Regarding tenant screening, housing providers have long used credit reports as an indicator of an applicant’s financial reliability. However, the use of credit history in determining housing eligibility can inadvertently lead to discriminatory effects, particularly against minority groups and low-income individuals. In response to these concerns, the U.S. Department of Housing and Urban Development (HUD) has released guidance to ensure that credit screening practices comply with the Fair Housing Act.
The Role of Credit in Tenant Screening
Housing providers often rely on credit scores and reports to assess an applicant’s financial responsibility, particularly their ability to pay rent. Credit reports typically include information about an applicant’s debt, payment history, credit card usage, and loan performance. While this may seem an effective way to screen tenants, HUD’s guidance highlights how these credit screening practices can disproportionately impact certain protected classes.
Disparate Impact of Credit Checks
Credit scores are often seen as objective measures, but they can unintentionally perpetuate historical patterns of discrimination. For example, people of color, individuals with disabilities, and women—particularly survivors of domestic violence—are more likely to have lower credit scores due to systemic inequities. These groups may face additional barriers in obtaining credit, leading to lower or nonexistent credit scores, which can result in being unfairly screened out of housing opportunities.
According to HUD, relying on credit history in tenant screening is a matter of financial risk assessment and a fair housing issue. Discriminatory effects from credit-based decisions can arise if these policies disproportionately affect people based on race, national origin, gender, or other protected characteristics under the Fair Housing Act.
Fair Housing Act Protections
The Fair Housing Act prohibits discrimination in housing-related activities, including rental, sales, and lending, based on race, color, national origin, religion, sex, familial status, and disability. This includes policies or practices that may not be intentionally discriminatory but result in disproportionately negative impacts on protected groups—commonly called “disparate impact” discrimination.
The use of credit screening can inadvertently lead to disparate impact discrimination. For example, research shows that Black and Hispanic individuals are more likely to have lower credit scores or be credit-invisible compared to their white counterparts. Similarly, individuals with disabilities are more likely to have financial difficulties, which can affect their credit scores. As a result, policies that overly rely on credit scores could disproportionately exclude these groups from housing.
Why Credit Scores Are a Flawed Measure of Rental Risk
HUD’s guidance stresses that credit scores were originally designed to predict loan defaults, not rental behaviors. As such, credit scores may not always be the best indicator of whether an applicant will successfully fulfill their rental obligations. For example, many renters prioritize paying their rent over other debts when facing financial hardship, but this prioritization is often not reflected in their credit reports.
Additionally, credit reports typically do not include timely rent, utility, or nontraditional debt payments (like payday loans or car title loans), which are disproportionately used by marginalized communities. This lack of comprehensive data on rental payment history further limits the usefulness of credit scores as a measure of a potential tenant’s ability to pay rent.
Best Practices for Fair Credit Screening in Housing
HUD’s guidance outlines best practices for housing providers to ensure that their credit screening practices comply with fair housing laws:
1. Customize Screening Policies
Housing providers should customize their screening policies to avoid overreliance on credit scores. Instead, consider other factors that better reflect an applicant’s ability to pay rent, such as timely rent payment history, participation in housing assistance programs, or employment stability. Avoid using default credit score thresholds that could disproportionately disqualify protected groups.
Applicants should be allowed to explain negative credit information or provide additional context for information found in a screening. For instance, survivors of domestic violence may have lower credit scores due to financial abuse by their partner. Applicants with disabilities may have higher medical debt that impacts their score. Allowing applicants to explain these circumstances can help ensure that decisions are based on a complete understanding of the situation.
3. Consider Alternative Credit Data
Housing providers should consider using alternative credit data. This includes rental payment history, utility payments, or other indicators of financial responsibility. This approach is particularly helpful for applicants with little or no traditional credit history. These applicants may be immigrants, young adults, or individuals recovering from financial setbacks.
4. Use Credit History as Part of a Holistic Approach
Credit history should not be the sole determinant in a rental decision. A holistic approach, where credit scores are just one factor among several considered, can help mitigate discriminatory effects. Other factors, like employment, savings, or assistance programs, should be taken into account to create a fairer screening process.
5. Review Policies Regularly
Housing providers should review their credit screening policies regularly to ensure they are not inadvertently leading to discriminatory outcomes. This includes analyzing the outcomes of credit-based denials to ensure that they are not disproportionately affecting certain protected groups.
Moving Toward Fairer Credit Screening Practices
While credit checks are a common tool in tenant screening, HUD’s guidance emphasizes we must avoid discriminatory effects. Overreliance on credit scores can disproportionately harm certain groups, particularly minorities, women, and people with disabilities. By adopting more nuanced and comprehensive screening policies, housing providers can ensure they comply with the Fair Housing Act.
Incorporating alternative credit data, allowing applicants to provide context for their credit histories, and using credit scores are essential.
