Life Just Got Harder for Landlords: A Review of HUD's Guidance on Criminal Records

Katie is the property manager for a new 300-unit luxury apartment complex. During the construction phase, Katie worked with the property owners to develop a Resident Selection Policy (RSP) that would ensure that only top-notch tenants would be approved as residents. As a result, the RSP prohibited any residents who had been arrested for or charged with committing a crime from being approved.

Johnny Football's Application

As luck would have it, Katie was floored to receive an application one day from a Jonathan Paul Manziel. Katie had family in Texas and is a huge football fan, so this application caught her attention. She did a quick Google search and confirmed that her applicant was, in fact, Johnny Manziel, the Heisman Trophy-winning quarterback who was recently released by the Cleveland Browns. Now out of work and having taken his publicist’s advice to get out of the limelight for a while, Johnny was looking to relocate a quiet community where he could live in relative anonymity.

Katie was really excited to process his application. Unfortunately, as she ran his criminal background check, she was disappointed to learn that Johnny had recently been indicted in the state of Texas for assault related to domestic violence. Being one of Johnny’s fans, she did not believe that Johnny actually did what he was accused of doing and was extremely disappointed that he would not qualify for residency because he had been charged with a crime.

Motivated by the perceived injustice to Johnny Football, Katie began researching whether her community’s RSP provision on arrests and criminal charges was a smart policy. She came across an interesting article on a fantastic website, kylandlordlaw.com, about how landlords should not exclude tenants or applicants solely based on arrests. The article, linked here, explains that arrests are merely allegations or claims of wrongdoing, not evidence of wrongdoing. Katie was persuaded that her RSP needed to be changed. Knowing how a celebrity resident could boost the property’s profile, the owners quickly agreed to amend the RSP.

The Minister's Application

With an undying belief in Johnny’s innocence, Katie changed the RSP to prohibit residents who had been convicted of a felony. Convictions, as she learned in the article, are legal conclusions that someone committed a crime, as opposed to mere charges or allegations, which are often dismissed. Shortly after changing the RSP, Katie received an application from a married couple who were involved in a religious ministry to jockeys at Keeneland. They seemed to be a delightful couple, and Katie was thrilled to have such good people as residents. Unfortunately, the criminal background check on the couple showed that the husband had been convicted of Promoting Gambling in the First Degree, which is a Class D felony in Kentucky.

Katie met with the couple and learned that many years ago the husband had been a regular at Keeneland. During that time, he got to know many of the jockeys and became an expert at predicting the winners. As a result, he became a bookie to other gamblers. He set odds, took bets, and made a lot of money. His business grew to the point that he hired several other individuals to work for him. Unfortunately, local law enforcement got a tip on his operation, performed a sting, and arrested him. He was subsequently convicted and given a one-year prison sentence. The sentence was probated, so he never went to jail. During his community service, he converted to religion and started an outreach program to jockeys and others in the horse industry. He had not had anything more than a traffic ticket during the 15 years since his conviction.

Katie knew she had to reject the couple as residents, as she couldn’t allow a convicted felon on the property, but she certainly had reservations about rejecting them. "Why should I reject applicants who have a history of paying their bills and are clearly not a threat to the community?", she wondered. 

HUD's New Guidance Statement on Criminal Records

Katie’s line of reasoning is entirely logical, and it represents the trend in housing law across the country of requiring landlords to move past blanket, categorical prohibitions that exclude people from housing without a reasonable basis for doing so. Earlier this month, HUD announced new guidelines regarding the use of criminal records in the rental industry.

As noted above, HUD issued guidelines last fall about the use of arrest records in housing. In short, the point was that an arrest is not evidence of criminal activity, and therefore should not be used to exclude applicants or remove tenants from rental housing. Instead, an arrest is merely a red flag that you as a landlord need to investigate in order to determine whether criminal activity occurred that might disqualify the tenant from housing.

This month’s HUD Guidance Statement takes the process one step further: it states that even criminal convictions MAY not be a proper basis on which to exclude applicants from housing, and such individuals, if improperly excluded, MAY have a claim against the landlord that excluded them.

Last week’s blog post set up the general rule on Discriminatory Effects Liability (DEL) or Disparate Impact Liability (DIL) for landlords. HUD’s new guidelines specifically apply this framework to the issue of criminal records as a basis for excluding tenants. A copy of HUD’s Guidance Statement is linked here.

Let’s look at Katie’s policy under the four-step DIL analysis that I covered last week. Her policy excludes applicants who have ever been convicted of a felony.

Step One: Does the policy have a discriminatory effect?

HUD’s statement notes that national statistics show that African-Americans and Hispanics are arrested, convicted, and imprisoned at significantly higher rates than their proportion of the population. Unless Katie can find state or local statistics contradicting these findings, or show that these national statistics are not valid, it is likely that an African-American or Hispanic applicant that was rejected under the policy would be successful in showing the policy had a discriminatory effect or disparate impact on them.

Step Two: Is the policy necessary to achieve a substantial, legitimate, and non-discriminatory interest of the landlord?

Katie would likely argue that the purpose of her policy is to keep her residents and her property safe. In order to prove that her policy actually achieves this purpose, she would need to provide evidence that tenants convicted of felonies cause harm to others and/or damage to property at a substantially higher rate than non-felons. It is highly questionable whether she’d be able to find such evidence.

Step Three: Is there a less-discriminatory policy that would achieve the interest?

Even if Katie were able to prove that felons are a substantially greater danger to residents and property, it is almost certain that her policy would fail under this step in the analysis. As Katie herself noted, is a tenant who was convicted of gambling 15 years ago but has been a model citizen since that time really a risk to other residents or to the property? Of course not. As a result, Katie’s policy is certainly too broad to serve the stated purpose, and a narrower, less-discriminatory policy could be utilized to achieve her goal. In her case, perhaps a policy that only excludes individuals convicted of crimes involving injury or potential injury to another person or property within the last five years would both achieve her goals and remove the discriminatory effect.

Step Four: Does the policy qualify for the exemption based on prohibition of tenants convicted (not arrested) of drug manufacturing or distribution (not possession)?

Landlords may exclude individuals convicted of manufacturing or distributing illegal drugs, regardless of any discriminatory effect of such a policy. This exemption only applies to convictions, not arrests, and only to manufacturing or distribution, not use or possession. Since Katie’s policy is much broader than this and her applicant’s conviction did not involve illegal drugs, the exemption does not apply. 

Conclusion

Under the four-step DIL analysis, as informed by HUD’s Guidance Statement, there is little doubt that Katie’s policy and others like it would result in Discriminatory Effect/Disparate Impact Liability for Katie and her owners. As noted, even if she could prove that her policy actually served a legitimate interest, there is little doubt that less-discriminatory policies would also serve those interests.

While it's true that HUD's statements on this issue are not the final word on the topic (it will be up to the courts to interpret the Fair Housing Act), their guidelines do show landlords the type of cases that HUD will prosecute against them.

Lessons to Learn

Do not use arrests or arrest records to exclude or remove individuals from housing. Arrests are nothing more than accusations that a crime has been committed. Arrests are often never prosecuted or, if prosecuted, often result in a dismissal of the charges. They are not a solid basis on which to make any housing decision. They are, however, a signal to landlord to investigate as to whether any criminal activity might have occurred that violates the lease or the RSP.

Do not use blanket prohibitions on convictions. HUD has made it clear that any policy that fails to consider the following will likely not satisfy the standard necessary to avoid liability under Steps Two and Three of the analysis: 

the nature and severity of the offense,

the amount of time that has passed since the offense was committed,

the age of the individual at the time of the offense,

the rental history before and after the offense, and

any rehabilitation efforts undertaken by the individual.

As a result, landlord would be wise to consider these factors and make sure their policies are narrowly tailored to the interests the policy is designed to achieve.

Conduct Criminal Background Checks last. The gist of HUD’s new guidance is that landlords are going to have to look more closely at the facts and circumstances regarding convictions. This will likely require additional time and resources. As a result, it would be wise to first determine if the applicant would qualify for housing based on the credit and rental history requirements, so that Criminal Background Checks are only performed on applicants who otherwise qualify, instead of all applicants.

Don't forget to avoid discriminatory treatment liability by consistently applying your policies. We can’t forget that, even if a policy has no discriminatory effect, landlords are still liable if the policy is discriminatory on its face or is applied in a discriminatory manner. For example, a policy that excludes applicants with felony assault convictions in the last two years could result in liability if the policy is applied only to some applicants and not to others.The only exception to this is when an applicant requests an accommodation (different treatment) based on his or her disability.

So, despite the fact that life just got harder, there is some good news in this for Katie. She’s probably gonna meet Johnny Manziel. Or maybe that’s bad news, too.