Junk Fees in Rental Housing Come Under Fire

Rental fees can increase cost burdens for renter households, who are often already spending a growing share of their income on rent due to a limited housing supply across the country. 

President Biden and HUD Secretary Marcia Fudge recently announced new commitments by several of the biggest rental housing search platforms to increase transparency of housing fees, and released new research that highlights and summarizes state and local innovation to address junk fees. 

The backdrop: As part of the housing search, prospective renters often pay application fees to be considered for available rental units. Application fees can limit options for renters and strain household budgets, particularly for renters with low and modest incomes who already face high rental cost burdens. These fees may be particularly burdensome in tight markets where renters often submit multiple applications as they compete for scarce units. 

In addition, the monthly rent included in a listing may not reflect the full cost if a landlord later requires the tenant to pay undisclosed or hidden fees. After securing housing, renters may end up paying a monthly amount for their housing that exceeds the listed price of the unit due to hidden or junk fees. Tenants are sometimes evicted when they don’t pay these fees—even if they have paid their rent. These fees make it harder for renters to find housing in the future if they are saddled with debt, an eviction on their record, or diminished credit scores.

Driving the news: Three of the largest online rental platforms (Zillow, Apartments.com, and AffordableHousing.com) have responded to an open letter to the housing industry penned by Secretary Fudge calling for action on junk fees that renters face. These platforms have announced that that they will provide new tools to help renters determine the all-in price of a desired unit and comparison shop more easily. 

For example, AffordableHousing.com, the nation’s largest online platform dedicated solely to affordable housing, will require owners to disclose all refundable and non-refundable fees and charges upfront in their listings. It will launch a new “Trusted Owner” badge that protects renters from being charged junk fees by identifying owners who have a history of adhering to best practices, including commitment to reasonable fee limits, no junk fees, and full fee disclosure.

One level deeper: At the state level, a number of states have been cracking down on rental housing fees. 

• Colorado enacted House Bill 1099, which allows prospective renters to reuse a rental application for up to 30 days without paying additional fees;
• Rhode Island enacted House Bill 6087 to limit rental application fees beyond the actual cost of obtaining a background check or credit report, if the prospective tenant does not provide their own report;
• Minnesota enacted Senate File 2909, which includes a requirement for landlords to clearly display the total monthly payment and all nonoptional fees on the first page of the lease agreement and in all advertisements;
• Connecticut enacted Senate Bill 998 to prohibit a landlord from requiring a fee for processing, reviewing, or accepting a rental application, and set a cap of $50 on the amount that can be charged for tenant screening reports. The law also prohibits move-in and move-out fees, and certain fee-related lease provisions, including certain late fees related to utility payments;
• Maine enacted Legislative Document 691 to prohibit a landlord from charging a fee to submit a rental application that exceeds the actual cost of a background check, a credit check, or another screening process. The law also prohibits a landlord from charging more than one screening fee in any 12-month period;
• The Montana Senate passed Senate Bill 320 to require landlords to refund application fees to unsuccessful rental applicants except any portion of the fee used to cover costs related to reviewing the application, including conducting a background check. Landlords may charge candidates for only the actual cost of obtaining a background check or credit report; and
• The California Senate passed Senate Bill 611 to require the mandatory disclosure of monthly rent rates, including disclosure of a range of payments, fees, deposits, or charges, and to prohibit certain fees from being charged.

What you need to know: The IRS has ruled that application fees “may not exceed the actual out-of-pocket costs incurred by the site for checking a prospective tenant’s income, credit history, and landlord references.” In other words, one-time fees charged at the time of application aren’t considered rent. So, LIHTC site managers may charge application fees and/or credit check fees.

However, only the amount the owner incurs for processing the application may be charged to the prospective tenant. The owner can’t make a profit from the processing fees charged to tax credit applicants. For example, if the real cost of processing an application including background and credit checks amounts to only $30, the owner can’t charge $60. Be sure to check with your state housing agency for any additional restrictions imposed on one-time application fees.