Michigan House bill would restrict landlord use of credit scores

Legislation under consideration in the Michigan House would prohibit landlords from basing leasing decisions on a prospective tenant’s credit score.

Rep. Brenda Carter, D-Pontiac, introduced House Bill 4818 on June 15. “The credit score of a prospective tenant must not be used as a deciding factor in determining the prospective tenant's eligibility for a lease,” the bill says.

Landlords use credit scores to evaluate a potential renter’s financial responsibility and thus his or her likelihood to pay rent consistently and on time. Credit screening also helps landlords ensure their own financial well-being by avoiding a potential eviction.

Evicting a tenant can cost a landlord more than $7,000 out of pocket, according to Snappt, a company that sells software that helps landlords detect fraud in rental applications.

A credit report helps landlords confirm rental applicants’ identity because it contains the name, address, and Social Security number of the applicant. A 2022 survey conducted by Snappt found that 92% of landlords ranked verifying an applicant’s ID as a critical step in the renting process.

“Credit reports have become one of the most essential elements in checking the background of a potential tenant,” wrote John Nuzzolese, president of the Landlord Protection Agency, an information service geared toward property owners. “The days of the handshake rental lease are over. Today, renting to a person without checking his credit is like playing lotto.”

Opponents of checking rental applicants’ credit argue that credit reports are discriminatory and unnecessary, claiming credit checks worsen the housing crisis. A 2022 white paper by the National Consumer Law Center argued that credit reports are not an accurate predictor of whether someone will pay rent as scheduled. The center said that credit reports can contain errors, making them an unreliable screening tool for landlords. Income verification, the report suggested, would be a more accurate way of evaluating prospective tenants.

The proposal to restrict the use of credit scores comes as tenant fraud is increasing, especially with tenants altering income verification documents. One in eight renter applications are fraudulently altered — a 29% increase since the pandemic — according to Snappt data. Bank statements and pay stubs are the most often and easily falsified documents, the company says, making them less than ideal as a replacement for credit scores.

Landlords already must walk a narrow line between protecting themselves from bad tenants and violating the Fair Housing Act.

“Altered documentation was the biggest problem identified in the survey, with 84% of respondents saying it was a somewhat or extremely significant challenge. But the next largest percentage – 79% – ranked running afoul of the Fair Housing Act in the same category,” Snappt reported.

If enacted, HB 4818 would prohibit landlords from relying on one of the few available tools that sorts out bad applicants without violating discrimination laws. And it would also harm those with good credit scores from attaining housing.

"This policy will result in landlords facing more uncertainty and more losses. This might lead to fewer landlords being able to offer rental units, decreasing the supply of affordable housing,” said Michael Van Beek, director of research for the Mackinac Center for Public Policy. “Dwindling supply means rents will rise for everyone and especially harms those who've worked hard to establish good credit."

Carter was unavailable for comment due to travel engagements.

The House Committee on Economic Development and Small Business is currently considering the bill.

Therese Boudreaux is a Michigan Capitol Confidential intern.