’s an Action.

As you can see, it really doesn’t take much to trigger Notice requirements when Screening. It is prudent to err on the side of giving Notice if ever in doubt. There is no penalty for giving Notice when it is not required, other than the nominal expense of sending it.

FCRA Adverse Action Letters: Contents, Timing, and Consequences

The FCRA mandates Landlords issue Notice for Actions based on "any information … in a consumer report."[5] Timing varies. Decisions based on consumer reports have no specific timeframe, while those based on third-party information require Notice “within a reasonable period of time.”[6] Notices must include four key elements: (1) notice of the Action, (2) credit score and factor disclosures, (3) consumer agency disclosures, and (4) a statement of the Applicant’s rights. Willful noncompliance risks liability for the greater of (a) the actual damages suffered by an Applicant, or (b) a $1,000 fine per instance. In addition, the Landlord will be responsible for the Applicant’s attorney’s fees in either case.[7] Even negligent noncompliance still risks liability for actual damages suffered by an Applicant and their attorney’s fees.[8] However, if an Applicant brings a claim, a Landlord may mitigate their FCRA liability with an affirmative defense showing that, “by a preponderance of the evidence” the Landlord "maintained reasonable procedures to assure compliance” during the Applicant’s Screening[9]

CFPB Sample Forms: Reasonable Procedures for a Landlord to Assure Compliance

The Consumer Financial Protection Bureau (“CFPB”) provides sample forms Landlords can use to ensure compliance with the FCRA's[10] Notice requirements. Utilizing these forms is a straightforward way for Landlords to meet the "reasonable procedures" standard for avoiding liability under the FCRA. But Landlords should still be sure to read the instructions and guidance though because the “sample forms … may not be appropriate for all [landlords].”[11]

Some Landlords may also wish to create, or find, their own compliant forms, which is fine. Wherever the FCRA Notice forms come from, though, they must still be used properly. If a Landlord, for example, checks off inapplicable reasons or fails to check off an actual reason, arguing “reasonable procedures” will be much more difficult.

Conclusion: Key Takeaways for Landlords Taking Adverse Actions Under the FCRA

Navigating the intricacies of adverse action under the FCRA during Applicant Screening can be daunting for Landlords. Prudent Landlords should keep in mind the simple rule of thumb: any response other than unconditional approval may be an Action. Then pair that understanding of Actions with timely issuance of properly filled out, compliant, Notice using forms, like these. If a Landlord can internalize these two points, they are well on their way to building a “reasonable procedures” defense to an FCRA Screening claim. Finally, remember, when in doubt, err on the side of caution – Send the Notice.

If you need assistance navigating these circumstances and other landlord-tenant or commercial real estate matters, reach out to FRB’s Real Estate Practice Group or submit the form below for a free consultation.

[1] “Residential” is a key distinction. FCRA notice requirements do not apply to commercial applicants. Note, similar Equal Credit Opportunity Act (“ECO”) requirements may separately apply, but ECOA is beyond scope for this article.

[2] For the purposes of this article, any reference to “landlord” is equally applicable to any agents including attorneys, real estate agents, brokers, employees, Screening vendors, etc.

[3] Similar concepts of adverse action are also implicated in many discrimination and tenant rights contexts. These other implications, while similarly important, are beyond the scope of this article. As a rule of thumb, though, Landlords can assume similarly broad definitions and scopes may apply.

[4] Fair Credit Reporting Act, Sec. 603 (k). (https://www.ftc.gov/system/files/ftc_gov/pdf/fcra-may2023-508.pdf).

[5] Id. at Sec. 615 (a).

[6] Id. at Sec. 615 (b) (1).

[7] Id. at Sec. 616.

[8] Id. at Sec. 617.

[9] Id. at Sec. 615 (c).

[10] It is worth noting the sample forms also, and primarily, contemplate similar ECOA notice requirements. In many cases, the same sample forms may be used to satisfy notice requirements under either the ECOA or FCRA, or both.

[11] See paragraph 3 of the instructions. (https://www.consumerfinance.gov/rules-policy/regulations/1002/c/#2).

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.