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CFPB Examining Use of Credit Reports for Checking Accounts
Friday, October 10, 2014 6:30 AM

On Oct. 8, the Consumer Financial Protection Bureau held a forum on access to checking accounts in Washington, D.C. to determine how it could get financial institutions and their partnering credit reporting agencies to have more consistent polices and share accurate data.

CFPB Director Richard Cordray said some consumers are unable to open an account because of marks on their credit report, regardless of whether it's factual. Such consumers also face greater overdraft charges if they do open an account because they are perceived as riskier credit.

"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," Cordray said. "We envision a process that better understands consumers' needs and can provide an account that is appropriate to their personal circumstances."

Consumers who struggle to pay their bills each month or who have problems managing their checking accounts risk overdrawing them. This frequently results in stiff penalties. The CFPB found that the median overdraft fee was $34 in 2012. Overdraft and non-sufficient funds (NSF) fees account for the majority of checking account fees charged to consumers. These fees quickly add up, and consumers who are unable or unwilling to repay what they owe end up losing their accounts. This can have serious consequences for consumers, affecting their ability to open a new checking account for several years. While some accounts are closed because of fraudulent behavior, most are closed due to overdrafts.

Cordray said financial institutions screen consumers to determine if they pose a credit risk, which is a concern because it could leave riskier consumers vulnerable to overdraft charges or being blocked from a checking account entirely.

"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—as we expressed in the 'ability to repay' rule we adopted in the mortgage context," 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."

The agency is specifically watching how financial institutions use data from so-called "specialty" reporting agencies that are beyond the main three credit reporting bureaus to determine a consumer's credit risk.

"The specialty consumer reporting agencies typically generate reports focused on information that is primarily derogatory about a consumer," Cordray said. "This includes charge-off amounts, past non-sufficient funds activity, unpaid or outstanding bounced checks, overdrafts, involuntary account closures, and fraud."

The CFPB is focused on three main areas within this data transfer: the accuracy of the reports; accessibility of the reports and ability to dispute any errors by the consumer; and how the reports are being used. A primary concern from the CFPB is that there are inconsistent policies and practices at each financial institution, and also inconsistencies in how financial institutions separate principal and fees when they report overdue balances to collection agencies.

"Depending on how careful and conscientious a bank or credit union may be in passing information along, the quality of its policies and procedures can profoundly affect the accuracy of screening decisions for consumers," Cordray said. "In the face of these challenges, we are interested in understanding what procedures they follow, and what alternatives are possible."

Cordray added that they also wanted to look at whether having better data might help a bank or credit union "make more nuanced decisions" in account screening rather than giving a "yes" or "no" response.

"This kind of assessment might provide greater access to the banking system," he said. "We will continue to research and monitor this market carefully."