Monday, January 25, 2010
Can the board check credit scores for potential purchasers and renters?
It is not surprising in today's economy that more and more boards are asking if they can check credit scores to determine whether or not a potential purchaser or potential renter in their community has the financial resources to meet their assessment obligations after moving in.
As with any other restriction or board action, the first step is to determine the source of such authority whether it is statuory or documentary. The common interest ownership statutes do not confer the right to check credit scores for potential purchasers and renters. We must then look to an association's governing documents to determine if such authority is conferred to the board.
Let's take the best case scenario (for a board wishing to do this) that the association's original recorded governing documents contained the right to check credit scores. The board in this situation would still need to obtain the consent of the potential purchaser or renter to check his or her credit. Any time a credit inquiry is made, the subject's score is affected slightly. A board that makes such an inquiry without first advising the subject that such action will be taken and getting consent to do so exposes itself to unnecessary liability. Many boards choose to include a statement on the application to purchase or rent form that must be signed by the applicant acknowleding and consenting to a credit check being run.
Even if all of the above is properly handled a board still has a complicated issue with which to contend when the credit report comes back negative. First, is a low score really indicative of the person's current fiscal fitness or is it the result of a traumatic life event (job loss, divorce, illness) which has since been surmounted with the ill credit effects simply lingering for a while? Moreover, some people fail to build up high credit scores because they don't like credit! These are the folks who don't have 10 credit cards, don't demand high limits on the ones they have and pay for most things in cash. Hardly sounds like an undesirable resident.
If the low credit score is truly indicative of a person who will be unlikely to meet their financial obligations to their neighbors after moving in, it is essential to speak with your association attorney to ensure that the association's governing documents allow you to reject an application based on such information. To add a further wrinkle to this equation, even if the governing documents provide for such action that does not always mean a court will uphold it in the event of a challenge. A knowledgeable community association attorney can walk you through this minefield.
One last thing you should think about when pondering whether or not it is necessary or even desirable to check credit scores for potential new association residents: how many of your long-term residents' credit scores would make you lose sleep at night!!