When Are Application Fees Illegal?

by | Sep 19, 2011 | Tenant Screening

Q: What are the rules regarding charging an application fee? What if I don’t order tenant screening reports on that applicant?- TVS Landlord

Generally an application fee is fine as long as it relates to the actual costs incurred by the landlord in leasing the rental — fees for a tenant background check and other related expenses. Some local laws do restrict charging an application fee, or limit what a landlord can charge.

The fee must be kept to a minimum. We have seen reports of landlords charging $500 or more for an application fee when tenant screening reports cost only a small fraction of that amount.

Landlords cannot use application fees as a profit center. In fact, some local laws prohibit application fees beyond the cost of running tenant screening reports. Others limit the specific amount that can be charged–typically less than $40.

In Wisconsin, a landlord may not be able to charge a fee for screening if the tenant can produce a credit report that’s less than thirty days old. (We do not recommend accepting a tenant’s credit report for a number of reasons. See Landlords: Are You Getting the Wrong Tenant Credit Report.)

In addition to the statutes regulating application fees, landlords should be aware that the practice of charging tenants these fees and then not running the tenant screening reports could constitute fraud, especially if the landlord never intended to order the reports. View this as a “worst-case scenario” because fraud cases can generate civil penalties including punitive damages. That’s not to mention that by not running tenant background checks on new applicants, the landlord is placing other tenants and the property at risk.

Some landlords prefer to collect the application fee in cash. One reason for this would be to speed up the tenant screening process by not having to wait for a check to clear.  If you accept cash, be sure to provide a receipt to the applicant.  However, the landlord who accepts cash is missing out on an opportunity to collect valuable tenant screening information which may be on the face of a check. 

If the rental application is for multiple occupants, the landlord can–and should, conduct a tenant background check on each adult. The landlord can collect an application fee from each person to cover the cost.

When you live in an area that does not allow application fees to cover tenant screening, it is still crucial to run the reports for each applicant under consideration. The risk of income loss from renting to a bad tenant far outweighs the cost of tenant screening reports.

Any time that the landlord has charged an application fee and does not run the tenant screening reports on an individual for whatever reason, that cost should be refunded to the applicant. This would be true if one of multiple roommates is rejected before other reports are ordered, and also if the landlord has accepted multiple applications for the same unit.

If a landlord is charging fees during the application process, it is important to make clear what those fees are for. Perhaps the landlord has been paid to hold a vacancy open for a period of time while the applicant comes to town to tour the property. That is not likely to be construed as an application fee. However, if the fee is something that is charged each time someone applies to rent a property, the landlord should follow the local rules regulating application fees.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).

Click Here to Receive Landlord Credit Reports.

Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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