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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2016

Just Overlook Background Checks?

Commercial mortgage brokers can help multifamily clients comply with new guidelines on renting to ex-offenders

Just Overlook Background Checks?

Under new standards adopted by the U.S. Department of Housing and Urban Development (HUD), landlords risk sanctions if they refuse to rent to individuals with criminal records. By learning the details of the rules, commercial mortgage brokers can help clients in the multifamily sector avoid accusations of housing discrimination and costly lawsuits that could affect lending decisions.

In the middle of a singularly heated presidential election, guidelines handed down this past spring by HUD did not make front-page news. As a result of the guidelines, mortgage brokers’ clients who own or seek to invest in multifamily commercial properties should be prepared to make strategic changes in how they screen rental applicants. Those clients also should understand the potential liability faced under the HUD guidelines with respect to their rental-screening practices.

This past April, HUD unveiled a new standard for what it considers violations of the federal Fair Housing Act intended to curb blanket discrimination against renters with criminal records. Under the provisions released by HUD’s Office of General Council, landlords found to be discriminating against those with previous arrests or convictions can be sued or face other penalties.

Individuals with criminal records are not a protected class under the Fair Housing Act and, HUD said, turning down an individual based on a criminal record can be legally justified in some cases. The regulator argues, however, that because U.S. felons are disproportionately African-American or Latino, blanket bans on rentals to individuals with criminal records amounts to illegal housing discrimination.

HUD Secretary Julián Castro summed up the policy in a statement for the media: “Right now, many housing providers use the fact of a conviction, any conviction, regardless of what it was for or how long ago it happened, to indefinitely bar folks from housing opportunities. ... Many people who are coming back to neighborhoods are only looking for a fair chance to be productive members, but blanket policies like this unfairly deny them that chance.”

Fear of lawsuits

The new guidelines are likely to be a matter of concern for commercial mortgage lenders and, in turn, to brokers’ clients. Just as lenders and landlords feared a multitude of lawsuits when the Americans with Disabilities Act took effect, those involved in multifamily housing will want to know what is permissible or not legal under the HUD guidelines. Mortgage brokers can assist clients by understanding the issue and providing sound advice on whether the leasing policy for a property a client seeks to sell — or purchase — is likely to attract HUD’s attention and make it difficult to find financing from institutional lenders.

HUD’s policy is part of an effort to tackle what is perceived as an unfair rental-housing climate for ex-offenders that could arguably lead to a host of unfavorable societal outcomes, including homelessness, families living in substandard or overcrowded housing, and recidivism among the previously incarcerated. According to HUD, about 650,000  people are released annually from state and federal prisons, and African-Americans and Latinos make up a disproportionate percentage of that population.

Fair-housing advocates have long argued that while there may be a declining number of cases in recent decades of rental-property managers using racially biased screening practices, there are still policies in place that have a discriminatory effect —including barring individuals with felony convictions.

The consequences of not complying with the new HUD guidelines could be significant for property owners who are shopping for a loan.

The new HUD housing policy would allow regulators and others to use demographic data to prove the existence of housing discrimination, intentional or otherwise.

Some landlords, as well as some conservative news agencies, have suggested that the new HUD guidelines will make it nearly impossible for a landlord to turn away a prospective tenant, even when an individual has been convicted of a violent felony. That, in turn, will make it difficult for multifamily-property owners to assure existing tenants are not put at risk.

HUD’s reasoning

The new HUD guidelines do not explicitly ban criminal background checks in rental-housing screens. Instead, housing regulators will take steps to determine if rental-property owners or rental agents are using criminal background checks in a way that discriminates against a protected group, such as minorities, in violation of the Fair Housing Act. HUD will consider the effect of individual rental-screening policies; whether the policies serve a legitimate interest; and whether the policies could be replaced by standards that are equally effective, but less discriminatory.

In order to be found in violation of the new rules, HUD or prospective tenants must prove that a landlord’s review of their criminal history has led to a disparate impact on a group of people based on race or national origin. The agency would presumably make its case by presenting national and local statistical data, such as census figures, criminal-justice data, and tenant files to show that, even if the landlord did not intend to discriminate, the landlord’s policy resulted in discrimination.

Landlords will be required to prove that their policy on renting to felons is necessary to achieve a substantial, legitimate, nondiscriminatory interest. Legitimate interests can include protecting the safety of tenants and their property, but only if the alleged safety threats can be proven. The legal standard of proof is high in such cases and difficult to meet. As a result, landlords face serious challenges and uncertain outcomes when defending against claims raised by ex-felons they decline to accept as tenants.

Even if the landlord is able to prove that the use of the rental policy is necessary, the fight may not be over. HUD says it has the right to argue that the landlord’s legitimate interest could be served by “another practice that has a less discriminatory effect.” This might include, for example, giving much more weight to an applicant’s financial and other qualifications than to criminal history. The new HUD guidelines do not, however, protect prospective tenants who have been arrested or convicted for distributing or manufacturing drugs.

Advice for multifamily clients

Landlords will argue that the new guidelines are vague and that it is unfair that they be accused of running afoul of the law without having actively tried to discriminate against anyone. Regardless of the arguments for and against the new HUD policy, there are some measures that brokers can advise clients to take to protect themselves:

  • Make credit, employment and prior rent history the primary qualifying and screening factors. Do not run a criminal background check on anyone until those issues are cleared.
  • Establish a look-back period. Do not consider crimes that are over seven years old, for instance, unless they may indicate a threat to the welfare and safety of other tenants.
  • Reshape your policy to include language from the new HUD guidelines. Document any changes and any retraining efforts.
  • Consider the nature and severity of the crime. Perhaps exclude misdemeanors and nonviolent felonies during the screening process.
  • Make sure any policy on criminal background checks is applied evenly across races and ethnicities.
  • Allow applicants to present evidence of mitigating and extenuating circumstances surrounding their criminal conduct, including evidence of rehabilitation.
  • Distinguish between an arrest and a conviction, and assess each accordingly. Arrests alone are generally not considered legal grounds for barring a tenant.
  • Do not judge all convictions equally. Some may be serious enough to bar an individual as a tenant, (i.e., drug manufacturing) and some may not. Similarly, be sure to revisit and comply with all state and local guidelines concerning criminal background checks.

When in doubt, seek legal counsel. An attorney who specializes in housing policy should review your clients’ rental-screening policies to avoid problems. Also, stay connected with any relevant renter associations for updates on the HUD rules as interpreted and clarified in the courts.

The consequences of not complying with the new HUD guidelines could be significant for property owners who are shopping for a loan or seek to refinance. When underwriting a commercial residential property, lenders will consider the fact that they could someday directly or indirectly become managers of the property if it were to revert to them in a foreclosure, so lenders are likely very aware of HUD’s new policy.

Lenders will no doubt also be aware that the new HUD policies, if violated, could embroil a borrower in litigation — resulting in possible loan-payment delinquencies or even foreclosure, if the loan goes bad. Lenders can help themselves by providing borrowers with a copy of the new HUD policies along with suggested compliance strategies. Although change can be difficult, lawsuits can often be avoided by using best practices against discrimination. 


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