The Impact of Dodd-Frank on Resident Screening and Adverse Action Letters
In recent years, we’ve seen AIG’s liquidity crisis, Lehman Brothers’ bankruptcy, the subprime mortgage meltdown and resulting Troubled Asset Relief Program (TARP), and the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year.
As it relates to applicant screening for apartment owners and property managers, there hasn’t been much new legislative news in the past 20 years. Sure, we had the USA PATRIOT Act, FACT Act, and the Red Flag rules that helped fight terrorism and identity theft, but otherwise it has been pretty straightforward. For 30 years or so, the multifamily industry’s primary regulatory responsibility has been to provide applicants a letter explaining their Fair Credit rights when adverse action is taken.
However, a funny thing happened once Dodd-Frank was enacted. Because of its impact relating to adverse action letters, the multifamily industry started to have conversations about the proper use of these letters. I spent time in different cities across the country speaking to groups of executives. It turns out that many, probably the majority, were confused on what “adverse action” really is. Just to be clear, adverse action is not only when you deny someone residency but also when you ask for an additional deposit, a co-signer, or require any other conditions. Most apartment communities deny about 15 percent of applicants outright during the screening process. But another 20 percent or so are conditionally accepted. Federal law requires that both groups be provided adverse action letters.
With something that’s been in place for so long, how did this important requirement suddenly get so fuzzy? To answer that, let me use an analogy. Have you ever watched a teenager working a broken cash register squirm when they have to make change the old fashioned way…with their brains? Most resident screening software companies have taken the thinking out of regulatory compliance. They handle it with their software, so that the right people get the right adverse action letter when it’s required. A generation of apartment managers hasn’t had to spend much time thinking about adverse action requirements. And now they do.
Dodd-Frank made a number of significant changes in big finance, and one little change in the way the multifamily industry screens residents. If a credit score—such as a FICO—is used in any way during the screening decision process, then it must be disclosed on the adverse action letter, along with certain details regarding that credit score (e.g., the range of possible scores, the key factors used in determining the score, and the date on which the score was created). I know, it doesn’t sound like much but it has brought significant hand wringing to the apartment industry.
If a property owner is found to be in violation, the penalties could cost up to $3,500 per violation:
- The Federal Trade Commission (FTC) can treat a violation as an unfair or deceptive act or practice under the FTC Act and under the Fair Credit Reporting Act (FCRA), for a knowing violation, which constitutes part of a pattern or practice of violations. The FTC can also sue for a civil penalty of up to $2,500 if the property knowingly failed to comply.
- A State Attorney General can seek any remedies under state law and under the FCRA and can also sue for an injunction. The Attorney General also can sue for damages that state residents could get if they could sue and up to $1,000 if the property acted recklessly.
As with adverse action though, you shouldn’t have to worry much, because your resident screening vendor should be doing all the heavy lifting. The resident screening company must have its product experts and lawyers determine if it uses the credit score in a way prescribed by Dodd-Frank. The screening company should insert the score and other required text into the adverse action letter. And the screening company should dynamically and automatically generate an adverse action letter that provides the applicant the appropriate direction that meets State and Federal requirements.
So what’s your job as an apartment manager in all of this? Two things: First, make sure that the letters get into the hands of all adversely impacted applicants. No matter how good the screening provider is, they generally can’t do this job without your help. Second, choose the right resident screening software…one that is sophisticated and sturdy enough to help you cover your regulatory risk. And make no mistake; it is your regulatory risk.
What’s your take on this issue? Do you use a resident screening company to take care of all of your adverse action letters or are you navigating through this effort on your own? Let us know your thoughts.