More than $4 billion of household rent debt is charged off by property operators in a typical year. New COVID-19 protections allow many renters to extend their payment due dates, increasing average balances owed. In this environment, understandably, rental housing operators are watching closely to ensure their rent receivables are paid.
Fortunately, renters’ credit quality has improved during COVID-19: Delinquent consumer accounts in 2020 were at their lowest level in years. One leading measure of tenant credit quality—TransUnion’s Resident Score—moved higher in 2020, as consumers reduced credit card usage and paid down outstanding balances.
Federal assistance buoyed tenant balance sheets in 2020, enabling tenants to make good on prior rent debts. As 2021 gets underway, the renewal of federal unemployment insurance supplements, direct stimulus payments and new targeted renter supports—along with regular tax refunds—is giving renters ample means in the first quarter of 2021 to pay down prior debts owed to housing providers and other creditors.
The value of rental debt placed is expected to increase year-over-year in 2021. Tenants’ ability to defer their repayment obligations on expired leases—whether by regulation or their landlord’s voluntary offer—had begun to expire in many jurisdictions by the close of 2020. Debt accounts are expected to have higher average balances, especially in jurisdictions with liberal tenant lease avoidance rights.
A year-end survey of New York City assisted properties, for example, concluded that residents’ debts of two months or more were up 300 percent in all—$1.14 billion was owed on 185,000 New York City assisted units alone. As balances grow, more former tenants can be expected to dispute what they owe.
Here are key tips for successful rent debt collections in 2021:
1. Document and Communicate
Regulatory extensions of a former tenant’s obligation to pay are complex, and can depend on property financing, state/local ordinances, operators’ payment-plan terms, and subsidy conditions.
Tip: Track when a tenant has exhausted her/his ability to delay payment due under the lease. Maintain documentation around payment-plan relief. Clearly communicate consequences of nonpayment under the lease and any modifications. Place promptly upon charge-off with detailed documentation.
2. Consider Credit Reporting
Strategic behavior by tenants with an ability to pay—this is a real issue costing landlords. Solvent tenants stop paying rent and avoid replying to landlords’ payment plan offers and hardship confirmation requests.
Tip: Document outreach attempts. Consider credit reporting for nonpayment by nonresponsive tenants where repeat hardship offers go unanswered.
3. Authenticate Identities
Identity theft and application fraud is a dispute topic that obligates creditors to show how they identified the original applicant. More transactions are online, and operators’ controls on personally identifying information are tight.
Tip: To rebut these post-move-out disputes easily, smart landlords have handy authenticating documents and PII originally used to verify the applicant. Develop and implement a process to confirm that social security numbers and other identifying information provided by applicants belong to the applicant and are valid.
4. Prepare for 3rd Party Interventions
Expect to see private attorneys, state attorneys general and the Consumer Financial Protection Bureau continue to engage on behalf of former tenants in former tenant debt disputes. After all, consumer reporting and debt collection are two of the CFPB’s most common areas for consumer complaints.
Tip: Consumer behavior has changed. Often today, a consumer will begin to dispute an old lease debt with the AG or CFPB before approaching the property. And consumers are more inclined to hire counsel for larger debts.
5. Monitor Moveouts
Smart rental operators clearly communicate to tenants at lease-end damages owed, security deposit/insurance coverage and payment terms.
Tip: Video move-outs are increasingly popular. Renters have clear notice of the damages they are responsible for, and property managers can address questions and clarify misunderstandings from a safe distance.
6. Stay Current on Regulations
Collections agencies will be implementing the long-awaited Fair Debt Collections Practices Act rule in 2021. The rule is evolutionary—not revolutionary: Collections agencies and their property management clients will adjust consumer contact and dispute processes in time to meet the fourth-quarter 2021 implementation date. Tip: Ask your rental collections agency what changes to expect on your account documentation process.
7. Update Your Systems
Property operators are using well-established, sophisticated collections integrations from leading collections agencies to speed and simplify rental debt management. FCO, for example, works with leading property management firms and their software and service providers to optimize document/data flows to streamline compliance and reduce workload. The result: More debts are placed more promptly with better documentation under agency integrations. Tip: The Real Estate Technology Alliance’s update to the industry’s Collections Schema is underway—a key update for property managers and their collections agencies implementing best practices.
Working directly with the right rental collections agency can ease property management, increase recovery and smooth compliance. Check your operations now before the busy spring leasing season to ensure you’re prepared for an even bigger 2021.
Jay Harris is vice president & general counsel at Fair Collections & Outsourcing, a rental collections agency.