HUD’s New Guidance Adjusts Screening Policy

By Robert L. Cain, Copyright 2024, Cain Publications, Inc.

One bad tenant can destroy a rental business. That’s why we screen applicants carefully by examining credit reports, rental histories, employment information, and verifying that the information is accurate and belongs to the person applying to rent. Failure to do that is a disservice to other tenants and to our investment. But you know that already.

To ensure that we get accurate data from an applicant, many rental owners rely on third-party screening companies. They use them because they can check things that rental owners don’t have access to. And they do a thorough job of it. Nothing wrong with thorough screening. It’s just good business. But the Department of Housing and Urban Development (HUD) on April 29, 2024 issued a Guidance regarding how we must screen applicants to avoid running afoul of the Fair Housing Act by screening “too thoroughly.”

In that Guidance, they admit, “Housing providers have a legitimate interest in selecting tenants who will pay their rent and otherwise comply with lawful requirements of their lease. However, some tenant screening practices do not in fact serve these goals.”? Who’s their “bad guy” here? Tenant screening companies, says HUD.

“These issues have been magnified in recent years by the increasing reliance by housing providers on tenant screening companies to drive tenant selection decisions. An increasing number of tenant screening companies claim that they use advanced technologies, such as machine learning and other forms of artificial intelligence (‘AI’). These technologies can increase these companies’ capacity to access and analyze information about applicants that has not been widely used for rental decisions until recently but may have little bearing on whether someone will comply with their lease.” Or so asserts the Guidance from HUD.

Just how are they running afoul of the Fair Housing Act? The tools they use gather data from numerous sources, put it all together, and come up with a “screening” score that might violate the Fair Housing Act if the application is rejected.

You see, as the Guidance reports, “Even when there is no intent to discriminate, a policy or practice violates the Fair Housing Act if it has a discriminatory effect and (i) the policy or practice is not necessary to achieve a substantial, legitimate, non-discriminatory interest or (ii) the interest can be served by a less discriminatory alternative.” They cite regulation 24 CFR 100.500 which reads in part, “(a)Discriminatory effect. A practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons . . .because of race, color, religion, sex, handicap, familial status, or national origin.” There’s the magic phrase, “Disparate Impact,” a catchall for otherwise neutral requirements that might possibly negatively affect a member of a protected class.

Lest you think that only screening companies are on the hook for a violation of the Fair Housing Act or the Guidance from HUD, the rental owners who hired them are, too. It’s basic contract law. The person hiring a contractor is just as responsible for any illegal or unsafe practices as the contractor is.

HUD issued six “Guiding Principles for Non-Discriminatory Screenings,” many of which are things that rental owners do already. But a couple of them leave questions that most rental owners could be unsure of without legal advice.

1. Choose relevant screening criteria. HUD’s Guidance says they “should be waived if not relevant to the applicant’s individual circumstances.” How can you necessarily judge relevancy for that applicant? And suppose you “waive” a requirement for one applicant but consider it relevant for another and reject that person? That leaves the door open for a HUD complaint from another member of a protected class. The example HUD uses is for evictions where the tenant prevailed. That is supposedly not relevant. But if you look at the case, the tenant might have prevailed because the rental owner made an error in the filing. It wasn’t that the tenant didn’t deserve eviction; it was just that the landlord didn’t do it right.
2. Use only accurate records. That calls upon landlords to become expert at interpreting data for accuracy plus being required to prove the data are correct.
3. Follow the applicable screening policy. That’s just good business sense. If you’ve already delineated what you will legally check to decide if an applicant meets your standards.
4. Be transparent with applicants. Most rental owners who know their stuff already write out rental policies and requirements and hand them to applicants. That’s all HUD asks for in this case.
5. Allow applicants to challenge negative information. Don’t you do that already?
6. Design and test complex models for Fair Housing Complaints. Here’s a rabbit hole that’s a cinch to get lost in. HUD’s explanation doesn’t create a map of the hole. “Screeners that use complex models should choose types that are more interpretable, especially when doing so does not meaningfully reduce accuracy or fairness.” Their clarification may be even more obtuse: “If a highly complex model has a discriminatory effect, the model’s lack of transparency could make it hard to prove that a legally sufficient justification exists for the criteria used for a denial decision.” How are we supposed to follow a Guidance whose meaning we can’t decipher?

HUD then “clarifies” three screenings that rental owners most often do to test applications.?? The first is credit history. “Black and Brown persons are more likely to have inaccurate credit reports or have had experiences that resulted in low or no credit scores.” What does HUD suggest? “Because of these disparities, overbroad screenings for credit history may have an unjustified discriminatory effect based on race or other protected characteristics. How much, then, can you accommodate poor or nonexistent credit and still operate in a businesslike manner. HUD suggests looking at their rental history and if they had been paying rent regularly. But you’d take that into consideration, anyway. We don’t care if Visa doesn’t get paid as often as they would prefer as long as the rent gets paid as agreed. But long-overdue bills can result in wage garnishments and car repossessions.

Second is eviction history. HUD states that Blacks are evicted more or most often. So they say we shouldn’t use, but don’t define, old, incomplete, irrelevant data especially when a better measure is available. The worry comes when an eviction is ignored for one applicant but not for another and the rejected applicant files a Fair Housing complaint.

Third are criminal records. “Persons who have been involved with the criminal justice system are disproportionately individuals with disabilities and Black and Brown persons, and therefore overbroad criminal records screening policies are likely to have an unjustified discriminatory effect.” We are supposed to look at the nature, severity, or how long ago they occurred and ignore arrest records if they didn’t result in a conviction, just like we ignore failed evictions. A special case is if records are old or for offenses not directly “relevant” to tenancy. And what does relevant mean in this case? Some will obviously be irrelevant, but how relevant are convictions for drug sales, drug manufacturing such as meth labs, or sex offenses? A case could be made by a crook’s attorney that those offenses happened long ago so shouldn’t count against the applicant. Here’s where there’s so much up in the air that it may be impossible to get a firm grasp on any of it.

The question remains, what’s a rental owner to do to ensure that he or she doesn’t end up in HUD’s crosshairs? ?When you use a screening company, be as specific as possible about the property’s rental requirements. Your screening company probably already provides a form where you can input your specific requirements. Follow your rental requirements but examine them for “disparate impact.”

Sponsored by Zip Reports where they do employment and rental screening. Contact Robert L. Cain at [email protected]