Be Careful About Basing Denials on Credit History

Recent HUD Guidance (Application of the Fair Housing Act to Advertising of Housing, Credit, and other Real Estate-Related Transactions through Digital Platforms) cites three types of tenant screenings that are particularly likely to result in indirect exclusion of groups the fair housing laws protect. The first is use of credit history, or credit scores that national credit bureaus assign to consumers based on data indicating how likely they are to default on a loan.

Most tenant screening companies incorporate this information into their own screening models. But credit scores don’t measure a consumer’s risk of not paying rent. In addition, use of credit scores creates potential fair housing problems due to some protected groups’ lack access to equitable credit and homeownership opportunities.

Median Individual FICO Credit Scores by Ethnicity (as of August 2021)

As the Guidance explains, Black and Brown persons are more likely to have inaccurate credit reports or experiences resulting in low or no credit scores. Black and Brown people are also disproportionately represented among those who are “credit invisible,” i.e., have minimal or no credit history.

Another example of a credit-invisible applicant is someone who recently immigrated to the U.S. This person may not have any history that suggests they’re a credit risk, let alone a rental risk. Their credit record simply lacks information regardless of their financial history in their country of origin. Use of credit scores might also have discriminatory effects against the disabled and victims of domestic violence, the vast majority of whom are women.

Compliance Strategy: Be aware of these discrimination risks and seek to de-emphasize use of credit scores for screening, especially when more relevant financial information is available. In general, HUD says landlords should avoid denials based on credit scores or history if:

• An applicant’s financial background is of little relevance, such as when the applicant has a cosigner who meets the landlord’s financial screening criteria;
• The negative credit history is due to an event that’s unlikely to recur, such as a family or medical emergency; and
• Minimal or poor credit history is due to domestic violence, dating violence, sexual assault, or stalking that’s not the victim’s fault and that doesn’t bear upon the likelihood of their paying rent on time in the future.  

Landlords can implement this policy, HUD adds, by manually disregarding the applicant’s credit score when it’s not relevant or programming an automated screening model to do so.

Coach’s Tip: Having no or limited credit history is even less relevant than having poor credit history. Accordingly, the Guidance suggests that landlords adopt a policy of admitting applicants so long as they don’t have a negative credit history rather than requiring them to have a positive credit history.

To learn more about the April 2024 Guidance, see our July lesson, “Avoid Discrimination When Using AI-Based Tenant Screening Services,” available to premium subscribers here.