Avoid the Identity Theft Blues: The Pitfalls of Telephone Lease Applications
As most of us know, the economic rental market over the last several years has left many housing providers singing the blues. Because of the depressed market, many property management companies and owners have considered different ways in which to improve vacancy rates. In doing so, one common consideration is finding ways to increase the number of applications from prospective renters. Some housing providers have opted to take rental applications over the telephone and by fax because it has increased the number of overall applications. Some property managers have taken telephone applications in the past in unique circumstances, such as an out-of-state applicant who cannot apply in person. So, this is not a new idea. What is a new trend is property managers creating a system that actually encourages applicants to apply by telephone. The goal of such a system is of course to increase applications. Increasing applications increases the chances of filling vacancies. However, telephone applications can open the door to identity theft, which has the potential of causing housing providers unnecessary sorrows. As a result, it has become important to weigh the benefits of telephone applications against the possible risks.
The benefit of telephone applications is pretty straightforward. In today’s fast-paced and electronic age, some people may find it much easier to apply for residency over the telephone, by fax or even email. If you offer a prospect the option of applying by some means other than in-person, you may increase the total number of applications you will get. Also, it may cut down on the time leasing agents invest in showing prospects units and floor plans in-person. You can still get identification on the applicant by fax. In short, telephone applications may be more convenient and may increase the number of applications you get at your property. Yet, in our world of increasing identity theft, an important question arises. How do you know for sure your telephone/fax applicant is who he or she claims?
Most housing providers conduct background checks on applicants. These background checks frequently involve a credit check on the applicant, details on rental history and often a criminal background check. The Fair Credit Reporting Act (FCRA) is a federal law that regulates credit bureau companies, lending and financial institutions who report to credit bureau agencies. Thee FCRA applies to many types of businesses besides credit reporting agencies and lending institutions. It is our firm’s absolute opinion that the FCRA can apply to property management groups and all housing providers who obtain credit related background information.
The FCRA, 15 U.S.C.§ 1681b, is so broad that anyone who obtains credit related information in the form of a credit bureau, credit history, credit summary, etc. and then stores that information is deemed to be using it as a “consumer report.” When someone uses a consumer report, the FCRA often then applies. Because housing providers use and even create consumer reports, the FCRA governs housing providers in certain contexts. The Federal Trade Commission closely enforces the FCRA and he agreed with our assessment that the FCRA covers housing providers when they are doing credit and other background related checks.
The FCRA requires that employers get written permission from an applicant or current employee before doing a background check. While the FCRA does not specifically mention housing providers having to do this, it only seems logical that the same rule would apply. The Landlord Protection Agency publishes on its website that it is their opinion that it is illegal to pull credit related information on a prospective resident without their written authorization, based on the FCRA. Because the FCRA certainly applies to housing providers, we believe the written authorization for credit and background checks applies to housing providers as well.
Written approval by a prospective resident is central to this issue of doing applications over the telephone. You have to have a signature. The only way to get the signature is by fax or in an electronic format such as a signed pdf document. While it is certainly feasible to get written permission from a telephone applicant, there is no way to concretely verify that the applicant is who he says he is. You can even get a copy of a drivers license or other valid form of identification by way of fax or pdf. Yet, as asked above, how can you truly know if the person who sent this documentation is really the person on the identification? Many identify theft criminals use their victim’s information and identification not only to use their existing credit, but to obtain credit, apply for credit cards and even housing.
The Landlord Protection Agency advocates an application process in which you get a copy of the applicant’s driver’s license or other valid form of I.D. in order to verify that the person you are screening is really the person whose references you are checking. From a pragmatic point of view, this is hard to do over the telephone. If you have someone who is impersonating someone else, they will likely have that person’s identification and there is no way to compare the person against the I.D., as you can in- person. In-person identification is important in the leasing context because of the incredible increase in identity theft in this country. As identify theft grows, so will questions concerning who is liable for identity theft.
Congress enacted another federal law to deal with credit related and identity theft issues. The Fair and Accurate Credit Transactions Act (“FACT Act”), gives consumers an entirely new set of rights. Based on those rights, it is currently unclear on who all a consumer can sue or bring into a lawsuit based on identity theft. Under the FCRA, there is no doubt that a prospective renter is a “consumer”, as defined by the FCRA. Consumers have some broad rights under both the FCRA and FACT Act. If a housing provider has obtained written consent, there may be no liability under these two laws, but no one has tested that as far as we can tell based on our legal research. The question really comes down to this: if you accepted the application of an imposter, would you be liable to anyone else because of that acceptance? The imposter renting under the victim’s name creates potential legal problems for the victim, such being liable for lease break charges assigned to collection agencies. More remote but not impossible is a situation in which the imposter uses the rental property for illegal purposes such as a drug lab or a place to fence stolen property.
The real issue is whether under a negligence standard a landlord owes a duty of care to an unknown person to make sure that they properly identify an applicant. There are no reported cases on this issue yet. However, it is important to be aware of the fact that a few states have allowed lawsuits under a new tort theory called “negligent enablement of imposters of fraud.” Alabama has allowed this legal theory and it has come up in the context of lenders grating credit from applications done over the phone where they did not get enough information to pin down the applicant as being who the applicant said he was. This type of legal claim can be asserted against anyone who takes personal information from someone for credit related reasons. Other courts have rejected this cause of action on the basis that the duty to an unknown third party is too remote. Colorado has not addressed this issue, nor have any federal courts in the Tenth Circuit (our federal regional jurisdiction). Nevertheless, legal commentators on identity theft have predicted that more states may adopt this negligent enablement claim. Whether there is liability to an unknown third party or not, one thing is clear: identity theft is a huge problem and telephone applications raise a red flag.
If a property management group is getting written approval to run background checks via faxes, mail, etc, then the management group can technically process the application. That alone does not appear to violate any laws. Yet, in doing so, we feel that the management company is taking on potential legal liability, possible bad press and other risk. There may be legislation coming soon on this issue. Further, if a housing provider accepted the application of an imposter, it could be faced with tough decisions on how to handle the person’s tenancy upon suspicion of identity theft. When you really think about it, the housing provider becomes a potential victim of the identity theft as well. Everyone victimized by identity theft suffers. Our firm spends a lot of time on risk analysis and this is one of those issues where we think the downside outweighs the upside.
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