The CFPB's January Report highlights the need for more accurate and reliable method

The Consumer Financial Protection Bureau (CFPB) has stressed the importance of credit reporting agencies fixing mistakes in tenant background checks and sharing credit file data more effectively. This stems from the increasing use of background checks by landlords and employers in making decisions. These reports provide information about an individual's credit history, rental history, employment history, income, professional licenses, criminal history, and driving record.

Credit checks face challenges despite their prevalent use. The limited scope of credit files, focusing primarily on trade lines and debt balances, provides only a partial view of an individual's financial health. This incomplete picture may lead to misguided assessments of applicants' ability to manage rental payments. Delays in updating credit files compound these issues, emphasizing the need for a critical evaluation of credit checks as a primary screening tool.

Issues with the Current Logic

The idea behind using credit checks to assess potential renters is to collect a wealth of data points about an individual's financial behavior from their interactions with banks and lenders. These data points act as indirect behavioral signals, including factors like available credit amounts, credit balances, and recent loan applications. Property owners believe analyzing these signals helps judge monetary responsibility, forming the basis for decisions on renting apartments based on creditworthiness.

Despite some advantages, there are significant shortcomings that raise questions about the efficacy and fairness of traditional screening methods:

1. High error rate: A Consumer Reports investigation discovered that 34% of Americans found at least one error on their credit report, with 29% identifying personal information errors and 11% discovering account information errors in 2021. These inaccuracies, ranging from false delinquencies to erroneous listings, can lead to denied applications and higher interest rates, hindering access to essential services.
2. Limited scope: Credit files focus narrowly on trade lines and debt balances, missing crucial indicators like income sources and expenses. This one-dimensional view risks overlooking qualified renters and assessing financial stability unfairly.
3. Delayed updates: Outdated credit reports may misrepresent current financial health, particularly impacting renters with recent changes in income or debts. Relying solely on outdated data can wrongly assess if someone is ready for a home.

These shortcomings necessitate reevaluating the use of credit checks as the primary determinant in screening rental applicants. For instance, someone with an 800 credit score may still be unable to afford an apartment costing $1,200 per month if their monthly net cash flow is only $1,000. The disconnect between credit reports and actual financial capabilities demonstrates the need for more thorough and accurate methods to assess an individual's housing readiness.

Challenges in Correcting Credit Report Errors

The CFPB revealed that the major credit bureaus failed to resolve consumer complaints about inaccurate information in credit reports, providing relief in less than 2% of cases in 2021, down from nearly 25% in 2019. Despite the CFPB emphasizing accuracy and transparency, individuals often encounter substantial hurdles when attempting to rectify errors in their credit reports.

One significant challenge is the complexity of the correction process, which can be daunting for those unfamiliar with the intricacies of credit reporting systems. Many individuals need a clearer understanding of the necessary steps to dispute inaccuracies effectively. The prolonged resolution times add to consumer frustration.

Technological barriers further complicate the process of correcting credit report errors. Online platforms and digital interfaces, often the primary channels for credit report disputes, may pose challenges for individuals with limited technological literacy. Navigating these systems to submit accurate and comprehensive dispute claims can be overwhelming, particularly for those less adept at utilizing digital tools.

Accessibility also remains a critical issue for a sizable portion of the population. While online resources are available for dispute submissions, they may not cater to individuals without reliable internet access or digital devices. This lack of accessibility creates barriers for those who rely on alternative means of communication or face challenges accessing online platforms. Segments of the population may find themselves disadvantaged in rectifying credit report inaccuracies, highlighting the need for more inclusive and accessible avenues for dispute resolution.

It is crucial also to consider financial inclusion in the screening process. Many individuals, particularly those with side hustles or who are self-employed, may not have traditional pay stubs to verify their income. Statistics indicate that over 50% of Americans participate in side gigs or are self-employed, making it imperative to have alternative methods for assessing their financial stability. Utilizing bank data to analyze income ensures that a broader range of applicants are evaluated accurately for housing readiness.

Modernizing Rental Applicant Screening

Traditionally, property managers have used methods like pay stubs, credit checks, and criminal background screenings to evaluate rental applicants. However, these methods have weaknesses. Criminal background checks can give incomplete or dated info, and the absence of a conviction doesn't guarantee the individual is free from fraudulent behavior.

Modern tools like artificial intelligence (AI) have made distinguishing between real and fake documents difficult. For example, AI-generated pay stubs can look so much like real ones that even advanced AI models have trouble spotting them. This makes it harder for landlords to check applicants' credit because fake pay stubs can surpass traditional checks. The widespread use of fake pay stubs and the problems with credit checks show that there needs to be a better way to screen tenants.

To overcome barriers in financial assessment, a new method called user-permissioned bank data net cash flow underwriting has emerged. This method involves asking applicants for permission to review their bank account data to assess their monthly net cash flow. This differs from conventional methods that rely on documents which can be false or inaccurate, as it allows for a direct and uncorrupted analysis of individuals' financial transactions.

Bank account information is harder to fake, making it a more reliable way to check an applicant's finances. While pay stubs can be tampered with, bank data gives a clearer and more accurate picture of income and spending. Knowing an applicant's monthly cash flow is key to deciding if they can afford rent. It's important to be aware of possible fraud that standard background checks may not catch.

By analyzing financial data, property owners and managers can make better decisions about renters. Using bank data to check cash flow instead of credit scores helps ensure a fair and accurate screening process that benefits both the renter and the landlord. The industry should focus on a renter's financial health, especially their monthly cash flow, as a critical factor in deciding if they qualify for a rental.