New Resident Screening and Avoiding Disparate Impact Claims

Most well-run community associations incorporate a new tenant application and approval process, and some even utilize such a program for new owners. A typical new resident screening program includes criminal background checks, credit checks, employment verification, and prior rental history. A community association is likely to deny any prospective new resident whose background check produces questionable items. But are associations cognizant of the liability concerns pursuant to recent changes in federal law regarding disparate impact claims for administering a flawed screening process? This blog post will discuss the recent changes to federal law involving new resident screening and how community associations can avoid disparate impact claims.

Relating to new resident screening, the relevant portion of the Fair Housing Act (“FHA”) states as follows:

It shall be unlawful to refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin. 42 U.S.C. § 3604(a).

The Florida Statutes have adopted that same language and basically incorporated the FHA into Florida law. See Fla. Stat. § 760.23(1). Because community associations, such as condominium and homeowners’ associations, are housing providers, they are governed by the FHA and Florida’s housing laws. Most associations are aware that intentional discrimination against a protected class (i.e. race, color, religion, sex, familial status, or national origin) is a violation of law; namely, the Civil Rights Act, but may not realize that unintentional discrimination can now also be a violation of law under a “disparate impact” claim.

Disparate impact is distinct from intentional discrimination because disparate impact is where seemingly neutral and unbiased rules, policies or practices in connection with the sale or rental of housing have a disproportionate adverse impact against persons in protected classes. In the 2015 U.S. Supreme Court case Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., the Justices held that housing decisions that have a disparate impact on a protected class, regardless of the housing provider’s intent, are violations of law. As a result, what may appear to be a neutral and unbiased rule could be deemed illegal discrimination based on unintended results from implementing that rule. If community associations are not mindful of their new resident screening rules and its potential effects on protected classes, they could be subject to liability under disparate impact claims even if those associations had no wrongful intent.

After the Supreme Court’s above-referenced ruling, the HUD’s Office of General Counsel issued formal guidance on the FHA’s standards for the use of prospective residents’ background information by housing providers, specifically, criminal background history. HUD explained that “while having a criminal record is not a protected characteristic under the Fair Housing Act, criminal history-based restrictions on housing opportunities violate the Act if, without justification, their burden falls more often on renters or other housing market participants of one race or national origin over another.” See HUD FHA Guidance (2016). If an association’s tenant screening rules are challenged, HUD states that the association must prove the challenged rule is “necessary to achieve a substantial, legitimate, nondiscriminatory interest of the [association].” Id. While at first glance that burden may seem easy to meet, the reality is it can be very difficult.

An association must be able to prove through reliable evidence that a specific decision based on criminal history actually assists in protecting property and resident safety. “Bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record are not sufficient to satisfy this burden.” Id. HUD explains that an association’s blanket policy that excludes all individuals because of a prior arrest, without that arrest leading to a conviction, cannot satisfy the association’s burden of showing a nondiscriminatory interest. Id. HUD’s reasoning is that minorities are arrested at a disproportionate rate of the overall population and all an arrest proves is that the person was accused of some type of illegal activity, while a conviction is actually based on an adjudication of the facts involved.

A record of conviction, and not merely an arrest, is sufficient evidence to prove the prospective resident engaged in criminal conduct; however, an association must still prove that a blanket policy that excludes persons with any prior conviction is necessary to achieve a legitimate non-discriminatory interest. According to HUD, an association that “imposes a blanket prohibition on any person with any conviction record – no matter when the conviction occurred, what the underlying conduct entailed, or what the convicted person has done since then – will be unable to meet this burden.” Id. The lesson for community associations is that a blanket policy against arrests and all convictions is likely to subject an association to potential liability under a disparate impact claim.

A community association’s policy must be a more tailored and specific policy that excludes individuals with only certain types of convictions; however, the association must still prove that its policy is necessary to achieve a legitimate non-discriminatory interest. To do this, an association “must show that its policy accurately distinguishes between criminal conduct that indicates a demonstrable risk to resident safety and/or property and criminal conduct that does not.” Id. HUD suggests a new resident screening policy must take into account the nature and severity of the conviction, along with the amount of time that has passed since the crime. HUD also suggests that a screening policy should consider relevant mitigating information beyond that contained in a criminal record, such as whether the person has maintained a good rental history since the conviction or community service work without incident. Such an approach is likely to have a less discriminatory effect than categorical exclusions that do not take such additional information into account. The FHA does allow for prospective tenants to be denied if the person “has been convicted . . . of the illegal manufacture or distribution of a controlled substance . . .” FHA § 807(b)(4). (Emphasis added.) Please note this is only for a conviction of manufacturing or distributing a controlled substance, and the FHA does not address arrests without convictions or possession charges.

Nothing in the HUD’s guidance addresses tenant denials based on the person’s prior rental history or credit report. However, in the spirit of the HUD’s guidance and the FHA’s standards, community association policies regarding these areas should be specific and tailored rather than vague and overbroad. When it comes to credit reports, a blanket refusal for credit scores less than a certain level may not survive a disparate impact challenge. This is especially true if the prospective tenants, regardless of their credit scores, meet the threshold income requirement for obtaining housing within the area. Moreover, items can stay on a credit report for a number of years, meaning that a bad score may be the result of something that happened years ago and the prospective tenant’s financial situation may have since improved. Regarding prior rental history, a situation where a prospective tenant’s most recent landlord refused to re-rent to that person may be a valid reason for denial; however, the association must ensure the prior landlord did not base its decision on reasons that would violate federal or Florida law. Furthermore, if the person’s most recent landlord was willing to re-rent to the person, then an unwilling landlord from two or three years ago most likely isn’t sufficient justification now.

The law should not be construed to mean or imply that community associations cannot continue screening new residents. In fact, the board of directors of a community association has a fiduciary duty to protect the health, safety and welfare of the members and association property. Appropriate new resident screening likely falls within that fiduciary duty. But associations must ensure its screening policies do not violate federal or Florida law. Community associations should consult with an experienced attorney to determine whether its current new resident screening policies and procedures need to be revised in order to avoid potential disparate impact claims.