New Legal Requirements For Tenant Applications – You Should Start Preparing Now

A proposed law will significantly change the tenant application process. The law will pass in some form and is likely to pass close to its current form. The proposed law is House Bill 19-1106. HB19-1106 (HB1106 or the “Application Bill”) is entitled an “Act Concerning the Rental Application Process.” HB1106 addresses rental application fees, limits information that can be considered, mandates action when a tenant application is denied and imposes penalties on landlords for violating the law.

The sponsors introduced the Application Bill primarily to combat alleged widespread overcharging of tenants for rent applications. Tenants told the sponsors stories that they were charged thousands of dollars when applying to rent. Because most application fees are $50 to $75, these tales are not credible. Regardless, the point of the bill is to limit application fees to the exact amount of a landlord’s cost in processing the application and prohibit profit making on rental applications.

The Application Bill attempts to achieve this by prohibiting a landlord from charging a prospective tenant an application fee unless the entire amount of the fee is used to cover the application process. A landlord’s application costs can be based on actual costs or average costs. We are not sure how “average” differs from “actual” because all tenants are charged the same application fee; the average cost is the actual cost. HB1106 also prevents landlords from charging a prospective tenant an application fee that is different from other prospective tenants. Apparently, members of the Colorado General Assembly are unaware that the Fair Housing Act already prevents this.

The Application Bill also requires landlords to disclose the landlord’s application related costs to prospective tenants. Additionally, a landlord has to provide every applicant with a receipt for all money received from a prospect in connection with an application. You will be able to provide electronic receipts. However, if the prospect requests a paper receipt, you must provide one. Yes, this is correct and not a misprint or mistake. The Colorado General Assembly is telling you in the year 2019 that you must provide a paper receipt.

The most ironic and pointless part of the entire bill is its refund requirement. Someone had the bright idea to amend the bill to require landlords to refund any amount of an application fee from a prospective tenant if the landlord did not use the entire amount of the application fee to process a tenant application. The amendment ignores the fact that the entire purpose of the bill is to make landlords charge the exact costs. So what unused portion is there? Holy oxymoron Batman!

Some landlords have asked us whether the Application Bill will impact their ability to charge administrative fees, move-in fees, or lease preparation fees. At this point, these fees are not prevented. The Application Bill defines “rental application fee” as any sum of money, however, denominated (meaning no matter what you call it), that is charged or accepted by a landlord from a prospective tenant in connection with the prospective tenant’s submission of a rental application. Because administrative fees are not charged in connection with an application submission but rather after approval and in connection with a lease preparation, the proposed law does not prohibit them.

The Application Bill also restricts credit and criminal information that can be used to deny a tenant application. Credit history is limited to seven years. Apparently, nobody at the Capitol has ever read the Fair Credit Reporting (FRCA). Consumer credit reporting agencies provide credit history used in connection with tenant applications. Because FCRA limits consumer credit reports to seven years, consumer credit utilized in connection with tenant applications is already limited to seven years. Thus, other than to just pass a duplicate law, we don’t see the rationale for this.

The current proposal is to limit criminal history to five years. Because this doesn’t match the seven-year period for credit history, it makes no sense. Further, many if not all of the consumer credit reporting agencies that provide credit history are providing criminal history. Because these companies are “consumer credit reporting agencies” under FRCA, they have already taken the position that criminal information is limited to seven years and self-imposed this limitation. THS is making every effort to have the credit and criminal time frames match. Numerous amendments have been made for exceptions to the criminal limitations, i.g. for registered sexual offenders, serious felonies, drugs, etc. When the bill becomes law and the exceptions are finalized, we will discuss specific criminal exemptions in more detail.

THS has also proposed limitations on the use of eviction history. Many tenant advocates in general and specifically the advocates behind HB-1118 (Right to Cure Bill that proposed changing 3-Day notice to a 14-Day notice) argue that an eviction on a tenant’s history is the equivalent to a Scarlet Letter forever marring the ability of a tenant to find housing. To address this concern, we proposed that a past eviction should not count against a tenant if the tenant addressed or resolved the eviction. For example, many evictions are resolved when a tenant pays and stays. In other words, after the eviction is filed, the tenant pays the landlord all outstanding amounts, the landlord accepts, and the tenant is reinstated in good standing. Similarly, in many cases where the tenant has vacated, a tenant resolves an eviction judgment by paying the amounts owed to the landlord and the possession judgment is vacated. In short, only outstanding possession judgments in an eviction should be used to disqualify a prospect and not an eviction case that was adequately addressed by the tenant.

If you deny an application, the Application Bill requires you to provide the prospective tenant with written notice stating the reasons for the denial. If the prospect fails to meet multiple criteria requirements, providing a reason does not comply with the statutory intent. The statute requires you to provide the “reasons” for denial. You have to provide the written denial within twenty days, but we recommend providing it promptly after a denial is made. Because you already promptly notify prospects, this is not a significant change. If specific screening criteria can’t be cited because a proprietary screening system is used, the landlord is required to provide the denied prospect with a copy of the report from the screening company. Landlords can provide this report electronically unless of course again, the tenant requests a written report and then the landlord has to provide it in writing.

Providing the reasons for denial is a major change from existing operational practice and current law. Under the status quo, when tenants are denied, many landlords currently provide an adverse action letter that states you were denied in part or in whole based on a consumer credit report that was provided by X Company. You may obtain a copy of this report from X Company by contacting them at their address and phone. If you believe any portion of the report is an error, you should dispute with X Company.

Other than FICO or credit scores, we aren’t clear on how a screening system can be proprietary. Based on our experience the screen is built based on the landlord’s criteria that is provided to the screening company. Regardless of proprietary screening system claims, it may be more practical to just state the reason for a denial. Stating the reason will avoid prolonged disputes. Claiming a proprietary system will generate prolonged disputes because providing a copy of the report probably will not satisfy the tenant. The dispute also will have the potential to come back into the landlord’s lap because landlords deny tenants for specific reasons that are built into criteria. This may lead the tenant to claim that the landlord knew the exact reason despite claiming a proprietary screening system and thus has violated the application statute.

As currently written, landlords are liable for treble the amount of the application fee plus court costs for violation of any provision of the new law. The law requires the tenant to make a good faith effort to notify the landlord seven days prior to filing a lawsuit. The law further provides that a landlord who corrects or cures a violation within seven calendar days after receiving notice of the violation is immune from liability for the violation.

Given the current political climate, there is nearly zero probability of this bill passing without a penalty provision. Thus, our point is that if the landlord is going to be penalized for violation then it is only fair to give the landlord a chance to return the application fee before the penalty being attached. However, the way it is currently drafted, the Application Bill won’t always guarantee this result. Specifically, the Application Bill only requires the tenant to make a good faith effort to notify the landlord of their intention to sue but does not require notification. Thus, the tenant can say “we tried” but couldn’t get a hold of the landlord and sue anyway. For this reason, we will continue to advocate that the bill be amended to track the Security Deposit Act. The Security Deposit Act requires that the tenant notify the landlord of intent to sue and give the landlord seven days to return the deposit before liability attaches.

Because the Application Bill will pass, you should start preparing now. Make sure you are not charging more than your costs. Get a disclosure ready that discloses what your costs are. Set up a receipt system to provide receipts to tenant prospects that pay application fees. Make sure you have the ability to deliver paper receipts if requested. Make sure your credit screener is not utilizing credit history older than seven years. Under FRCA, their reports should already be limited to this time frame. Make sure that your provider of criminal history limits it to number of years set forth in the final bill and meets other parameters. Make sure that whoever provides rental history only reports eviction possession judgments and not mere eviction filings.

Regardless of your screening system and whether you or your screening provider believes it to be “proprietary,” you should evaluate if it would be more operationally efficient just to state the exact reasons for the denial up front, as opposed to providing the screening report. Because you should already have detailed written criteria, you should ask your provider (regardless of any report currently being generated) if they can generate the report required to be delivered to the tenant by the new law.

Finally, once the bill passes, you will need to monitor the situation closely for several years to see if adjustments to any procedures or policies are necessary. Based on our experience, the industry already has significant difficulty in responding to security deposit return demands. The biggest issue is that many landlords can’t evaluate whether to return a security deposit within the seven days when a demand is made under the Security Deposit Act. The industry is likely to have the same problem with application fee return demands. Similar to security deposits, if you can’t evaluate within seven days, you should consider just automatically returning in every case. Given the amount of money, it might also make sense to just return than fight over such a small amount. But this will likely create another operational challenge. Many larger landlords have difficulty cutting and delivering a check within seven days. The number of demands and related onsite team costs will be additional factors to be considered. If you receive a large number of demands, you may not want to return because now the cost is a significant financial cost. However, if you are frequently getting sued in small claims court, returning the application fees may make more financial sense so that you are not losing money by having onsite team members waste a tremendous amount of time in court. As with all new legislation, it will take years for processes and policies to adjust to the new law.

View Resource »