Dan Firestone

Vice President / Director

Caryn Bennett

Compliance Manager

Applicant Screening: Legal Pitfalls to Avoid

Important: The information in this presentation is for general guidance only. CIC, its officers, employees, and agents do not accept any liability to any person for the information or advice given in this presentation.

CIC does not provide legal advice and nothing contained in this document or provided by CIC should be deemed as legal guidance.

This document is authorized and distributed by Contemporary Information Corp. 42913 Capital Dr. Unit 101, Lancaster, CA 93535

Disclaimer

The “Goal” of screening Applicants (It’s Important) ECOA, FCRA, & FACTA Adverse Action Notices Creating a Screening Process & Accepting Applications Rental History and Employment/Income Verification Establishing Your Screening Criteria / What to Consider? (HUD – USDA) Identification & Identity Documentation Identity Theft Prevention-SSN vs. ITIN FICO Scores Co-Signers Record Retention Criminal Background Checks Disparate Impact Questions?

You will learn about:

Good vs. Bad-The application process is intended for landlords, property owners and property managers to mitigate risks and to ensure the safety of the residents and the integrity of their property from matters such as financial, criminal, and physical (i.e. vandalism) damages or losses. Your property is an investment-screening applicants protects that investment.

This process is NOT to be used for any intent of discrimination.

Each application that is processed must be treated equally. You cannot run a criminal report on one particular applicant just because you have a “feeling”. This is discriminatory.

Your application should include language stating that the applicant gives you the authorization of disclosure for such information.

Proper resident selection: DON’T RUSH.Improper screening can - and will - affect your NOITurnovers, bad debt, and attorney’s fees can be costly

Go for the GOAL-What’s the “goal” of applicant screening?

ECOA-Equal Credit Opportunity ActEnacted in 1974 to ensure individuals are not discriminated against based upon factors that are not directly related to their creditworthiness. Under the law, it is unlawful to discriminate based on religion, national origin, race, sex, marital status, age, or gender of the individual.Make sure to check state and local laws that may have more provisions on additional protected classes.Protected ClassesRaceColorReligionSex (including Gender Identity)AgeFamilial StatusNational Origin DisabilityMarital StatusAncestrySexual OrientationSource of Income

No arbitrary discrimination. For example; you deny the applications of all people with tattoos or piercings. Although they are not in a protected class this is arbitrary discrimination.

FCRA-Fair Credit Reporting Act The FCRA was passed for the protection of consumer privacy as

well as to ensure the accuracy of reportable information. WRITTEN adverse action notices are REQUIRED for any

applicant who has been denied OR when the terms of the initial arrangement are less than optimal.

Example: The applicant’s credit is below the needed criteria; company policy requires a co-signer. This REQUIRES a “conditional adverse action notice” because the terms or original arrangement are not the best terms available.

MAKE SURE TO REFER TO YOUR WRITTEN POLICIES & PROCEDURES. This is important to make sure you are properly carrying out and enforcing the criteria set by management in your organization AS WELL AS being in proper compliance with FCRA Regulatory Mandates.

What to send with the notice of Denial or the Conditional Notice (AKA Adverse Action)? A written notice detailing the sources used, contact

information, Dodd-Frank Act (scores and score factors) and the basis for the denial (why)

A copy of the FCRA Summary of Rights (Can be found on the CFPB’s website-FTC is no longer the regulatory agency for this effective July of 2012)

FACTA-Fair & Accurate Credit Transactions Act

Added sections to the FCRA intended to help consumers fight identity theft. In addition, the legislation addressed accuracy, privacy and consumer rights to disclosure.

Enacted by Congress in 2003 Allows Consumers to limit the usage of their personal information by

businesses Allows Consumers to put a “consumer statement” or “block/freeze” on

their credit/consumer report in cases (or suspicion of) identity theft. Limits Corporations from sharing information between sister entities

for the purpose of marketing, collections and others. Regulates Credit Reporting Agencies (CRAs) due diligence procedures

and timelines regarding disputed data on the consumers report. Red Flag Ruling & Address Discrepancy “Reasonable Means”- 4 parts

Must have a written procedure, must verify ID information as well as information provided on application (i.e. DL & SSN), if addresses cannot be substantiated on the consumer report, additional documents (i.e. utility bill) are required, lastly, if it cannot be verified, ruling states you cannot rent to the individual.

Adverse ActionMust be provided to applicant within 72 hours

A notice of Denial or the Conditional NoticeThe creditor’s name and addressScores and score factors (Dodd-Frank Act)The principle and specific reasons for the action takenThe FCRA Summary of Rights in English and Spanish

Screening Process:Make sure all applicants 18+ years of age complete, in

full, a written application for residency. If a paper application is used, read the completed

application thoroughly. Look for gaps in residency history. Make sure you can read the items that have been completed by the applicant.

Before signing the lease, VERIFY the SSN & DL/State ID card information with the physical copy and what was provided on the application.

It is recommended that you make a photocopy of the DL or State issued ID card as well as the SSN card.

Verify rental history& employment/income information. Ask your local association for available products and services that are available to you with your membership.

Rules to Follow When Accepting Paper Applications

Don’t Accept Incomplete Applications & watch for sloppy writing

The Verification Process – Check All Information Carefully Does the signature match? Do the date of birth, name, address, and identification numbers

match to those on the photo identification?

Do the documents appear genuine? Does the information on the pay-stub match the information on

the rental application and photo identification. “Red Flag Ruling”-amends the current Fair and Accurate Credit

Transactions Act of 2003.

Social Security Card, Individual Tax Payer Identification Number Watch for Social Security Number (SSN) alerts on credit report.

(FYI- the Social Security Administration has created a “randomization” of SSN’s due to the rise of ID theft. Therefore, SSN’s are NO LONGER issued by geographical area sequences)

Verify, verify, verifyBefore signing the lease, compare the

information that was provided online with the government-issued photo identification.

Does the photo resemble the person in your office?Is the name exactly the same?Does the date of birth match?Was the address on the ID submitted?Does the signature match?Question discrepancies. Although online applications

are convenient for everyone, they may pose an increased risk of identity fraud if caution is not used

Rules to Follow When Applications are Completed OnLine

Rules to Follow-Employment/Income & Past Rental History VerificationsWatch for fraudBank statements, W2’s, recent pay-stubs etc.…Check phone book or internet for employment telephone

number match

Verify Past Rental Experiences:

Call “411” or check phone bookAsk specific questions:When did the resident move in/out? How much rent was being paid? Was the rent current?Any pets?Any Three-Day Notices served?Has the resident given notice of intent to vacate?Would you rent to this applicant again?

Establishing Criteria Do you know what your criteria is? Does you staff know? Do you have a WRITTEN policy clearly disclosing your criteria for

screening prospective residents? Many communities have their written criteria posted in their leasing office

as well as copies of the requirements attached to the application for residency.

Before posting or dispersing your criteria make sure that it is in compliance with local, state, and federal requirements for Fair Housing. Things to consider:

What is the minimum income to rent ratio accepted Will the ratio even be used? FICO score No Credit / Thin Credit / Bad Credit How much past rental history is required in your process? How much work or income history is required in your process? How will late rent be taken into account? Will habitual NSF’s be allowed? What about Bankruptcies or Foreclosures? Will you consider a co-signer?

http://www.rurdev.usda.gov/supportdocuments/3560-2chapter06.pdf

Special Provisions for:United States Department of Agriculture

SSN’s and ITIN’s-What about neither?

A social security number is an important aspect of retrieving a credit report. Without it, there is a high likelihood of pulling a “no record” report.

ITIN numbers are not used in the credit bureaus database

A consumer credit report is vital to the screening process because:Shows financial responsibility (or lack of)May show discrepancies alerting to possible

identity fraud May provide information not disclosed by the

applicant (i.e. additional addresses or aliases)

ITIN & No SSN… ITIN = Individual Tax Identification Number For those that are working towards citizenship for the U.S. or have the legal

right to work in the U.S. they are issued a ITIN . ITINs start with the # 9. Remember this is NOT a SSN. In some cases it may appear to be treated like

one, but they are not the same. The bureaus do not use ITIN numbers Those without SSN OR who have ITIN’s must still be properly screened when

applying for residency. This is REQUIRED by Fair Housing. Per HUD a 2003 memo issuance was sent stating that it is unlawful to

discriminate against individuals as protected under the ECOA (race, gender etc.); It does not clearly identify citizenship as a protected class. However, it DOES require that the same application process be applied to everyone who applies for residency at your property.

Written procedure must also take into account those of non-citizenship status. Applicants with non-citizenship must still have the same credit and background check screening process as any other applicant.

FICO ScoreFICO=Fair Isaac CompanyThis is a complex algorithm created by Fair Isaac &

Company. It ranges from 300-850 the higher the score, the lower

the risk.Probability of financial risk of the consumer/applicant

based on the credit data of that consumer.Reflects score factors which weighed most heavily on the

calculation of the score.The FICO score analyzes the credit history, payment

history, public records, total available credit, strengths of trade lines (i.e. Mortgage, Revolving, Installments), number of inquires and other factors. These are all weighed into the complex sequence of the algorithm.

Co-Signers? A Co-Signer may be needed for the financial protection of the unit for

those residents that meet only a partial amount of the required criteria (i.e. they have the income but have a poor credit score).

Have written criteria in place for eligibility of co-signers Verify that the co-signer meets all of the rental criteria and that they

have sufficient income to absorb the applicant’s rental obligation if something goes sour.

Complete a co-signer agreement. If you don’t have one, seek legal counsel for this or refer to your company’s management.

If the co-signer is not local, ensure their signature is notarized- ESPECIALLY if they are out of state.

Make sure the co-signer signs the lease agreement with the applicant.

When the lease expires, its recommended that the resident’s information be reevaluated. It’s possible that a co-signer will no longer be needed. ALSO consider a policy should the co-signer not want to renew.

Record Retention/FCRAKeep all applications, both denied and approved, for no less than six (6) years to be in compliance with both the FCRA and bureau policies.

Vital Leasing Documents to Retain:Rental applicationWritten rental criteria/qualificationsPhone LogAvailability Log – the list of currently available units for rentDetailed Guest cards or daily logScreening checklistWritten community policiesLeases or rental agreementsApplications that you accept and REJECTCopy of complete credit report that you accept and REJECTCopies of adverse action notifications for denials or conditional acceptance

When requesting a criminal check… If its your policy (which its highly recommended) to process

criminal background checks on prospective residents, you MUST disclose that a criminal background check will be processed in your authorization disclosure.

Make your criteria clear and concise.Make sure to check for past criminal offenses in all states

where your applicant has lived. Why? Not all states, law enforcement agencies, or jurisdictions

report to a central database.This is essential for eviction searches as well. What if

the applicant lived out of state and had been evicted? Industry standards for criminal record reporting and

record retention is First Name, Last Name, Date Of Birth.

A theory of liability that prohibits an employer from using a facially neutral practice that has an unjustified adverse impact on members of a protected class. A facially neutral practice is one that does not appear to be discriminatory on its face; rather it is one that is discriminatory in its application or effect.

In more simplified terms: Disparate impact is a way to prove discrimination based on the effect of a policy or practice rather than the intent behind it.

Disparate Impact

Examples:Denial of all applicants with a criminal record

(Does the crime threaten the safety/security of the property or other residents? How long ago was it? Has there been remediation?)

Denial of all applicants who are unemployed (Is there a medical reason? Can the applicant show other means of income/ability to pay?)

Disparate Impact (cont.)

Questions?

Presented by:Dan Firestone Caryn BennettVice President/Director Compliance

Manager888-232-3822 800-288-4757

#222dan@cicreports.com

caryn@cicreports.com