It's not fraud if you tell the applicant what the rental criteria are and what happens to the money if they are turned down.

In ancient times, I was a small time landlord. On a couple of occasions I asked for an application fee. I followed these rules, which I explained to the applicant:

1. The application fee was refunded if I turned down the applicant, provided the background check did not disclose a lie on the application.
2. The application fee was applied to the security deposit if I granted the rental.
3. The application fee was not refunded if the background check found a lie on the application, or if I granted the rental and the applicant changed their mind and declined to rent.

It costs money to do background checks. I wasn't going to be out of pocket if an applicant was dishonest with me.