HUD’s April 2024 Fair Housing Act Guidance on Tenant Screening delivers a critical update for community associations and property managers that rely on credit scores to evaluate rental applicants. While creditworthiness remains a legitimate concern, the overreliance on credit scoring metrics, without context or flexibility, may run afoul of federal fair housing standards.
Legal Risk: Credit Scores as a Discriminatory Filter
Credit scoring systems were not developed to assess rental risk but rather the likelihood of loan default. Nevertheless, many associations and tenant screening companies use raw credit scores, or proprietary tenant scoring algorithms, to recommend acceptance or denial of applicants. HUD now cautions that such practices may result in unlawful disparate impact under the Fair Housing Act.
Key statistics underscore the risk:
- Median FICO scores: White (727), Hispanic (667), Black (627).
- Over half of White households have scores above 700, compared to only 21% of Black households.
- Individuals with disabilities and survivors of domestic violence are also disproportionately affected.
HUD explicitly states: “HUD is unaware of any studies showing that credit reports and scores accurately predict a successful tenancy.”
Best Practices for Association Counsel and Property Managers
Attorneys advising boards and managing agents should counsel clients to:
- Avoid blanket credit score thresholds. Rigid criteria (e.g., “must have 700+ FICO”) without individualized assessment invite disparate impact claims.
- Evaluate financial context. If rent is guaranteed through a housing voucher, government assistance, or a qualified co-signer, poor credit may be legally irrelevant.
- Document a tailored screening policy. Customize tenant screening protocols that reflect actual risk while accounting for reasonable accommodations, mitigating circumstances, and alternatives to exclusion.
- Ensure transparency. Denial letters must disclose specific reasons (e.g., “score of 620, policy minimum is 675”), cite the data source, and offer an appeal or dispute process.
- Utilize a Combination of Factors. If an Association wishes to utilize credit scoring as a factor, it should be evaluated in conjunction with other factors and not as a sole determining factor.
Implications for Associations
Boards acting as landlords, whether through leasing restrictions, tenant approval procedures, or ownership of rental units, must ensure their policies and third-party vendors operate in compliance with the Fair Housing Act. Delegation to screening companies does not shield the board from liability; in fact, courts have found both the housing provider and the screener can be jointly liable.
Credit-based denials may be defensible only if the score is narrowly tailored to predict rental performance and no less discriminatory alternative is available. In practice, that bar may be difficult to meet.
Bottom Line: Condominium associations involved in screening tenants should revisit their credit evaluation practices and consult legal counsel to align with HUD’s latest guidance. Disparate impact liability is real, and avoidable. Please note that not all Associations are created equal. The ability to screen tenants depends on an Association’s Governing Documents.
Need help updating your leasing policies or screening criteria? Visit eisingerlaw.com or call 954-894-8000.
