You run the tenant background checks. You verify income. You run credit checks for potential tenants. Two qualified applicants make the cut, so you choose the one with the stronger credit score.
Three weeks later, you hear from the applicant you rejected—through their attorney.
When screening tenants, the decision itself isn’t always the problem.
If a consumer report influences that decision, the Fair Credit Reporting Act (FCRA) may require you to send an adverse action notice. Adverse action rules can apply even when you approve an applicant. Requiring a cosigner, larger deposit, or other condition based on a consumer report may trigger these rules.
That’s one side of landlord lawsuit protection. The other is what happens after someone becomes your tenant.
A tenant can sue over an injury, repairs, habitability, a security deposit, or another dispute. That’s why landlord asset protection matters. You may own rental properties in your name or hold several in one rental property LLC. Either way, a lawsuit could put more of your assets at risk.
You need a process for choosing tenants and a structure for protecting yourself when a tenant becomes a legal problem.
Key Takeaways
- Consumer reports can trigger responsibilities under the FCRA.
- Adverse action includes more than rejecting an applicant.
- Landlords need a consistent screening and notice process.
- Screening cannot prevent future tenant lawsuits.
- Landlord asset protection strategies can help isolate rental property liability.
Prefer to watch my video? Access it here, along with more asset protection tips for landlords.
Can Screening Tenants Get a Landlord Sued?
Yes. Consider two applicants with similar income and employment. You choose the applicant with the higher credit score.
That sounds reasonable. A credit check for tenants can help you compare applicants. But if the results affect your decision, you may need to follow adverse action requirements.
Many landlords assume adverse action only means rejecting someone. It can go further than that.
Proper tenant screening can help with landlord lawsuit protection. But if a consumer report affects your rental decision, you need to follow the right process.
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What Is Adverse Action in Tenant Screening?
Adverse action in tenant screening can occur when a landlord uses information from a consumer report to deny an applicant or offer less favorable rental terms.
Rejecting an applicant is the obvious example. But you might approve someone and change the terms because of what you found.
That could include:
- Requiring a cosigner
- Increasing the security deposit
- Charging higher rent
- Requiring certified funds
- Requesting additional documentation
If information in a consumer report causes you to change the deal, you need to provide an adverse action notice.
What Is an Adverse Action Notice?
An adverse action notice tells an applicant that credit history information from a consumer report influenced an unfavorable decision.
When the FCRA requires one, the notice may need to identify the consumer reporting agency and provide its contact information, including name, address, and phone number.
The notice should explain that the reporting agency didn’t make the rental decision. It should also tell applicants about their rights regarding the tenant screening report. For example, an applicant generally has 30 days to dispute inaccurate or incomplete information with a consumer reporting agency.
If you used a credit score, additional disclosures may apply.
It’s important to note that different rules may apply when your decision relies on information from a third party rather than a consumer report. For example, an applicant may have 60 days to request disclosure of information you received from a previous landlord.
The form is only one part of compliance. You also need a consistent tenant screening process that you follow and document for every applicant.
What Happens If You Forget the Notice?
Depending on the circumstances, FCRA violations can expose landlords to actual damages, attorney’s fees, and court costs. Willful violations can create additional exposure, including statutory and potentially punitive damages.
One mistake may also lead an attorney to examine how you handled other prospective tenants.
Instead of relying on memory, create a repeatable process. Set clear screening criteria for income, credit, and rental history. Make sure your criteria follow federal, state, and local housing laws.
Your process should also address how you handle rental applications, application fees, and tenant screening reports. Then apply those standards consistently, know what triggers a notice, and document what you send.
The Consumer Financial Protection Bureau provides sample notices that can serve as a starting point. You still need to ensure your screening process complies with federal, state, and local housing laws. I recommend having a qualified attorney review your screening process and forms.
Does Proper Tenant Screening Protect You From Lawsuits?
No. You can screen every applicant correctly, but a tenant can still sue you after moving in.
They could slip on a staircase, dispute a security deposit or rent payments, challenge the terms of a lease agreement, claim you failed to make repairs, or raise a habitability issue.
At that point, your screening process doesn’t determine which assets a lawsuit may reach. Your ownership structure becomes much more important.
Suppose you own several rental properties in your own name. A rental-related lawsuit could create unnecessary exposure to your personal assets.
Putting every property into one LLC may not solve the entire problem either. If one LLC owns several properties, a lawsuit against that LLC could put all of those properties at risk.
Depending on your portfolio, an asset protection strategy might involve separate LLCs, a holding company, appropriate insurance, and clear separation between entities.
That doesn’t mean every investor should automatically put every property into its own LLC. Equity, financing, insurance, state law, costs, and portfolio size all matter.
You should structure your portfolio so that a lawsuit involving one rental doesn’t put your other assets at risk.
Tenant Screening Is Compliance. Your LLC Is Protection.
Landlords need to address risk before and after someone gets the keys.
Start with a consistent screening process. Understand when adverse action requirements apply and document your decisions.
Then look at your portfolio. How do you hold the title? Are you listed as the property owner on every property? How many properties sit inside the same LLC?
Screening can help you avoid preventable compliance problems. Asset protection can help limit the damage if a tenant lawsuit happens anyway.
Schedule a free 45-minute Strategy Session with Anderson Advisors to review your current structure. We’ll help you build an asset protection plan that reduces your exposure to lawsuits.
Frequently Asked Questions
Do tenant screening services protect landlords from liability?
No. Tenant screening services can provide credit, background, eviction, and rental history information. However, landlords still make the final decision. You must follow screening requirements, including sending an adverse action notice when required.
Can a landlord deny a tenant because of a credit report?
Landlords may use lawful, consistently applied credit criteria, subject to applicable laws. If a consumer report influences an unfavorable decision, the FCRA may require an adverse action notice.
Do I need an adverse action notice if I approve the tenant?
Possibly. If a consumer report leads you to change the rental terms, you may need to provide an adverse action notice. This can include requiring a cosigner, larger deposit, higher rent, or certified funds.
How should landlords screen tenants to reduce lawsuit risk?
Establish lawful, objective criteria and apply them consistently. Create a documented process for consumer reports, rental decisions, adverse action notices, and recordkeeping.
Can a tenant sue after passing the tenant screening?
Yes. Screening doesn’t prevent lawsuits involving injuries, security deposits, repairs, habitability, or other landlord-tenant disputes.
Does an LLC protect landlords from tenant lawsuits?
A properly structured LLC can help separate rental property liabilities from your personal assets. However, an LLC cannot prevent lawsuits or protect you from every liability.
Should landlords put each rental property in a separate LLC?
Separate LLCs can help isolate liabilities between properties, but the strategy isn’t right for everyone. Consider equity, financing, insurance, state law, costs, and portfolio size.
What’s the best way for landlords to protect themselves from lawsuits?
Consistent tenant screening, proper insurance, regular maintenance, and accurate records can help reduce your risk. An asset protection structure adds another layer by separating rental property liabilities from your personal assets.
