Real estate professionals engaged in the renting and leasing of properties are confronted with some very real legal requirements. In today’s economic environment, it is not uncommon to receive multiple applications to rent. Based on recent experience and discussions with prospective tenants, it is not uncommon for the applying tenant to receive no response to the application, or if the application is denied, to not receive an adverse action notice.
In either case, it raises the question of compliance with the laws regarding the usage of consumer credit report information. The usage of this information is governed by both California State Law and Federal Law.
While credit reports can legitimately be used to screen tenants, the use of consumer credit reports brings into play specific legal duties which govern their use. Generally, whenever an “adverse action” is taken against a prospective tenant based in whole or in part on information contained in a consumer credit report, an adverse action notice must be given to the prospective tenant under both Federal and California State Law. Federal law permits such a notification to be other than in writing, California law requires a written statement. [15 United States Code (U.S.C.) §1681m; California Civil Code § 1785.20]
This raises the question of what constitutes an adverse action based on information contained in whole or in part in a consumer credit report.
Some notable examples of adverse action include:
- denying the application;
- requiring a co-signer on the lease;
- requiring a deposit that would not be required for another applicant;
- requiring a higher deposit than required for another applicants; and
- raising the rent to a higher amount than would be applied to another applicant.
If, for example, a higher deposit is requested because of poor references and not because of the information contained in the credit report and/or credit score, these circumstances would not trigger an adverse action notice because it is not based solely or partly on the prospective tenant’s credit report and/or score.
However, once the credit report becomes part of the decision making process, the adverse action notice is triggered. Although, examples such as this demonstrate exceptions to the need to send the required notice, one should keep in mind that relying on such an exception may require the ability to prove that the credit report did not play any part in the adverse action. This could be a difficult proposition to prove.
An adverse action notice must contain the following information.
- a statement that the decision was based in whole or in part on information contained a consumer credit report;
- the name, address and telephone number of the consumer credit reporting agency which furnished the report;
- a statement that the applicant has the right to obtain, within sixty days, a free copy of the applicant’s report from the credit reporting agency identified in the notice; and
- a statement that the applicant has the right to dispute the accuracy or completeness of any information contained within the report.
California law is silent on the method of delivery for an adverse action notice. Generally speaking, delivery of the notice in person or by first class mail with postage prepaid should be deemed acceptable. [15 U.S.C. § 1681m, Calif. CC§ 1785.20]
Credit reports can be ordered with or without the numerical score. If a report with a score is used, additional requirements are imposed. If a credit score is used in whole or in part, the adverse action notice must also contain:
- the numerical credit score used in making the credit decision;
- the range of possible scores under the model used;
- up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor);
- the date on which the credit score was created;
- the name of the person or entity that provided the credit score or the credit file upon which the credit score was created. [See 15 U.S.C. § 1681m and 15 U.S.C. § 1681g]
There are both federal and state penalties for a failure to comply with the notification requirements.
The extent of the penalty is based on the determination of whether or not the failure was willful. Under federal law, willful failure to comply with the requirements of the law the tenant may recover:
- any actual damages sustained by the prospective tenant; or
- punitive damages of not less than $100 and not more than $1000.
If the tenant is successful in his or her actions, they may also recover legal costs and reasonable attorney fees.
If the failure to comply is based on negligence as opposed to a willful failure, the tenant’s recovery is limited to any actual damages sustained by the prospective tenant; and in the case of a successful action to enforce any liability, the costs of the action and reasonable attorney fees.
Liability will not be imposed for a violation of the applicable federal laws if, at the time of the alleged violation, it can be shown reasonable procedures to assure compliance with the law were maintained.
Under state law, if a landlord violates the law through negligence, the prospective tenant can recover:
- actual damages, including court costs;
- loss of wages;
- attorney fees;
- compensation for pain and suffering, if applicable.
If a landlord is held to have willfully violated the law, the prospective tenant can recover the same costs plus punitive damages of not less than $100 and not more than $5000 for each violation, and any other relief that the court deems proper.
Liability will not be imposed for failing to provide the notice if it is shown “by a preponderance of the evidence that at the time of the alleged violation he or she maintained reasonable procedures to assure compliance” with the notice requirements.
Finally, under California law, if an application screening fee has been paid and if the tenant requests it, a copy of the credit report must be provided to the prospective tenant.
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