Is it OK to run credit checks on tenants?

Question: I was recently hired to manage a rental property with 32 units. Given the current economic uncertainty, I want to review the financial records of the residents to decide which of them are financially stable and which can be expected to have trouble paying the rent. I want to be ready in case ownership decides to increase the rent to make up for reductions they were forced to offer in the last couple of years.

I feel that running a credit report for each resident is the best way to check their ability to pay in the future, which is why we always obtain a credit report for rental applicants. Before I start, I just want to make sure I won’t be violating any laws if I run the credit reports. Will I?

Answer: You would need a written authorization from each tenant to obtain a report. We do not believe you can charge a current tenant for the cost of running the report. A current tenant is not the same as an applicant covered by Civil Code Section 1950.6(a), the statute that allows you to charge an applicant for the cost of a credit report connected to an application process.

Under the Consumer Credit Reporting Agencies Act, California Civil Code Sections 1785.1-1785.35, if you take any adverse action based on your review of a tenant’s credit report, Section 1786.40(a) requires you to give immediate written notice to the tenant. That notice must include the contact information for the credit reporting agency that issued the report, a statement that your action was based in whole or in part on the credit report, and a statement telling the tenant that he or she has a right to a free copy of the report from the agency within 60 days of your notice. This notice entitles the tenant to access the report and dispute its accuracy.

Rather than impose these requirements on yourself, look for some alternative methods to achieve your goal. A credit report is only a report of recent general financial activity.

You can obtain much more direct information about prior relevant financial activity by reviewing the rent payment histories for your current tenants. There are no reporting or disclosure obligations attached to your own internal review. The rental payment history will directly indicate a tenant’s level of reliability in meeting his or her rental obligations. That history should be more important than their record of dealing with other types of debt, such as consumer loans and credit cards.

Martin Eichner, Project Sentinel

Eichner is director of Housing Counseling Programs for Project Sentinel, a Sunnyvale, Calif.-based mediation service. To submit a question, go to https://www.housing.org.