A Landlord’s Guide to Credit Reports and FCRA Compliance

A landlord requests written permission to obtain an applicant’s credit report, according to FCRA regulations

Landlords and property managers need to be aware of numerous legal regulations. It’s their job to understand local laws related to housing conditions and building codes and those covering evictions, tenant privacy, and other essentials. These laws are just the beginning for landlords, of course. They also have to comply with national laws, and two that require extra vigilance are the Fair Housing Act (FHA) and the Fair Credit Reporting Act (FCRA).

The FHA bans discrimination in the housing market based on the protected categories of race, color, religion, sex, disability, family status, and national origin. The FCRA deals with consumer rights concerning their credit reports. This guide focuses on the FCRA and covers all the essentials you need to understand if you want to be successful as a landlord or property manager.

The Fair Credit Reporting Act, Explained

The FCRA is a set of laws that governs the collection of consumer credit information and the use of consumer credit reports. A few key facts:

  • The federal government passed it in 1970 to protect consumers and their sensitive info. 
  • It addresses issues around the fairness and accuracy of data collected by the national credit bureaus.
  • It outlines exactly how they can collect and store information and how long they can keep it.

These laws also protect consumers’ privacy by detailing who can request credit reports – and this is perhaps the most important part of the FCRA for landlords.

Why the FCRA Is Important for Landlords

Landlords and property managers enter into a long-term financial relationship with their tenants, and to ensure the success of that relationship, landlords should get to know prospective tenants as well as possible. This involves looking at applicants’ credit reports to assess their financial history, and the FCRA affects that process in the following ways:

By Determining What Appears on Credit Reports

The FCRA dictates the type of data credit bureaus can collect. These companies are typically allowed to gather information on bill payment history, consumer debts, bankruptcy filings, arrest records, and delinquent child support payments. 

By Governing Who Can See Credit Reports

The FCRA also contains rules that govern who can see a consumer’s credit report.  This law bans you from pulling an applicants’ credit report without their written permission. The government may be able to access credit info, however, if there is a court order or a subpoena for a consumer.

By Establishing Consumer Rights

The FCRA gives consumers the right to one free credit report from each of the three reporting bureaus annually. Consumers can also receive a copy of their report anytime information in their file has been used to deny them credit or other opportunities. Consumers have the right to file a dispute with the credit bureaus, and if you’re working with an applicant who claims some of the information is incorrect, you should understand this process.

Landlords need to understand what type of information can be collected by the credit bureaus so they know what they will see when they look at a potential tenant’s credit report. They can then decide if they need to pull in more resources to get a clearer picture of the applicant’s financial situation.

It’s important that landlords understand the legal requirements they need to meet to pull a credit report or make a decision based on the information in one.

How to Stay Compliant With the FCRA

a magnifying glass looking over a credit score checklist

Staying compliant with the FCRA is critical for property managers and landlords. Keep these rules in mind as you process applications and perform tenant background checks:

Only Request Credit Reports From Current Applicants

You can only request a credit report for someone applying to live in one of your properties or trying to renew their lease. You cannot request one for an existing tenant because you’re worried about their financial situation and want more details.

Obtain Written Permission

You should obtain written permission before accessing applicants’ credit reports. Keep a copy of their consent to a credit check in your records in case you face any issues down the road.

Tell the Credit Bureau That You Plan to Use the Report for Housing Purposes

You are only allowed to use applicants’ credit reports to determine whether you want to offer them housing. You cannot pull one for any other reason. It’s not acceptable to request one, for instance, if you’re trying to decide whether or not to give someone a personal loan or to help you decide whether or not to raise the rent on an existing tenant.

Notify Applicants of Adverse Actions

You need to let applicants know if you take an “adverse action” against them due to the information in their credit report. An adverse action refers to any decision other than deciding to rent to the applicant. This may include denying their application, requiring a co-signer, requesting an extra deposit to minimize your risk, or raising the rent above what you would charge an applicant with strong credit.

Write the Adverse Action Notification Correctly

The adverse action letter lets the applicant know what adverse action you have taken, and it alerts them that they have the right to request their credit information so they can understand your decision. The notice should include the name and contact details of the credit reporting bureau you used. It should explain that the credit bureau did not make the decision, and it should also explain how the applicant can dispute the information on their report if they believe it is incorrect.

Consider Making Reports to the Credit Bureaus

The three credit reporting bureaus allow landlords to make reports about their tenants’ rental payments, but you must be a high-volume landlord to qualify. TransUnion, for instance, requires a certain number of monthly rent payments if you want to take advantage of this option. There are a few options for smaller landlords, such as Experian’s RentBureau service, which facilitates automatic transfers of rent payments from your tenant’s bank accounts to yours, but it only allows you to report late and on-time rent payments if your tenants choose to opt in.

Pulling credit reports can be tricky on your own, especially if you’re new to the world of managing rental properties. The right digital tools can help with the process and guide you through FCRA compliance issues. Tenant screening tools can help you move the application process online, collect and store written consent from prospective tenants, and draft adverse action notifications accurately and efficiently.

Common Risks of Not Understanding the FCRA

You need to understand the basics of the FCRA to be legally compliant as a landlord. The main risk of not understanding these laws is that you may be held liable if you break the terms of the FCRA. 

Consumers have the right to bring a lawsuit against you if they believe that you have acted negligently or infringed on their rights. The potential damages vary, but when you’re dealing with significant assets like investment properties, you do not want to take the risk of being sued for damages.

  • Renting to tenants without looking at their credit reports
  • Failing to obtain written permission from applicants before collecting their credit reports
  • Not storing proof of written consent to access the report
  • Misunderstanding the type of information collected by the credit bureaus
  • Assuming that all the information you need to see is on a credit report
  • Failing to look at databases that augment the information found on credit reports
  • Trying to obtain credit reports on your own
  • Forgetting to write adverse action letters
  • Making mistakes in adverse action letters
  • Losing money in the long run by not investing in applicant screening tools upfront

Landlords take a significant personal and business risk every time they open one of their properties to a new tenant. A credit check is a critical part of the process of minimizing this risk and assessing the responsibility of prospective tenants. This process is governed by strict federal laws, however, and you need to be compliant with the FCRA.

Get Help From Rent Safe’s Online Application Platform

Landlords who want to be successful and profitable need to invest in tools that help streamline the tenant screening process, and Rent Safe can help. Rent Safe allows you to create custom applications for prospective tenants, and it enables you to run a variety of tenant background checks, including credit checks.

Don’t let compliance issues get in the way of your success. Leverage Rent Safe to help you with FCRA compliance and other aspects of the tenant screening process — contact us today to learn more.

Devin Henry
Devin Henry
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