HUD’s New Regulations: Relax, We Have Seen This Before.

HUD’s New Regulations: Relax, We Have Seen This Before.

HUD’s New Regulations: Relax, We Have Seen This Before.

First of all, let me get the legal mumbo jumbo out of the way. I have been a landlord for 15 years and a Private Investigator for 20. I make my living by providing investigative products to landlords that help them make the right choice when evaluating a tenant. I have been in the trenches my whole career, qualifying tenants and employees, and have come to realize that new regulation often gets overblown at first and then settles down later. Although this article will be very helpful to you, it is in no way legal advice and you should consult with your attorney before making any changes to your policies and processes.

On April 4, 2016 HUD announced its new standards on the use of criminal background histories when screening a potential tenant. First of all, this is not a new concept. In April 2012, the EEOC came out with their standards that limited employment screening. It rocked the employment world; at least for those employers that had not already proactively made the changes, and when the dust settled, business went on as usual. Now, four years later, we see a very similar approach impacting the world of tenant screening. The arguments in both cases are similar; when using criminal records as part of the tenant application screening process, statistics indicate that more minorities are incarcerated than whites, causing a natural consequence that more minorities will be denied than whites, thus creating an environment ripe for discrimination. The reality is that most good landlords do not discriminate intentionally or even accidently. However, the way the new rules are set forth there is some fear that the new rules may actually be the catalyst of an environment where discriminatory acts occur, whether intended or not. So, let’s look at policies or criteria that could possibly cause unwanted discrimination as a result of the new rules and make sure that you don’t accidently violate them.

No criminal records ever. This policy or criteria will be a huge red flag for HUD. It really says “I am not willing to look or assess my true risk with a policy or criteria like this.” No matter how good all the other data is, they are denied based on the fact that there is a criminal record of any kind. This means your criteria cannot weigh everything on criminal records. Think of a classified ad saying: “We will not rent to a criminal” vs “criminal and credit checks are required.” The first ad may create the impression that your policies are creating a discriminatory act because you are putting so much weight on the criminal records. The second really says the same thing but does not create a discriminatory policy as long as you run those exact same reports on every applicant.

In addition, I recommend you specifically list the crimes which you can show may cause your property or neighbors risk. A crime that may pose a risk of harm might be a felony involving a person or property, where the crime was committed within the past 10 years or the applicant was released from prison in the same time period. Since misdemeanors are of less serious nature, I usually impose a 5 year time period prohibition if the crime has to do with a person or property. This will be different for every landlord based on location, property and associated risk. HUD specifically recognizes that you can deny for all drug manufacturing and
distribution charges. In addition, there is data that indicates that sex offenders are never really rehabilitated, so there is credible rationale for denying those individuals. Crimes that you will be assessing that carry the most risk are drug possession, theft, assault, and fraud. This data from the Bureau of Justice Statistics (April 22, 2014) can reinforce why your policy or criteria is set the way it is.

  • About two-thirds (67.8%) of released prisoners were arrested for a new crime within 3 years, and three-quarters (76.6%) were arrested within 5 years.
  • Within 5 years of release, 82.1% of property offenders were arrested for a new crime, compared to 76.9% of drug offenders, 73.6% of public order offenders, and 71.3% of violent offenders.
  • More than a third (36.8%) of all prisoners who were arrested within 5 years of release were arrested within the first 6 months after release, with more than half (56.7%) arrested by the end of the first year.  Two in five (42.3%) released prisoners were either not arrested or arrested once in the 5 years after their release.
  • A sixth (16.1%) of released prisoners were responsible for almost half (48.4%) of the nearly 1.2 million arrests that occurred in the 5-year follow-up period.
  • An estimated 10.9% of released prisoners were arrested in a state other than the one that released them during the 5-year follow-up period.
  • Within 5 years of release, 84.1% of inmates who were age 24 or younger at release were arrested, compared to 78.6% of inmates ages 25 to 39 and 69.2% of those age 40 and older.

Though we as Landlords are supposed to treat everyone the same, pursuant to fair housing rules, there is an additional but contradictory rule that HUD made as part of the new standards, i.e. The “Individual Assessment”. At first this seems hard to grasp…treat everyone the same, but look at everyone individually on a case-by-case basis. At first glance it seems a recipe for disaster. This policy is instituted to discourage creating and enforcing “blanket” denial criteria. I recommend a two prong approach; 1) you must create strong criteria where you can treat everyone the same and then, 2) for those who do not pass the criteria, ask yourself these questions:

  • What was the age of the applicant at the time of the crime? (it makes a difference if they were 18 or 40)  Did the applicant go through rehabilitation?
  • How long ago did the offense take place?  What kind of crime was it? How serious was it?  How was their rental history before and after the offense?
  • Will this cause my neighbors, other tenants, my property or I harm?
  • Are there other factors that can compensate for the criminal history?

For example I own several single family homes valued at $250,000 plus. My bar is higher
because of the amount of the investment involved. I am looking for personal responsibility and trustworthiness because the damage to my investment can be huge. Because of the risk of placing my investments in the hands of people I do not know and because of my duty not to place my neighbors at risk of harm, my criteria requires several items right from the start, including a higher FICO score, criminal background checks, rental verifications, income and employment history. Once I gather all the information I look at the applicant’s information as a whole. By not just looking solely at the criminal history, I am doing a full evaluation on whether an applicant qualifies. I am now doing an “individual assessment” and I suggest before making any decisions, you also perform the “individual assessment.” If I found a criminal record I might ask myself….Does that shoplifting charge 8 years ago create a risk to my neighbors, other residents or to my property? Does the applicant have adequate income to pay the rent? Has their life changed in a way where they are not a risk anymore? How old were they when they shoplifted? By completing an individual assessment, you can make an educated decision based on all the facts, a totality of the circumstances and free of influence regarding race, national origin or any protected class. As investors, protected classes will not be a factor in our decisions since we treat everyone the same. We are in the business of filling our rentals with people that meet our non-discriminatory criteria and hope to make some profit. HUD is demanding we take a more in-depth look at those who are applying with us. It’s imperative that you develop a good criteria or policy and lean on your screening company if you need more detail. This will aid you in making the right decision.

Do not rely on or use arrest records alone. Arrests are not convictions and, in many cases,people are never adjudicated because a prosecutor did not have the necessary evidence to prosecute. On the other hand, you can and should use open or pending cases in making your decision if the prosecutor is litigating the case. If you have an applicant that is applying with you and he/she has an open case for sexual assault, you should take this into account, even though he or she has not been convicted yet. There is a difference between an arrest and an open court case that has not been adjudicated yet. In the overall assessment, open criminal cases can be huge.

Years ago, I was told by my attorney to never give a reason why I denied someone. He told me this would keep me out of trouble. That has changed. We now need to document why we are denying someone in case they file a claim or a lawsuit against us. Document it if the applicant did not meet the income requirement or if you could not verify the income. Whatever the reason – document, document, document. If their criminal history was too recent and posed a risk to your staff, property and neighbors – document what the risk is and why it is relevant. I can tell you from experience that most of the time it is not only the criminal history that disqualifies an applicant. Often, those with criminal histories have low FICO scores and other disqualifying factors other than criminal history. Remember; always document ALL of the reasons every time! The fact is you can and should use criminal history in your assessments. Just be the same responsible landlord you have always been and document a little more than you may have in the past. For sample criteria for your property, feel free to reach out to me at David@CrimShield.com

About the Author
David Pickron has been a licensed private investigator for over 20 years, specializing in tenant screening for real estate investment owners and property management companies. His company, Rent Perfect, an Investigative Screening Company, helps clients onboard tenants from the initial background check to leasing and payment collection. You can learn more by visiting www.rentperfect.com or calling 1-877922-2547

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