Walking the Line

Discrimination is an ugly word. But boards, deciding on the applications of would-be buyers, discriminate all the time. And sometimes there can be legal hell to pay.

It can't happen to you?

Talk to the Queens co-op that denied a woman an apartment because, she claimed, it had a bias against her physical disability. Preposterous? The court decided in her favor. Or, how about the co-op that had to print stationary claiming they were "an equal opportunity cooperative" after losing a race-based lawsuit?

Or, what about the case where an applicant purchased an apartment but was rejected by the board on what he felt were spurious grounds? He sued, charging that two directors had rejected him because they wanted to purchase the unit for below-market value and sell it for profit to a third party. The court agreed that the rejection was improper.

Admitting new shareholders to your building is a complicated process, and in today's litigation-crazed environment, it is getting more byzantine every day. Unwary boards and admissions committees could find themselves facing a day in court they could just as easily have avoided.

"Co-op boards and admissions committees have to be careful during the admissions process," notes Steven Wagner, a partner at Wagner, Davis & Gold.

What does a board need to know in setting up an admissions committee? What should it ask and what should it avoid?

LEGAL AND ILLEGAL DISCRIMINATION
First, realize that it is perfectly legal for a board to be discriminating in who it allows into the building. "It's appropriate to find out certain information about the applicant — like whether they can afford to pay their maintenance and how many people will live in the unit," says Wagner. "But you have to be careful with the kind of questions you ask. Sometimes boards can get into problems by asking the wrong questions."

"Boards can and should discriminate in the admissions process based on who they think is going to be a good member of their cooperative," explains Herb Cooper-Levy, a managing agent and housing consultant. "They can't discriminate on the basis of the protected classes — race, creed, color, etc. — under federal law. But they need to have a sound concept of what the co-op needs and wants."

Boards can reject applicants for financial reasons, for instance, and base that decision on income, credit checks, residential history, and/or employment history. The rationale is that successful applicants must be able to pay their monthly maintenance charges, special assessments, and mortgage payments. No board wants to accept a buyer who could soon be in default. "But with any other issue, acceptance or rejection is really a gray area," notes an attorney with Wolf Haldenstein Adler Freeman and Herz.

According to experts, boards can reject an applicant for any reason permissible under the law. "A board can reject an applicant because they have blue eyes," says one attorney. "But the board needs to be consistent. If someone is singled out for treatment that is different from another person interviewed, there is a definite chance for litigation. But, beyond the unlawful grounds for rejection, boards have an incredible amount of latitude."

There are typical groups associated with "legal discrimination." Those are:
*entertainers and celebrities, who are often rejected for membership out of fear for the notoriety and unwanted visitors they can bring to a building;
*political figures and diplomats, for those same reasons, as well as the fear of terrorist violence;
*attorneys, for their tendency to pursue litigation and find legal loopholes to avoid maintenance charges or granting boards access to their units; and
*applicants who have moved frequently, because in the event of another move, the purchase may turn into a sublet situation.

Problems arise when the interviewers ask inappropriate questions. "The rule for cooperative housing is the same for any housing," says a spokesman for the state Human Rights Commission. "Boards cannot discriminate against applicants for reasons of race, color, religion, national origin [or ethnicity], sex, age, marital status [which also includes the number of children in a family], disability, sexual orientation, or citizenship status. A co-op cannot ask an applicant for a green card, for instance."

The challenge is being able to walk the fine line between protecting the financial and social stability of the co-op and treating prospective buyers fairly. "The bottom line is boards have to act in the best interest of their co-ops," says an attorney. "They want to protect the character of their buildings while retaining their fiduciary responsibility."

THE PROCESS
Co-ops can avoid the discrimination dilemma by developing a sound, consistent admissions procedure. One good place to start is offered by the Council of New York Cooperatives and Condominiums, which makes available to its member buildings a guide to the admissions process, including a sample applicant questionnaire.

"Set up routines for fair and good practices and stick with them," says a management executive. "It is imperative that boards keep all of their procedures as uniform as possible so that turned-down applicants can't say that the board's procedures are discriminatory."

The ideal procedure should include the following:

Set strict deadlines for each step of the process. To ensure that the process runs smoothly, the co-op should set strict deadlines for the filing of forms and ensure that all of the forms have been submitted before reviewing the applicant. Also, announce the dates of the committee meetings and the dates the board will review applicants far in advance so that both the potential buyers and the sellers can make sure they are prepared.

"The problems we had to deal with had less to do with discrimination, or the guidelines we set up, than it did with human nature," says a former board member and admissions committee chairman at his 189-unit Brooklyn co-op. "Buyers and sellers have to understand that there is a procedure that must be followed. Often, they weren't very patient." Setting and publicizing the deadlines can help.

Use a detailed yet legal application form. Applications, as well as their development and filing procedure, are generally up to the individual boards. Most applications request the name; age; residential history; employment and bank history/references; personal references; financial information, including assets, debts, and credit histories; hobbies and interests; interest in board or committee service once approved; and data on the person(s) that will live in the unit. Co-ops like New York Towers also require applicants to file letters of recommendation, the completed mortgage application, and a written commitment on financing from the mortgage lender with the admissions committee.

In addition to requesting financial history, the application should also take into account the personal values of the board — i.e., social activities and the potential for involvement in co-op management — and, therefore, can vary. But the application should always include the information the co-op needs to make a judgment, not the criteria behind it. "Use open-ended questions," Cooper-Levy cautions. "Saying, 'Where would you like to participate in co-op leadership?' instead of requiring it for approval is a big difference. The latter would be inappropriate."

Verify the applicant's income and employment history. Perhaps the most important part of the application process is a thorough review of the buyer's financial history. Does he have a steady, legal, income source? Can he afford the co-op charges? Will he keep up with their mortgage payments? "It is the board's responsibility to ensure that the applicant can meet the co-op's charges, as well as the payments associated with the blanket loan and the share loan," Cooper-Levy says.

When co-ops look at an applicant's credit report, they should look at the same information as the mortgage lender does, but with a bent toward their own needs. For example, how is the applicant financing the purchase? Does she pay rent or mortgage currently? Or, if the applicant has been overextended financially in the past, what has she paid off first, her debt with consumer purchases or her residential debt?

"It doesn't matter to the co-op whether the applicant has been over-extended on consumer purchases," observes Cooper-Levy. "The board can almost discount those problems. What's important is if the payment of consumer credit has been to the detriment of their residential debt."

In determining whether an applicant can make his or her payments, a rule of thumb, some say, is that an applicant's debt service should be no more than twice their annual income. "That rule can and should be adjusted to what makes sense for the individual co-ops," says Cooper-Levy.

Visit the applicant's current residence. The applicant's current residence can offer insight into his or her lifestyle and how he or she will behave as a neighbor. "You'll want to get a sense of the condition of the property — how orderly and clean it is; the wear and tear that is within their control," Cooper-Levy says. "If there is a suspicion of noisiness, or disruptiveness, and it's a borderline case, the board could interview the neighbors, but we don't recommend that because it's almost an invasion of privacy. It is most insufficient however to simply ask the current landlord for a personal reference. If he is anxious to get rid of the tenant, he may give them a good reference just to get rid of them."

Seek advice from your professionals. Lawyers and managing agents can let you know what's verboten. Some companies offer admissions counseling as a secondary service, providing boards with sample forms and coordinating the paperwork. Applicant research includes verifying employment histories, reviewing tax returns for the three years preceding the application, requesting a credit report, visiting the applicant's current residence, and reviewing personal letters of recommendation.

Ask thoughtful but cautious questions during the interview. This should be the final stage in the admissions process and reserved only for those applicants that pass through the above criteria successfully. Meeting the applicants, often for the first time, boards and/or committees should use the interview as a chance to determine the applicant's compatibility with the co-op and its character.

"I have always been told that it is safer to reject before the interview," says a manager. "If it looks like a clear rejection, based on financial reasons, don't bother with the interview. But, at the same time, many believe the interview gives a borderline applicant a chance to explain. It really is a judgment call."

What are the wrong questions? Saying, "You know you have to have a minimum income of $50,000 to live here," during the interview could offend the applicant and open the board to possible litigation. Instead of asking about salary, for instance, committees should ask applicants if they are employed and allow room for the applicant to offer details on salary and job stability.

"I would recommend that the board or admissions committee, whoever does the interview, should have a prepared list of questions so that they're asked correctly to avoid any problems," says Wagner. "Focus on the things that are pertinent to the applicant's membership. You can avoid a lot of issues by the way the question is asked."

Interview everyone who will live there and tell them the rules in advance. The interview should be held with all of the potential unit occupants present. This is especially important if there are children involved, because the co-op can determine the behavior of the children and the degree of the guardian's control, without asking a delicate question.

"I try to get boards to focus on what they can ask," Wagner says. "The number of children, or even asking the profession of the applicant, can be a problem today. Asking 'In whose name will the unit be?' or 'Who is occupying the unit?' is better than 'How many children do you have?' "

Strict house rules on children and pets should be made known prior to the interview, and in a professional, not accusatory, tone. Also, establishing and providing applicant income guidelines based on co-op charges beforehand can be helpful. "The best way for boards to avoid liability is to treat the people making the application just as they'd like to be treated," says a co-op attorney. "If you see such a loathsome person during the interview, which happens rarely, don't say anything that gives a reason for you to be subjected to an attack later on."

"When the interview begins, I explain the purpose of the meeting," adds the admissions committee chairperson at New York Towers, a 388-unit co-op at 305 East 24th Street. "Then we introduce ourselves, emphasizing that we are concerned with the stability and financial health of our building. We tell them about the house rules and some background about the building. The first question I usually ask is how they found out about our building. It's a way to find if they have friends or know someone in the building already, or if they like the neighborhood and went through a broker. It's a good way to start and break the ice. When the questions come back and forth, we get an idea of what the applicants are like. We try to treat everyone the same."

Make a fair decision. Once the application process is complete, boards act on the recommendation of the admissions committee. "The job of the admissions committee, in my view, is to present the relevant facts about an applicant to the board and to make a recommendation," a manager notes. "The committee should not pass judgment."

The New York Towers chairperson says her admissions committee — consisting of two board members and three non-board members — carefully reviews each applicant before making a recommendation to the entire board, which makes the final decision. "Because of the way we have this set up, with the form and financial requirements, there is a weeding out process before the interview," she says. "We have rejected very few purchasers once they reach the interview."

When making the decision on the application of a potential buyer, boards and admissions committees should remain open-minded. "We try to accommodate the sellers, because we know they want to sell and we don't want empty apartments," the New York Towers chairperson says. "But we also don't want people that are just coming through, that won't be good neighbors. If they don't have the proper finances, they don't come before the committee."

Wagner takes a more simplistic view. "Try and say, 'yes,'" he says. "You won't get sued if you say 'yes,' and quite frankly, that's the board's job, particularly in a tough market. They have owners who want to sell their units and are struggling with sublet policies. Provided that the applicant doesn't have a financial problem, or behaves like Attila the Hun, it is their job to approve the sale for the benefit of the investors in the building."

Above all, remain consistent. "Don't make admissions policy decisions on a case-by-case basis," notes an attorney. At New York Towers, the admissions committee strives to "regularize" the process, holding its regularly scheduled admissions meeting a week before the board meeting for review and recommendation purposes. "We needed to regularize the process so that we knew what to expect from our end as well as theirs," the chairperson says. "Now there are no surprises."

Keep accurate records of the individual application proceedings. Maintaining proof of a consistent and fair admissions process can only further insulate the board from liability. But an attorney warns against including detailed deliberations on an individual applicant because "if there are any detailed reasons for the rejection in the records, the rejected party could pick out something on which to base litigation."

Include enough information to show that each applicant undergoes the same fair and complete admissions process. "Boards have to avoid anything that ever touches on an area of discrimination," Wagner says. "If litigation is involved because of a rejection, the first thing that will happen is that the attorney of the rejected applicant will ask for meeting minutes and the co-op's policy. There should definitely be an established policy the board can fall back on."

While few cases of actual discrimination have been brought against co-ops as a direct result of the admissions process, another lawyer admits, "there have been several significant cases." He could not confirm industry rumors of a current case involving a co-op that allegedly discriminated against an applicant because of prior psychiatric problems, but acknowledged that illegal discrimination still occurs at many city co-ops.

"For co-ops, discrimination is traditionally hard to prove," he says. "Co-ops are well-shielded because they are not required to file their reasons for rejecting an applicant. But a handful of cases have been decided against co-ops and they happen to be important because they are precedent-setting."

A management executive adds that the process can be full of challenges, and both the admissions committee and the board should be prepared to face a variety of issues. "After they're turned down, an applicant will look for anything they can find to indicate they were discriminated against, especially in the interview," he says. "A turn-down can be very embarrassing for the people involved and they may be looking to claim discrimination. Most of the time, they have to reach further to find that, but boards should still be careful."