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From Banking and Finance Law Daily, October 9, 2014

Cordray: Does checking account screening unfairly block consumer access?

By Katalina M. Bianco, J.D.

Consumer Financial Protection Bureau Director Richard Cordray says the bureau is concerned that account screening processes may be unfairly preventing some consumers from opening checking accounts, leaving them to pursue other, higher-risk alternatives. The CFPB intends to take a closer look at the use of credit reports in the screening process, Cordray said at the Forum on Access to Checking Accounts.

Consumer screening. The bureau chief said that checking accounts play an important part in consumers’ financial lives, functioning as a basic tool for money management that provides a secure way for consumers to manage earnings, make payments, transfer and hold funds, and for many, pay bills. The problem for some consumers attempting to set up checking accounts is that they are screened for different kinds of risk and fail to make the cut, ending up with no access to a traditional account. Banks screen consumers to determine if they have engaged in any fraudulent or illegal conduct, such as money laundering, but consumers also are screened to determine if they pose a credit risk.

This process may seem “counter-intuitive,” Cordray said, because consumers are opening up checking accounts to deposit money and spend it later. Where’s the risk? Because of overdraft policies, banks and credit unions screen consumers to see how likely it is that they will incur overdrafts and pay them back.

Credit reporting agencies. Banks and credit unions often rely on reports from consumer reporting agencies when screening consumers, Cordray explained. There are many credit reporting agencies operating nationwide, despite the common view that there are only three agencies. A specialty consumer reporting agency associated with checking account screening would have a database of information on involuntary closures of checking accounts, check writing, and checking account history, the CFPB director said. The reports sold to banks and credit unions can tip the balance between a consumer being approved or rejected for a checking account.

CFPB areas of concern. Cordray said the bureau has three main areas of concern:

  1. the information accuracy of credit reports;

  2. consumers’ ability to access these reports and dispute any incorrect information they may find; and

  3. the ways in which these reports are being used.

Cordray said the bureau believes it is important for consumers to have “an effective avenue” of appeal available if they dispute inaccuracies in their credit reports. “If consumers cannot take steps to ensure that information about their account history is accurate, they will be unjustly hindered from re-entering or participating effectively in the banking system. That is a concern for us,” he stressed.

Cordray said the bureau will explore how consumers are getting information on their rights to obtain copies of their reports from specialty consumer reporting agencies and to what extent they are exercising those rights.

The CFPB director said that it is “troubling” that banks or credit unions may use a credit report to exclude some consumers from basic financial services such as depositing and transferring funds. Alternative financial services, such as check cashing and money orders, often are less convenient, more costly, and have fewer consumer protections than checking accounts.

Cordray emphasized the last area of concern, how reports are being used, saying that the question “is an interesting and important one.” The CFPB is “especially interested to learn more about how the screening system could be used to help institutions better meet the needs of these consumers, rather than simply excluding them from the banking system altogether.”

Bureau intentions. The bureau intends to learn more about checking account screening practices, Cordray said, and will consider how to balance the needs of banks and credit unions with the needs of consumers for access and protection. “We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude ‘black lists’ where consumers are turned down for an account simply because their name appears on the list.” He provided a specific list of questions the CFPB will be exploring:

  • How can the screening process be improved to identify consumers who could, or should, be given second chances at checking accounts?

  • Can checking accounts products that minimize risk, making screening less important, be made more widely available to consumers?

  • What improvements can be made to the way information is provided to the specialty credit reporting agencies and is processed and reported by those agencies?

  • What can regulators do to encourage a market that provides appropriate products for all kinds of consumers?

Finally, Cordray emphasized that the CFPB has the authority to supervise the larger depository institutions and the larger consumer reporting agencies for compliance with federal consumer financial protection laws. The bureau, he said, intends to continue researching and monitoring the market “carefully.”

CBA input. The Consumer Bankers Association responded to Cordray’s remarks at the forum by expressing its belief that “all U.S. consumers should have access to checking accounts with upfront fee disclosures and clear terms.” CBA President and CEO Richard Hunt said that CBA member banks “make every effort” to open checking accounts for consumers, but because banks must comply with federal safety and soundness rules, a “small percentage” of consumers are unable to set up traditional checking accounts.

Companies: Consumer Bankers Association.

MainStory: TopStory BankingOperations CFPB ConsumerCredit FairCreditReporting

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