Legal Issues

While application fraud has always been an issue in our in our industry, the COVID-19 pandemic has exacerbated the problem.

Application fraud occurs when an individual provides false information to obtain possession of a rental home. For example, an unemployed person may purchase fake paystubs online to prove employment, or an employed individual may purchase software to edit their paystub to a qualifying income. This is a problem that has plagued many industries but appears to be growing in the multifamily industry.

Fraud across the U.S.

In 2020 Snappt, a company that assists multifamily renters with application screening, commissioned a study conducted by ReRez Research of 100 property managers who either manage or are directly involved with evaluating rental applications. According to this study, two-thirds of the property managers surveyed confirmed that they had experienced losses due to fraudulent applications. This study also found that the issue has grown in light of the pandemic with 66% percent of landlords reporting being the victims of fraud in 2019 versus 85% in July of 2020. In 2021, Snappt estimated fraud rates in North Carolina at 11.5%, Florida at 12.8%, South Carolina at 15.7 %, Georgia at 19.6%, Kentucky at 28.6%, and the list goes on. This data shows, especially with the increased use of online applications, that this problem is growing and is here to stay.

How does a fraudulent application get approved?

According to the Snappt study, the typical application processing workload for those interviewed averaged 127 applications per month. However, more than 30% of interviewees processed over 350 applications per month and 15% processed over 1,500 applications per month. All of these applications were submitted online and, therefore, were at a higher risk of fraud. With the many tasks a property management team has every day it is easy to see how a fraudulent application may slip through the cracks.

Proceed with caution

As many property managers know, yet many leaseholders fail to appreciate, a lease is a binding contract between the landlord and the resident. This contract, while enforcing payment of rent and other policies, also extends some protections in the basis of contract law. When a party enters into a Lease based on fraudulent information, if challenged, a court may declare the lease void. However, the burden is on the landlord to prove that the resident knew of the fraud. Additionally, if fraud is discovered, the NAA lease allows a landlord to declare a default if any portion of the potential resident’s application is determined to be fraudulent or a material omission. To get possession of the rental home back a landlord will still have to proceed with a court action, usually for summary ejectment. While this protection should provide some comfort, the reality is that there are more consequences than merely being the victim of fraud for Landlords.

Ways to avoid approving fraudulent applications

There will never be a fool proof way to avoid fraudulent applications, but there are a number of ways your team members can help reduce the risk of liability:

Utilize screening services for credit and criminal background checks.

• One of the most fundamental resources to avoid fraudulent applications is to complete a credit and criminal background check. • If there is a conditional approval or a denial, make a good faith effort to determine why the application received that outcome.

Require photo identification to be submitted with an application and checking the ID against the individual applying.

• Does the name on the ID match the name on the application?

• Are there inconsistencies on the date of birth?

Complete verifications through contacting employers and previous rental communities.

• Do not merely rely on the information provided on the application. As there has been an increase of fraudulent applicants providing friends’ numbers as references, if something seems irregular, take the time to find a contact number independent of the application. • Ask questions that only an employer or previous rental community would know how to answer.

Review documents provided thoroughly

• Does the document appear to be an original or a copy? • Does each document of the same type match the expected formatting?

Review the math on paystubs

• Do the pay-stubs match the estimated income provided? • Check the math for the yearto-date earnings to reflect the proper income from statement to statement. • Does the place of business on the pay-stub match the business address?

Consider the whole picture

• Did the applicant mention something that would be a disqualifier, but that is not reflected on their application?

While every community will likely be a victim of fraudulent applications at some time, we hope that the information provided can better prepare your team about the issue and reduce any loss.

This article is not legal advice and should not be relied upon as such. You should seek guidance from legal counsel for any specific questions that you may have.

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As we move forward and strive to understand what will be considered normal post COVID-19, it is important to note that it is normal for humans to evolve, adapt and change. We set goals and do what we can to see these goals are met. That is how we ended up on the moon and is how we made it to where we are today. The “New Normal” is reflected in our ability to be able to make those changes and adaptations at a faster pace as more unthinkable challenges are thrown our way. My hope is that as we push forward, we continue to provide help to those that need it and appreciate and celebrate what makes each of us different, even more so than what makes us similar.

The TAA has some incredible plans for 2022 as well as several amazing new committees and initiatives that in certain ways were a product of all we have observed and learned in the past two years. If you are reading this, you likely have a vested interest in both our industry and association. If you have never taken the opportunity to join a committee or even just attend one of the amazing classes or events we offer, I strongly urge you to dip one foot in the pool and make an effort to do so. Craig Nardi