Because it is convenient and often free, many real estate agents will call their brokerage lender to run a credit report as part of their tenant verification process. What they don’t know is that this could get both them and the lender in some serious legal trouble.
We spoke with Richard Harris from Premier Funding, who has 27 years of experience as a brokerage lender, about why getting a tenant credit report from your lender is a bad practice.
"A mortgage lender can’t run someone’s credit legally unless that individual has applied for a home loan," Harris said. "For a rental property, the applicant has given permission to the agent or landlord to run their credit - that’s part of the application process. But for them to give that information to a mortgage lender that has nothing to do with the transaction is where they go wrong."
Under Section 604 of the Fair Credit Reporting Act, a reporting agency can only run a consumer’s credit if there is a "legitimate business need." An agent or landlord can go to a credit reporting agency because they are directly involved in the transaction. However, a third-party lender that isn’t involved cannot.
Additionally, privacy laws protect one’s credit score from being shared to a third party. While the lender is obligated to share and explain the report to the consumer, they are not at liberty to share that report with anyone else, including the mortgage applicant’s real estate agent.
That means that not only does the lender not have the authority to pull a rental applicant’s credit score, they are not allowed to share it with the applicant’s agent as well.
If the tenant gets denied a property and decides to file suit for discrimination, their lawyer will be able to see that the tenant’s credit was pulled and shared illegally by the lender. In addition to the lender, there is a good chance that the agent will be sued as well.
Laws that have further protected privacy of information have made things much more strict on lenders and their ability to pull credit for tenant verification in recent years.
"I’d say 10 years ago that the practice was pretty common," Harris said. Maybe 75 percent of rental transactions had a credit report run by the lender. Today, a lender would have to be crazy to put themself in a position like that."
Whether they don’t know it’s illegal or they believe they’re above the law, real estate agents continue to go to their lender for tenant credit reports. Harris says that he still gets about one call a week from an agent asking him to pull an applicant’s credit for them.
For this scenario, let’s pretend that the lender approached was indeed "crazy" and agreed to pulling an applicant’s credit. Even if we were to ignore the fact that this was illegal, there would still be issues with this practice.
First of all, the type of inquiry used by a mortgage lender is a hard inquiry. For those not familiar, you can learn all about hard inquiries here. But in short, a hard inquiry damages the applicant’s credit score and is not ideal for rental applications.
On top of that, the tenant credit report that would be generated by the lender would not be the right fit for your needs. The information contained in the report would solely pertain to credit, which we have documented is not enough for a proper tenant verification. Additionally, the report may contain information that may be irrelevant for a rental property.
"[A lender-generated credit report] contains valuable and usable information, but it is overkill for an approval for a rental property. In addition, it doesn’t contain important information regarding the tenant’s history. If they have had an unlawful detainer or eviction in their past, that wouldn’t show up on the credit report we run."
The reports pulled by a mortgage lender may also use a different scoring system as well. According to Harris, there are multiple types of FICO scores that vary depending on industry. For example, the FICO score you receive when applying for an auto loan can differ from the score you get when applying for a mortgage.
Harris recommends to get your screening reports directly from a tenant verification-specific service. He also cautioned against accepting tenant credit reports directly from the applicant, as these can easily be doctored.
Leave your mortgage lender alone. They have enough on their plates as it is, and they don’t need to be bothered with running credit for your applicants - not to mention it’s illegal.