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Credit Scores – Risk Management for Property Managers

Ensuring a prospective tenant can afford to pay monthly rent is an important consideration for landlords and the property managers that screen applicants on behalf of landlords. Property Managers need to be careful how they deal with credit scores in the screening process. Even if a Property Manager inadvertently does something wrong, it could lead to a lawsuit. Compliance with legislation is essential, as is understanding the recent changes towards alternative credit scores. 

Compliance with Legislation 

Property Managers and landlords who use credit reports to make decisions about tenancies must comply with all Federal and State laws. This includes the Fair Credit Reporting Act. 

Property Managers must have the approval of the rental applicant to obtain a copy of their credit score report. You cannot request information without consent. 

If the credit score isn’t satisfactory and the applicant wishes to have a copy of the credit report, a Property Manager or landlord must provide the credit report they have on file. 

The Fair Housing Act is another consideration. Discrimination based on race, color, religion, sex, disability, familial status or nation of origin is strictly prohibited. When it comes to credit scores, landlords can choose credit report criteria they deem acceptable for their investment properties. However, procedures must be followed consistently for all applicants. Failure to keep things consistent can lead to discrimination lawsuits. 

State laws may also apply and will vary according to your location. Some states allow landlords to charge the tenant for the cost of the credit check and others don’t. The state of Wisconsin even requires landlords to accept credit reports provided by the rental applicant under certain conditions. Property managers need to keep updated about what laws are in place for their location. 

Recent Changes to Alternative Credit Scores

Over the past year, the Federal Housing Finance Agency (FHFA) announced several changes to credit scores. They approved the use of FICO10 and VantageScore 4.0 credit score models by Fannie Mae and Freddie Mac (the Enterprises). 

These new alternative credit scores take into account a person’s missed payments and balances for the past two years more heavily than models used to date. They cover things like rent, utilities, and phone payments. 

For people with good credit, the new models may give them a boost in credit scores. However, for those that have missed payments over the past two years, their scores will be lower. While some commentators state that the new alternatives will offer a greater level of financial inclusion, others say it could widen the gap between those with bad credit and good credit. 

Unemployment, financial hardship, and a general economic decline as a result of the COVID-19 pandemic hit households hard in recent years. It is important to remember that credit scores are an indicator of a person’s risk of potential default for future payments. However, they do not explain why a person has been unable to repay a debt, and there are many factors. 

Research undertaken during the COVID-19 pandemic by credit rating agencies showed that people with medical expenses were not at a higher credit risk than those without medical debt. As a result, debt collection for medical debts that have been paid is no longer included in credit reports. The time period for unpaid medical debts has also increased to one year rather than six months. 

Tips for Property Managers When Dealing With Credit Checks

Keep up-to-date with new developments 

Property managers should keep updated on the new developments with credit scores including the new alternatives. Property managers and real estate professionals also need to keep on top of any legislative changes that can affect your business. This includes Federal and State laws, as well as local regulations. 

Have policies in place for the selection of tenants to ensure consistency

The key to avoiding a lawsuit relating to credit scores is to be consistent in your procedures. All applicants should be treated the same to ensure a fair process. If you lead a team, everyone within your team should be trained in your policies and procedures to ensure consistency.

Never suggest ways a tenant can boost their credit score

Tenants who have suffered financial hardships may ask property managers how they can repair or boost their credit score to meet the required criteria. Property managers should never provide advice outside of the realm of their expertise. Do not offer suggestions or tips to tenants. If asked, suggest that they seek professional advice from a qualified accountant or financial professional. 

Be aware that credit scores change over time

Just because a tenant has an insufficient credit score today to lease a property does not mean they will be unsuitable tenants in the future. The credit report you obtain about them is only relevant to the particular tenancy they applied for at that point in time. If they are to apply sometime in the future for another property, you could not consider the previous credit report in any decision-making about the tenancy. You must ask for their permission to request a new report. 

Protect Your Property Management Business

Property Manager E&O insurance can help you defend a claim if you do find yourself involved in a lawsuit. CRES specializes in Errors and Omissions insurance tailored for the specific risks property managers face.   As part of one of the largest insurance brokers in the world, we have access to more E&O options for Property Managers than just about anyone. Let us do the shopping for you.

As a CRES E&O + ClaimPrevent® member, you’ll also have access to qualified real estate attorneys to answer any legal questions pre-claim you may have. Contact CRES at 800-880-2747 to find out how you can protect yourself and your business.

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