CFPB Eyes Checking Account Screening
WASHINGTON – The CFPB will review how credit unions and banks use reporting agencies to screen members when they open a checking account.
In his prepared remarks during a checking account access and screening forum hosted Wednesday by the bureau, Director Richard Cordray criticized credit unions and banks for using credit reporting agencies to screen for checking accounts. However, in his remarks he interchanged credit agencies with consumer reporting agencies like ChexSystems, which reports deposit account loss, fraud and NSF activity.
“It is one thing to use a credit report or similar type of consumer report as a means of assuring that consumers do not take on more risk than they can handle. Indeed, the bureau would be concerned if banks or credit unions were to grant credit to consumers without regard to their prior credit history,” Cordray said. “For most consumers, though, checking accounts are not inherently credit vehicles, but instead are products for depositing and transferring funds. So it is troubling then that banks or credit unions may use a credit report to exclude some consumers from these basic financial services.”
Cordray defined speciality consumer reporting agencies as those that report NSF activity, unpaid or outstanding bounced checks, overdrafts, involuntary account closures and fraud.
Cordray said these reports could contain too many “imperfections and inconsistencies” and emphasized that each financial institution has different reporting policies.
CFPB officials cautioned after the event the bureau is still in the review process and has not made any decisions about screening procedures. They further clarified that the bureau's concern is with institutions that deny accounts based on involuntary closure records, and not loss records or suspected fraud.
Michael Coleman, NAFCU director of regulatory affairs, defended the checking screening process used by credit unions.
"Screening applicants for share draft accounts can be an important tool for credit unions to mitigate against fraud risk," he said. "In terms of consumers access to traditional banking products, credit unions have unique relationships with their members, and work with their members to provide them with the types of accounts and products that they want and need, and that make sense for their member."
The CFPB director also expressed concern about the accuracy of the reports and consumers’ ability to access the reports and dispute incorrect information.
“Some banks or credit unions separate out the principal and fees when they report overdue debts; others do not. Some update their reports daily and others monthly. Sometimes charged-off balances are sold as debts or assigned to collectors,” Cordray said.
Cordray told the audience the CFPB has issued a warning to some specialty reporting companies.
“Federal law requires them to provide consumers with access to their reports,” Cordray said. “And we issued a consumer advisory informing people that they have a right to obtain their reports from the nationwide specialty consumer reporting companies for free each year. We will continue to research and monitor this market carefully.”
Following Cordray’s remarks, Helen Godfrey Smith, president/CEO of the $100 million Shreveport Federal Credit Union in Shreveport, La., moderated a panel about the checking account screening system.
Celia Edwards Karam, managing vice president of Capital One, said Capital One only screens applicants for fraud but aside from that, everyone is approved.
Smith pointed out that checking account information is being recorded, which could hurt consumers in the marketplace.
The $416 million First Hope Bank, located in Newton, N.J., works with customers before charging off their checking account, according to Cara Quick, vice president for compliance. She said parents and schools have to do a better job educating children about checking accounts and financial planning.
Dave Bowen, director of the $92 million Key Community Bank, located south of St. Paul, Minn., said sometimes customers get declined for a checking account at his bank because they have an outstanding balance elsewhere.
Bowen encouraged financial institutions to be mindful of the difference between fraud and someone who had a lot of overdraft charges during their college years.
Stuart Pratt, CEO of the Consumer Data Industry Association, told there are many different companies that aggregate consumer data for risk, which has created a lot of competition in the marketplace and spurred innovation.
Pratt said credit unions are furnishers of data to consumer reporting agencies.
“They will choose to furnish data on fraud – that’s the whole point of these databases. They become shared exchange databases where the next credit union down the road can benefit from the unfortunate bad experience of the previous credit union and that’s the whole point about a risk decision,” Pratt said.