Credit in Crisis: How COVID-19 Has Changed the Credit-Checking and Screening Process
By David Crown
Now more than ever, researching the credit of rental applicants is essential to choosing the most qualified tenant for a vacant apartment unit. Credit-checking has never been able to tell you everything you need to know about an applicant, but historically, it has provided important information in the selection process.
The pandemic, however, has complicated things where credit is concerned. Millions of people were unemployed for a year or longer due to shutdowns for public safety, and they have relied on assistance programs to continue renting their residences. Many still do. We think of our current time as “post-COVID,” but in truth the pandemic is not over yet. As property managers, the question we should ask ourselves is: what do these changes in the effectiveness of credit checks mean for our industry? Let’s explore some information that’s pertinent to answering that question.
Credit Scores Might Not be as Effective…For Now. Joelle Scally, a Financial and Economic Analyst for the Federal Reserve Bank of New York, has said publicly, “[Credit scores] are a really important tool for lenders to identify creditworthy borrowers, but with the protection of the forbearance programs some of that may be muddled.” Given that typical indicators of poor credit (such as unpaid rent and other outstanding payments) do not have the same implications right now due to the circumstances of a global pandemic, it makes sense that credit scores are not as cut-and-dry as they usually are. A permanent weakening of credit scores as a tool would cause a significant shift in the way property managers and property owners evaluate applicants, but fortunately that’s not in the forecast. The efficacy of traditional credit scores will return, and in the meantime, banks are in the process of developing more holistic tools. That leads me to the next key factor.
New Models Are Incoming. Financial institutions are hard at work developing data-driven analysis models that will provide a more accurate credit risk assessment than current systems. Basically, help is on the way. Just like the FICO score, a credit score created by the Fair Isaac Corporation, updated their credit scoring system in January 2020 to include personal loans as a distinct category, new credit assessment systems will likely be able to account for the intricacies of how the pandemic affected a person’s financial standing. But just as you would not expect the financial sector to sit idly by while a worldwide disaster weakened one of its most essential tools, you should not sit idly by and wait for new metrics to return the tenant-analysis process to normal.
Property Managers Will Have to Strengthen Other Evaluation Efforts. This might go without saying, but there is no way around it: in the current absence of a perfect credit-checking system that contextualizes pandemic debts, property managers will have to place greater emphasis on their other means of appraising a prospective tenant’s financial responsibility. If you were to only call the tenant’s previous landlord, you should call their previous two landlords now. If you had only run a statewide eviction search on them, run a nationwide one now. Both of these examples should already be standard practices for all property managers, but if they are not for you, take this opportunity to step up; it might be your only way to even things out if you can’t perfectly check credit. In addition, you can ask for verification of previous money transfers between the tenant and their landlord in order to support the tenant’s creditability.
If anything, the inability to rely on credit checks should make you even better at selecting tenants in the future, because you should retain the other skills and practices you develop as a result. As I have said since the early months of this strange and confusing time, and as I say about all adversity, the best thing we can do with it (after we finally come through it) is learn from it.
David Crown is the Chief Executive Officer of Los Angeles Property Management Group and has over 25-years of experience managing all types of income properties. He can be reached directly at (323) 433-5254.
