How to Handle Adverse Action Notices After Denying a Rental Applicant

How to Handle Adverse Action Notices After Denying a Rental Applicant 

When a landlord denies a rental application based on information received from a consumer agency, the landlord is required to provide an adverse action notice. This is an important part of the screening process and ensures transparency for applicants and legal compliance for landlords. 

This guide explains when and how landlords should use adverse action notices, common mistakes to avoid, and best practices for handling applicant denials. 

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Quick Answer: When an Adverse Action Notice Is Required 

Whenever a landlord denies a rental application or takes a negative action based in whole or in part on information from a consumer report, the landlord must provide the applicant with an adverse action notice. The Fair Credit Reporting Act (FCRA) controls adverse action notices and requires a notice any time an “adverse action” is taken based on information received from a consumer reporting agency. 

Under the FCRA, an adverse action includes: 

• Denying a rental application
• Requiring a co-signer 
• Increasing rent or changing the rental terms 
• Requiring a higher security deposit 

Information commonly reviewed from consumer reporting agencies includes credit reports, criminal history background reports, and eviction history reports. 

If a landlord takes an adverse action that is even partly based on information from a consumer report, the landlord must issue a notice. When a landlord denies an application based on reasons other than a consumer report – for example, the applicant does not meet occupancy requirements or the vacancy is already filled – no FCRA adverse action notice is required. 

What Is an Adverse Action Notice for a Rental Applicant? 

An adverse action notice is an official notice from a landlord to a rental applicant, advising the applicant that the landlord has taken a negative action based on information received in a consumer report. 

Consumer reports come from consumer reporting agencies and include credit reports, background checks, and tenant screening reports. 

An adverse action is any negative action toward the applicant, including denying the application, changing the rental terms, or requiring a co-signer. Sometimes it includes an increase in rental price and is referred to as a risk-based pricing notice. 

What Must a Rental Adverse Action Notice Include? 

The FCRA includes specific requirements for what to include in an FCRA adverse action notice. To comply with these requirements, the notice must state: 

1. The adverse action taken – for example, the application is denied, or the security deposit is increased. 
2. The consumer agency that provided the relevant report, including the name, address, and telephone number of the agency. 
3. That the consumer reporting agency did not make the decision and cannot state why an adverse action was taken. 
4. That the applicant has the right to get a free copy of their report from the agency within 60 days of receipt of the adverse action notice. 
5. That the applicant can dispute inaccurate or incomplete information. 

How to Send an Adverse Action Notice to Tenants

When sending an adverse action notice, the most important pieces are the timing on the notice and the content of the notice. The FCRA does not provide a set timeline for issuing the notice, but it should be provided when the action is taken or as soon as possible afterwards. 

Landlords may choose the delivery method of the notice, but the best option is one that: 

• Ensures the applicant gets the notice as soon as possible.
• Gives the landlord documentation that it was sent. 

Given these factors, most landlords use email or send the notice through their property management software. 

Here are some best practices for sending an adverse action notice: 

1. Have a legally compliant adverse action template ready before you begin screening. 
2. As soon as you review a report and decide to deny an application or conditionally approve an applicant, send the adverse action notice. 
3. Send the notice through email or your property management software. 
4. Keep a copy of the notice and record of when the notice was sent.

Common Mistakes Landlords Make With Adverse Action Notices 

Dealing with tenant screening adverse actions can be a source of stress for landlords. When a landlord improperly handles a rental application denial, it can lead to legal exposure, regulatory actions, and fines. 

Some of the most common mistakes that landlords make with adverse action notices are: 

1. Not sending a notice when it’s required – for example, assuming it’s only required for denial of an application. 
2. Not including all required language and information in the notice. 
3. Identifying the wrong consumer reporting agency or providing inaccurate contact information. 
4. Sending an adverse action notice when it’s not necessary – for example, when the landlord denies an applicant based on factors other than a consumer report. 
5. Not maintaining adequate documentation or bookkeeping, including screening reports, screening criteria, a copy of the adverse action notice, and proof of delivery of the notice. 
6. Not knowing local laws – some states and cities have additional notice requirements that landlords must comply with. 

State and Local Rules to Watch When Drafting an Adverse Action Notice 

An increasing number of states and municipalities have their own adverse action requirements. Landlords need to be familiar with all applicable local laws when screening tenants. Some of the most common state and local rules that landlords need to watch for are: 

1. A requirement of providing the specific reason an applicant was denied. The FCRA does not require this, but some states require landlords to provide the specific factor or information that led to the adverse action – for example, credit score, credit report information, or criminal history. 
2. Restrictions on the use of criminal history. More states are setting limits on how criminal history can be used – for example, prohibiting “blanket bans” or requiring an opportunity for applicants to provide mitigating information about their criminal history. 
3. Restrictions on how credit reports can be used – for example, limits on the weight landlords can give to credit reports or requirements that landlords consider extenuating circumstances. 
4. Limitations on the use of eviction reports – for example, landlords may only consider evictions that result in judgments or cannot consider sealed or expunged records. 

Landlords should verify their state and city requirements before issuing a denial. Nothing in this article substitutes for legal advice, so it’s best to consult with a local expert to ensure a legally compliant tenant screening process. 

Frequently Asked Questions About Denying a Rental Application 

Do landlords have to give a reason for denying a rental application? 

The FCRA does not require landlords to give a detailed reason or explanation for why a rental application was denied. The FCRA simply requires that landlords disclose that the denial was based in whole or in part on information obtained in a consumer report. 

However, some cities and states do require landlords to give a specific reason for denying an applicant. Property owners should review local laws to ensure they comply with all requirements. 

When is an adverse action notice required for a rental applicant? 

An adverse action notice is required by federal law any time a landlord takes a negative action against a rental applicant based in part or in whole on information obtained from a consumer report. 

Is an adverse action notice the same as a denial letter? 

No, a denial letter and adverse action notice are not the same thing. A denial letter is any correspondence from a landlord to an applicant letting the applicant know that the applicant was denied. 

However, a denial letter and an adverse action notice can be combined when the letter includes the information required by the Fair Credit Reporting Act. 

What to Do After Denying a Rental Applicant?

When a landlord denies an applicant, the landlord should: 

1. Determine whether an adverse action notice is needed. 
2. Notify the applicant through a denial letter or, if needed, a combined denial and adverse action notice. 
3. Keep records that document the decision, including rental application, screening reports, screening criteria, and the adverse action notice. 

Do I need to send an adverse action notice if I only raised the amount of the security deposit? 

Yes, if you conditionally approve an applicant or take negative actions based on information from a consumer report, you need to send a notice. Increasing the security deposit is an adverse action, so a FCRA notice is required. 

What happens if a landlord does not send an adverse action notice? 

Landlords who fail to send an adverse action notice when it is necessary could face legal consequences, fines, and fees. This includes risk of a lawsuit from the applicant, regulatory enforcement by the Federal Trade Commission (FTC) or Consumer Financial Protection Bureau (CFPB), and exposure to fair housing law violations. 

Key Takeaways for Landlords 

Handling adverse action notices correctly is an important part of ensuring you have a compliant rental application process. Landlords can reduce compliance risks and ensure a fair and transparent screening process by timely providing applicants with adverse action notices. 

In addition to complying with federal laws, landlords should review their state’s adverse action notice requirements and always use a legally compliant adverse action notice or rental application denial letter.