EVALUATING THE PROSPECTIVE TENANT
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A credit evaluation is now accepted as essential to a prudent evaluation of the rental prospect. Obtaining such a report is possible for all landlords, whether they own one property or many. Through a local credit bureau, a merged report from all three recognized national databases, Equifax,
Experian, and TransUnion, can be obtained in hours or less. The data contained in these reports must be evaluated, however, if this screening tool is to be used effectively.
Reading the credit report is not really a problem, although the landlord inexperienced in doing so may have at first to spend a little extra time in the effort. Such reports contain abbreviations and acronyms the meaning of which may not be initially transparent. All credit bureaux supply a key to such with the report.
The typical credit report will be broken into sections, like paragraphs in an essay. These should be read just as one would read an essay. The landlord can expect the following items to appear:
1. Identification information. Here will be found the name, address, social security number, date of birth, and previous addresses reported.
2. Public records information. This will include outstanding taxes and tax liens, other liens, money judgments, and Bankruptcies. This section will not contain information on criminal convictions unless the criminal conviction resulted in a civil restitution judgment, or unlawful detainer judgments unless a money judgment was obtained.
3. Collection accounts. There may be a separate section for accounts which were assigned to collection agencies.
4. Credit account information. This will include all reported credit accounts standing in the applicants name or for which he is liable. In a chart-like format, the landlord will be advised of the creditor name and account number, the highest balance or credit limit, when the account was opened, when it was closed, if it was, the type of account, the terms, the balance as of the last report, if any amount is past due, and the date of the last report from the creditor.
5. Inquiries. Inquiries by potential extenders of credit will be reported here. Certain types of inquiries may not be reported. For example, Equifax will not report routine inquiries by existing creditors updating account information to determine the applicants continuing eligibility for a line of credit.
6. Miscellaneous information. Here will be found pieces of information which might not fit previous categories, such as foreclosures.
The landlord may choose to evaluate his report himself or accept an evaluation from the credit bureau. Companies such as Beacon or Fair, Isaac offer this last type of service. Utilizing sophisticated evaluation techniques, they in effect screen the applicant. In some cases, they will actually make a decision for the client as to whether the prospect is qualified or not based on prearranged criteria. In other cases they will present a rating or evaluation, perhaps based on a point system, the key to which is supplied to the client. For example, such a service may consider the data in the raw credit reports and assign them point
values based on the agency's own experience and statistics (which are often considerable). The total score is then added up and the total point value compared to a chart of values to give a "likelihood" of default expressed as a percentage. So, on a point scale of 1 to 800, a point score of 683 would be compared to the chart and a likelihood of default of X% will be generated.
There are a number of virtues to such systems. The primary benefit is that they allow the client, such as a chain of furniture stores, with a large number of applicants each day, to delegate all or part of the evaluation process to a reliable subcontractor. If a company has a large number of locations, each with personnel charged with approving or disapproving applicants, setting up standards based on point scores can promote uniformity of result and prevent introduction of fudge factors into the process which might result in easier standards in one location which needs to increase sales, and tighter ones in others which has
plenty of sales and wants to emphasize a trouble free receivables department. This type of system also benefits the consumer, in that he may qualify, or qualify with additional conditions, even if he has one or two blemishes on his report.
One need not receive a thousand applications a month to benefit from this approach. A landlord with, say, three apartment buildings which he manages himself, can use this system to delegate the credit decision to the respective resident managers with the confidence that his credit standards are preserved. An appropriate policy might be that an applicant rated below a certain number does not qualify at all, in one range of numbers he qualifies but must put up a 50% higher deposit, and above a certain range, he qualifies on the offered terms. Naturally, the numerical standards used must realistically be set.
Some drawbacks to this sort of system suggest themselves, however. For one thing, the primary reason for setting up this system in the first place was to accommodate clients with very large groups of customers to deal with, perhaps hundreds of applications each month. In this case, the client decides that he is unwilling to accept more than an X% rate of defaults and sets a number accordingly. What he is really saying is that he does not want to accept more than an X% rate of default over the entire population of his credit accounts, which may number in the many thousands. The rating company makes its statistical analysis of
default rates over millions of histories over a number of years. If the company comes back with a rating that translates into a 10% chance of default, that means that over a certain number of years and a million examples, 10% of the examples will default by paying the rent late or otherwise. Further, it may be that some will default, say, by paying late, more than once, so that the percentage of customers in this group that default may be even less. That does not mean that the applicant standing before the landlord will default 10% of the time. In other words, one should not expect to see that the whole population defaulted once
given ten opportunities to do so. Now, a very large customer is willing to accept the loss of all the customers who might never default because statistically they are better off. The individual landlord, with three or four units a year to rent might not wish to accept the loss of perfectly good applicants in this way, and adopt a more hands on approach to the evaluation. This is not to say that scoring systems are of no value to the small landlord, only that he should carefully evaluate their use.
One thing which point scoring systems impair is the ability
legally to discriminate among the data in the credit report. For example, suppose that the applicant went through a period of unemployment two years before. Because he was on unemployment and short of funds, he let a visa card and furniture store account slide for two months using the money instead to pay his rent. Having gotten a new job he caught up all his payments within a couple of months after that and went forward. He shows some payments as much as 90 to 120 days behind. A point system or other prepackaged rating, if relied upon without further inquiry,
might set up a democracy of debt, in which each debt is as important as another, rendering the applicant below the qualified level and rejected. On the other hand, a landlord making his own decision based not only on the raw data but the patterns of conduct which they display might decide that this applicant's priorities are in order and consider him, if not perfect, then worth the risk with an additional deposit, say. On the other hand, an applicant who decided to make his Visa card and furniture payments on time, but slide on the rent, might not even show up as far as credit rating is concerned, since landlords rarely report late
payments to the national data bases. Few landlords, if given the choice between the two, would hesitate.
Recently, literature selling such scoring systems has emphasized their utility in avoiding accusations of illegal discrimination. By reducing the various elements of the report to weighted (or
unweighed) numerical scores, so the argument runs, the decision making process is made "objective" and not subject criticism under the fair housing laws. The applicant either scores 620 or he does not, it is said, regardless of race, color, creed, etc. This argument should be viewed with caution, as it is the same one which was made in favor of red-lining. While it is true that such numerical scoring systems give a superficial
appearance of mathematical objectivity and precision, setting the level of the bar that the applicant must clear in order to qualify may still be attacked as discriminatory if it has the effect of disqualifying a disproportionate number of applicants in a protected class. For example, assume a landlord with an apartment building from which he wishes to exclude children, preferring to rent to couples with no children ("dinks,"
double income no kids). Knowing that couples with children are less likely to have as much earning power as those without due to child rearing obligations, and more likely
to have minor but real flaws on their credit reports due to the types of emergencies which children tend to cause, the landlord sets an incredibly high point score threshold to his applicants. In this example, experience shows that 19 out of his 20 units are rented to single persons or couples without children. Does anyone doubt that such a practice, even though clothed with a spurious aura of science, is a result of the landlord's unlawful prejudice in favor of dinks and against families with children?
It is no response that such a landlord would be acting stupidly by setting himself up for long periods of vacancy by insisting on a credit standard out of reach of so many applicants. There are some people who are willing to act stupidly in order to gratify their prejudices, and they make life more difficult and complicated for all. The state of the law is such that a civil rights lawyer can create, as opposed to win, a case about almost anything. Should the landlord decide to entrust his credit decision to a point score, he should do so for the reason that they are useful in making credit decisions, not because they will act as
a sort of shield against civil rights lawyers.
The landlord may prefer to review the credit reports and make his own decision as to the acceptability of the applicant. If this is so, then the landlord should remember that he is not looking for any one thing upon which to base his decision. Recall the example of the applicant who let his Visa and furniture store payments slide to get his rent in on time. The landlord wishes to see the following things:
1. Is the information in the report consistent with the information on the application?
2. Does the information in the report reflect a responsible approach to the applicant's financial obligations?
3. How does the information in the report compare with the information from other sources, such as the references, eviction report, etc?
If the landlord takes this approach, then it is necessary to document in the applicant's file the thought process by which this information was evaluated. It is the pattern of conduct which will give a true picture of the fitness of the applicant. The documentation will be invaluable if the motivation for a rejection for the applicant is ever questioned.
The identification information should be inspected first and compared to the application. The landlord is looking for aliases or undisclosed addresses. If significant, these can form the basis for a denial of the applicant on the ground that the application is a falsehood. In most instances, such discrepancies as occur are usually a matter of interpretation or, perhaps, simply an attempt by the applicant to summarize the information to fit on the application form.
The public records information will show outstanding money judgments. Restitution orders, issued in connection with criminal convictions, reduced to civil judgment, may show up here or in the miscellaneous section below it, providing further information about the applicant's background which may not show up on a criminal records check if the offense was committed outside the general area in which the applicant lived.
The sections showing accounts assigned for collection and the credit account information gives the meat of the report. It is here where the landlord needs to evaluate the applicant's attitude to debt payment generally. Again, patterns are what count. An account assigned to collection may be bad or not, depending on the circumstances. For example, a large medical expense not covered by insurance may have been assigned to a collection entity as a matter of routine by a hospital or medical office, even though the applicant is making payment as agreed since the assignment. This, alongside several other accounts paid as agreed may not
reflect badly on the applicant. This section also bears detailed reading. An applicant claiming previous addresses in Medford, OR, for the past five years might arouse suspicion if the credit report shows three revolving charges opened in Kansas City, MO, during that same time.
Where the credit report discloses information which is neither obviously sufficient to qualify or disqualify the applicant, many apparent discrepancies can be resolved with a conference with the applicant. Where the landlord has made the decision to disqualify the applicant due to discrepancies in the report, it is permissible under the FCRA for the landlord to disclose the nature of the derogatory or contradictory information to the applicant, regardless of his contract with the reporting agency. The landlord may not, however, give a copy of the report to the applicant unless the law of the state in which the landlord is doing
business so provides. It should be remembered that a discrepancy with a plausible explanation is not as good as no discrepancy at all, and that all such discussion should be documented with dated notes.
Professional credit scorers give the following data the greatest weight. Is there a history of accounts going over 90 days late, rather than one or two instances concentrated in the same time frame? What does the public record show in the last five years (the latest information is the best in all categories)? Are there current delinquencies? Are there a large number of inquiries which might show the applicant is "loading up?" Are the credit balances at or near their maximums? The existence of several of these factors is reason to question the applicant's credit worthiness.
Whether the landlord decides to evaluate the credit report himself or rely on the services of screening agencies to come up with evaluations or even final credit decisions, there is no question that the standard of care now requires such reports in the screening process. They can be a valuable predictor of the applicant's likelihood to make timely rental payments and live up to the other obligations of tenancy.