[Software] Tenant screening software faces national reckoning

[Shyloo]

Tenant screening software faces national reckoning

 

In November 2018, Marco Antonio Fernandez, returned home after a yearlong Navy deployment in South Korea and searched for an apartment near his next posting in Fort Meade, Maryland.

Fernandez, whose national security work had already earned him a top-secret clearance, had little to worry about when he was asked to undergo a tenant screening — a process involving credit, criminal records and eviction checks. But the screening’s algorithm-based software rejected him for an apartment: It found he had a drug conviction and three misdemeanors for petty theft. That’s because it confused him with Marco Alberto Fernandez Santana, an alleged Mexican drug trafficker.

The correct Fernandez sued RentGrow, a tenant screening firm, in a proposed class-action filed in Baltimore in April 2019, and has now also similarly sued CoreLogic Credco, a division of a larger property analytics firm, CoreLogic, in federal court in San Diego last July. In both cases, Fernandez says the groups violated the 51-year-old Fair Credit Reporting Act, which allows consumers to see and challenge data held by private companies about them. Fernandez’ lawyers said in court papers that the “inaccurate reporting will follow Plaintiff for the rest of his career as he is reinvestigated every five years to maintain his Top Secret security clearance.”

The judge in San Diego has put the case on hold until the Supreme Court rules in a related case that is set to be heard this month. Across the country in Baltimore, RentGrow has also asked that the judge issue a stay.

Housing law advocates say that Marco Antonio Fernandez is one of thousands of people who are mistakenly flagged by tenant screening software that culls criminal records data from many sources and that is made by CoreLogic, RentGrow, RealPage, AppFolio and a handful of other companies. This industry has accelerated over the last two decades as the rental market has increased and the digitization and real estate analytics market has boomed. Nearly all landlords now use some sort of tenant screening software as a way to find who they consider to be the highest-quality tenants.

“The status quo disproportionately impacts vulnerable po[CENSORED]tions,” said Nicol Turner Lee, a senior fellow in governance studies and the director of the Center for Technology Innovation, at the Brookings Institution, who has studied algorithmic bias. “I think first and foremost we need to solidify privacy law: We have a better grasp on what is being collected, how long and being transparent about that data. That’s fundamental.”

It’s big business, too: Real estate tech and tenancy screening firms have drawn the interest of Wall Street investors in recent years. Data from PitchBook, a financial data firm, shows that the number of private equity deals in this area has jumped in total value from $1.7 billion in 2018 to $6.9 billion in 2019 and $6.6 billion in 2020.

Some companies have learned they want to stay away. Last July, CoreLogic formally announced that it would divest itself from this part of its business, possibly because of lawsuits, and possibly because this division wasn’t making enough money. As of February, CoreLogic told investors it is entirely out of the tenant screening business.

Other companies, however, only see its potential. Stone Capital and Insight Partners acquired CoreLogic for about $6 billion in February, while another private equity firm, Thomas Bravo, acquired RealPage for $9.6 billion in December. Meanwhile, AppFolio was recently dubbed the fastest-growing company in America, according to Fortune magazine. Stone Capital, Insight Partners and Thomas Bravo did not respond to requests for comment.

Legal tests
But as the industry has grown, so have the lawsuits. Scores of people have sued alleging similar mistakes by these companies in recent years. And this may be the year the industry is forced to change.

The relatively new subset of credit reporting, the $3 billion tenant screening industry, which has both grown and gone largely unregulated since its inception, is about to be tested in new ways. In 2021, a notable lawsuit in Connecticut that could stop how this type of software is used has a good chance of going to trial. At the same time, California legislators are trying to figure out how to reduce algorithmic bias in industries like housing.

This credit reporting issue doesn't just touch housing, but other kinds of credit-based background searches as well. Fernandez' San Diego case has been put on hold until lawyers know the outcome of Transunion v. Ramirez in the Supreme Court. The case involves a man from Fremont, California, who tried to obtain a car loan, but was erroneously flagged — like Fernandez — for being on a federal list that prevents American companies from doing business with them. This list is usually reserved for wanted criminals and terror suspects.

The Supreme Court is set to hear oral argument in Transunion on March 31. The justices are being asked to decide whether class-action status should have been granted, and whether members of that class who did not suffer the same injury as the plaintiff, Sergio Ramirez, should receive the same amount in damages as him.

Standing up
In 2016, Carmen Arroyo, a medical assistant from Windham, Connecticut, had a simple request for her landlord: She wanted to bring her adult son, Mikhail, home.

Months earlier, Mikhail had been electrocuted while working atop a utility pole, and fell 30 feet to the ground. The accident left him in a coma for six-months, during which he could barely speak, walk or care for himself. After he recovered somewhat, Carmen Arroyo wanted to move the two of them from her one-bedroom apartment, into a two-bedroom apartment in the same complex, ArtSpace Windham, just east of Hartford.

When Arroyo filled out the new application, she assumed that the process would be perfunctory. Mikhail has lived with her before. But, she soon learned that the property manager, WinnResidential, uses CoreLogic’s CrimSafe service and had examined her son's criminal background.

WinnResidential quickly rejected her, saying that Mikhail had “disqualifying” records. Arroyo could not figure out what the obstacle was. Her leasing agent refused to answer.

“So now I'm not just angry, but I'm trying to figure it out and play detective here because I’m not getting any answers here,” she said. “Everywhere I turned to was a dead end. There were no answers to my questions on why. All of this while I’m trying to work a 40-hour shift and take care of my son at the hospital. It was a lot for me. It makes a person just so upset but at the same time makes you feel like, ‘What is going on?’”

WinnResidential did not respond to requests for comment.

Arroyo contacted the Connecticut Fair Housing Center, a legal advocacy group in Hartford, to see if it could help. But the lawyers there quickly learned that the landlord really did not know why the Arroyos had been rejected.

“We obtained documentation from the background check that the landlord had received from CoreLogic, and we noticed that they were not misleading us when they said ‘they had no idea,’" said Salmun Kazerounian, one of Arroyo’s lawyers at the center.

Arroyo’s lawyers eventually determined that Mikhail had been charged in Pennsylvania in 2014 with retail theft for $150, but that the charge was ultimately dropped. Arroyo knew nothing about the charge, and Mikhail was not able to speak about it.

Arroyo’s lawyers sued on her behalf not only under the Fair Credit Reporting Act, where monetary damages and settlements are common, but also under the Fair Housing Act, a key pillar of the Civil Rights Act of 1968.

The lawyers say that by making claims concerning tenant screening software under the Fair Housing Act, believed to be for the first time, there is a strong likelihood that CoreLogic may be compelled to changes it software and practices. That’s because a critical guidance issued in 2016 by the Department of Housing and Urban Development said that denying rent based on criminal history could violate the Fair Housing Act.

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The legal theory in Arroyo’s lawsuit goes like this: Because Latinos and African Americans are arrested, convicted and incarcerated at higher rates than whites, members of those groups suffer an “unlawful disparate impact” if CoreLogic disqualifies them as prospective tenants based on their criminal history.

In August 2018, CoreLogic’s attorneys argued in a motion to dismiss the case that it was not at fault, because it is simply an outside party: It does not make an affirmative or negative decision to rent a given apartment; only the landlord does that. However, two years later, the judge did not find this argument persuasive.