Should HOAS require background checks for renters?

Background checks have long been used as a way for owners wishing to lease their units to determine who may rent their property. However, this practice has recently come under fire, as rejecting tenants on the basis of their criminal history may violate state and federal discrimination laws. With that in mind, how should homeowners associations handle background checks for renters?

The Federal Fair Housing Act, 42 U.S.C. Chapter 45 (the “Act”), prohibits discrimination on the basis of race, color, religion, sex, national origin, familial status (having children), and disability. The Minnesota Human Rights Act, Minn. Stat. Chapter 363A (“MHRA”), adds to this list to include creed, marital status, use of public assistance, and sexual orientation. Homeowners associations in Minnesota are prohibited from creating or enforcing rules that discriminate against people on the basis of any of these categories.

However, in addition to prohibiting behavior that directly discriminates against particular classes of people, Courts have also held that even rules that appear neutral could violate the Act if they adversely affect a protected class of people. So, for example, an association chooses to enact a rule that prohibits strollers on the sidewalks. While that rule is technically neutral, in that it applies to all members of the association community, it is nevertheless discriminatory because the rule disproportionately affects people with children.

Similarly, rules that reject tenants on the basis of their criminal history may have an unintended discriminatory effect. In the United States, African American and Hispanic people are arrested, convicted, and incarcerated at far greater rates than their share of the general population. Any rule prohibiting tenants or owners on the basis of their criminal record will, incidentally, disproportionately affect such minorities.

We understand that background check requirements are intended to protect associations and keep them safe from dangerous or unsavory residents. However, HOAs rarely, if ever, require background checks of potential buyers. Thus, even though the intent of a background check requirement for renters may be reasonable, the effect is unlikely to have the results the Board intends.

In addition to opening the association up to liability as outlined above, requiring background checks for rentals also has a negative practical effect. In order for an association to maintain eligibility for its Owners to obtain FHA Financing, it must adhere to a number of requirements. That includes prohibiting a number of leasing restrictions, including requiring criminal background or credit checks.

While this may not seem like an important issue for the board to consider, nearly one in five homebuyers in the United States use FHA Financing to purchase their home. Cutting off that funding source could significantly limit the pool of potential buyers, and thus have a negative impact on the property values throughout the association.

Until courts have considered and determined how to evaluate different types of rental restrictions, particularly those based on criminal history, we recommend that homeowners’ association boards do not adopt or enforce rules requiring background checks. The financial penalties for violating the Act or the MHRA can be very significant, and it is not worth risking a lawsuit for the possible benefit of preventing a renter with a minor indiscretion in their background that likely will have no impact on their value as a neighbor.