The dos and don’ts of tenant credit check and conducting background checks

 

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There are rules and regulations all landlords should be aware of when conducting tenant screenings and background checks, particularly around the type of information you can ask for and when.

Can you request a potential tenant’s bank statements (KFC test)?

While asking to see a potential tenant’s bank statement seems like a reasonable request, doing so reveals their spending habits, which violates that person’s privacy. Worse still, it can cause you to form unethical judgements and prejudices about that person—which in turn leads to discrimination.

Requesting bank statements from tenants is also known as the KFC test, a term that came into use after a property manager said on record that she regularly asks for bank statements to examine their spending habits and determine whether a prospective tenant is capable of paying the rent.

“I don’t just want to put a tenant into a property and no sooner have they been put in they can’t afford the rent. They’re paying somebody’s mortgage and I see a lot of people who are low socio-economic and their bank statements literally will read, ‘KFC, McDonald’s, the dairy, KFC, McDonald’s, court fine’, trucks that they buy, goods that they can’t afford. You know, I see a lot of mismanagement of money.”1

We should be clear: this is an invasion of privacy and, if acted upon, grounds for discrimination. This is illegal under the Privacy Act and the Residential Tenancies Act.

Following this incident, the Privacy Commissioner released new guidelines for landlords and property managers that outlines what is and isn’t acceptable to request from tenants.

What information are landlords legally allowed to request from their tenants? 

Below is the following information you may ask for as part of your tenant screening and background check process. Important! Certain information should only be requested after the initial vetting phase.

* You should only request this information from your preferred tenant, not at the start of the application stage. This minimises the amount of personal information you collect on prospective tenants.

You cannot ask for information regarding their:

You cannot collect information about your tenant from other sources (e.g. social media) even if consent is given.

Consequences of discrimination and breaching privacy

Discrimination during the tenancy process can come at a cost too—up to $4,000, as one landlord found out after treating a blind woman’s tenancy application differently.

If you are basing your tenant selection on criteria such as age, nationality, employment status,  gender or sexual orientation—or shopping habits—then this is grounds for discrimination.

As for breaching privacy, from a legal standpoint, landlords can collect personal information:

“Landlords should only collect the minimum amount of personal information necessary to make a decision on the tenancy application,” states the Office of the Privacy Commissioner website.

“While it might be lawful for a landlord to collect information such as wage slips and credit reports to assess a tenant’s ability to rent, collecting bank statements to see how money was spent is unfair or unreasonably intrusive.”

Tenant Credit check 

Once you have all the information you need, ask for their consent to conduct a credit check. If they’ve completed a pre-tenancy application form, they’ll give their consent here. Then tell them you’ll contact them soon to let them know if they’ve been selected.

Check their references

Potential tenants provide details of two referees on the pre-tenancy application form. These may be a friend, a co-worker, their employer or anyone else who knows them well. It’s useful if one referee is the tenant’s current or previous landlord.

Ask the tenant to let the referees know you’ll contact them. If you can’t reach one or both of the referees, you can ask the tenant to provide the details of a different referee.

What to ask a referee

Ask questions to get an idea of the potential tenant’s behaviour. If the referee is a previous landlord, you could ask if the tenant:

If you think a referee’s not being completely honest with you, you may wish to speak to another referee.

Check their credit history

Can you request a potential tenant’s credit report?

Potential tenants give their consent for you to check their credit history on the pre-tenancy application form.

Pre tenancy application has more about credit checks.

Online pre-tenancy application

Don’t skip important steps

Don’t skip reference or credit checks because a tenant offers extra rent upfront. Never accept the tenant’s application to rent the property until you’ve done all your checks and fulfilled all legal requirements.

 

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