How Risky Tenant Screening Could Ruin Your Rental Business

Are you unknowingly breaking housing laws? If so, it could devastate your property business.

It’s no secret that being a landlord comes with many risks. Rental non-payment. Expensive damage due to negligence or unauthorized pets. Accidentally renting to ill-fitting tenants or scammers––the list goes on and on.

In a best-case scenario, you can work cooperatively with tenants to resolve any potential issues. But, in the worst-case scenario, you may need to start time-consuming, expensive eviction proceedings. Evicting a tenant is no picnic. And it’s more common than you might think.

According to the United States Census Bureau, every year, at least two million Americans have an eviction case filed against them.

Given this frequency and the risks of renting property, it makes sense you want to know as much about your potential tenants as possible before signing a lease or rental agreement. That is why most landlords conduct background checks with professional services like SmartMove®.

However, going after prohibited tenant data or trying to hunt down information in the wrong way could actually hurt your business––and may land you in serious legal trouble.

Why Landlords Run Tenant Background Checks

To start, it’s no secret that landlords want high-quality tenants––responsible, respectful people who pay the rent on time and don’t cause problems for the neighbors or property. After all, property management is a business and you can’t make money if you spend all of your earnings on costly repairs, lawsuits, and evictions.

Tenant screening is an upfront investment in time (and often money). That said, proper background checks can help drastically reduce the likelihood of placing ill-fitting or potentially destructive tenants. In short, tenant screening has a great ROI.

There are strict rules and regulations that landlords must follow when screening potential tenants. And, if you play fast and loose with the law, tenants can––and sometimes will––sue you.

Reasons Landlords May Get Sued By Tenants

According to Realtor.com there are several reasons why tenants might sue their landlord and have a chance at winning. These include things like:

• Poor living conditions/Implied Warranty of Habitability violations
• Withholding security deposits or using them for basic wear & tear
• On-site injuries due to negligence or unsafe conditions
• Unlawful eviction
• Failing to reimburse tenants for repairs
• Housing Discrimination

Two Screening Laws and Regulations, and Tenant Rights

Below you’ll find two laws and regulations you may encounter when screening tenants.

1: The Fair Credit Reporting Act (FCRA)

First up, the FCRA covers consumer reports and the personal data you uncover about tenants in rental background checks. According to the Federal Trade Commission (FTC), “consumer reports” are reports that include details about a person, such as their credit, rental, or criminal history.

While screening companies follow the FCRA, the FTC states there are also several legal obligations for landlords when “using consumer reports.”

You are required to get a rental applicant’s permission before running a background check. If you take adverse action, such as rejecting a tenant, requiring a cosigner or higher deposit, or charging a higher amount of rent that you would for a different tenant, you have additional requirements.

While the actual laws are more detailed (as set forth in the links above) and nuanced, the high level and general basics include the following.

If you take adverse action, the FCRA requires you to:

• Inform the rental applicant of the decision with an Adverse Action Notice (the exact method can vary by state)
• Make the applicant aware they are entitled to a free copy of the report(s) used to make your decisions
• Provide the application with the contact information for the reporting service
• Inform the applicant that the decision did not come from the screening company
• Notify the tenant they have a right to dispute the findings with the screening service

It all sounds simple enough, right? In practice, it can mean a stressful headache if you skip a step or make a decision based on data that should not be used. In the section below, you can see more details of common mistakes and real-world court cases involving FCRA violations.

2. Fair Housing Laws

While FCRA regulations come into play while landlords vet potential tenants, Fair Housing Act violations can occur at any point in a landlord-tenant relationship. According to the U.S. Department of Housing and Urban Development (HUD), the Fair Housing Act exists to help prevent discrimination in rental and other housing-related activities.

The Fair Housing Act prohibits housing discrimination based on the following protected classes:

• Race
• Color
• National Origin
• Religion
• Sex (including gender identity and sexual orientation)
• Familial Status
• Disability

According to the National Mortgage Professional website, in 2023 there was a 3.5% increase of fair housing complaints received by non-profit fair housing organizations (e.g. HUD and the DOJ) than the previous year––an all-time record of 34,150 in total.

In addition, the U.S. Department of Justice website lists several successful court cases where the department has brought landlords, property managers, investors, and other rental-industry professionals to court for Fair Housing Act violations and won––sometimes to the tune of hundreds of thousands of dollars.

If you were to get caught up in one of these cases, how would your rental business fare?

2. Blanket Policies that Ignore Personal Circumstances

As shown in the case above, another area where landlords can get in trouble is not reviewing individual circumstances and applying blanket policies instead. If, for example, you have a set policy to reject anyone with a criminal conviction or eviction history, you may find yourself in a tricky situation.

Court Case Example: Thomson Reuters CaseText breaks down a case from Connecticut in which a woman sued her landlord after an accident left her son severely disabled. The mother submitted a rental application on behalf of her son, so that he could move in while she cared for him. However, the housing provider rejected the application when the son’s criminal record report returned a charge for minor theft that occurred one year before the accident.

As a landlord, it may seem easier to have a strict “no exceptions” policy. However, like the case above, there could be situations where past criminal charges or evictions may not be relevant to the current rental situation.

How To Help Prevent This Issue
Screening reports only tell part of the story. Rather than a blanket policy, The U.S. Department of Housing and Development (HUD) advises landlords to take an individual approach when reviewing applications.

Additionally, the case above was further complicated when the mother had a difficult time getting a copy of the screening report, which is a tenant’s right under the FCRA. This is one reason if it’s helpful to use a screening service that makes it easier for tenants to get their reports.

SmartMove allows applicants to access a copy of consumer reports.

3. Basing Your Decision on Data that Shouldn’t Be Used

When screening tenants, you don’t just need to follow federal laws, but also state and even local regulations. These days, housing laws are changing around the country.

For example, according to The Detroit News, the city recently passed an ordinance that limits the use of criminal records in rental screening. This is both at the initial application stage and when landlords review criminal history reports.

Detroit is not alone. Similar laws have popped up in Los Angeles, New York City, and other cities. These varying laws can complicate your screening process, especially if you perform background checks in multiple states.

Court Case Example: In October 2024, The U.S. Department of Justice announced it is suing a St. Louis area apartment complex. The suit alleges the property management violated the Fair Housing Act by blanket banning potential tenants with any past felony convictions, regardless of the circumstances or how long ago it occurred.

Eviction records: Besides criminal records, past evictions can also be a hot button issue for tenants and landlords. Landlords have to watch out for local laws that limit the use of these reports.

For example, recently, the State of Idaho passed a bill that will shield some eviction records from public viewing after three years, according to the state’s legislature.

How To Help Prevent This Issue
First and foremost, it’s imperative to know and follow any federal, state, and local laws that apply to screening your rental applicants.

Then, when screening candidate’s it’s important to ask yourself questions like:

• Am I permitted to see this information about a rental applicant?
• Am I allowed to use this information in my rental decision?
• If I choose not to rent to this person or take other adverse action, what are my obligations?
• Are there any additional requirements I should be aware of?
• Does my screening and selection process comply with all federal, state, and local laws?
• Are my screening policies discriminatory or in violation of applicable federal, state, and local laws, even unintentionally?

To learn more about specific rental and housing laws in your area*, check out your local branch of the U.S. Department of Housing and Urban Development (HUD).

*Always consult legal counsel to help comply with state, federal and local laws in your area.