CFPB Flags Checking Accounts
The CFPB said it 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 Oct. 8 checking account access and screening forum hosted by the bureau, CFPB Director Richard Cordray was critical of credit unions and banks using consumer reporting agencies to screen for checking accounts. In the speech, 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,” he added.
Cordray defined specialty 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.
“As we examine these issues, we recognize the importance of institutions’ risk mitigation work and support the work of our partner regulators. We are 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 excluding them from the banking system,” a CFPB spokesperson said.
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.”
Mary Dunn, CUNA SVP and deputy general counsel, said credit unions want to do as much as possible to prevent fraud.
“Credit unions that conduct account screening do so in large measure to protect their other members,” she said. “As consumer financial cooperatives owned by the members, credit unions want to do all they can to minimize fraud against their institutions because the costs of handling issues like fraud are borne by the credit unions’ membership.”
Phil Tschudy, media relations manager at CUNA Mutual Group, said the company's insurance policies do not contain specific requirements for checking account screening.
“Our insurance policies, including our fidelity bond, do not have any specific requirements for the credit union to perform due diligence on prospective members seeking to open an account,” he said.
“We strongly emphasize the importance of risk management and encourage credit unions to perform due diligence in accordance with the risk management framework they have built for their organization, Tschudy noted, adding the CFPB has not contacted CUNA Mutual about checking account screening.
NCUA Public Affairs Specialist John Fairbanks told CU Times the NCUA and the CFPB each have a responsibility to protect consumers with the goal of making affordable financial services available.
“Credit unions need to have procedures in place to manage risk and to comply with Bank Secrecy Act requirements for establishing a prospective account holder's identity,” he said. “Reviewing an applicant's credit history is an accepted practice prior to opening a checking account, and credit unions generally give applicants opportunities to repair bad credit histories.”
In his speech, the Cordray also expressed concern about the accuracy of the reports and consumers’ ability to access them and dispute incorrect information.
“Some banks or credit unions separate out the principal and fees when they report overdue debts; others do not,” he said. “Some update their reports daily and others monthly. Sometimes charged-off balances are sold as debts or assigned to collectors,”
Cordray told the forum's 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 the bank 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 accounts, 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.
Stuart Pratt, CEO of the Consumer Data Industry Association, told CU Times 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,” he explained. “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.”
Marvin Umholtz, president/CEO of Umholtz Strategic Planning & Consulting Services, told CU Times the CFPB could hurt the consumers it is trying to help.
“Federally insured depository institution checking accounts for the unbanked, underbanked, underserved, low-income populations, etc., are never going to fill the gap that is better handled by ApplePay and the Walmart-GreenDot GoBank mobile access alternatives, not to mention the existing check cashers and others,” Umholtz said.
“The more the CFPB and the strident consumer activist groups mess up the marketplace with restrictions and limitations, the fewer Americans will have access to financial products and services. Rather than promote financial inclusion, the CFPB has been the leading federal agency in aggressively promoting financial exclusion,” he added.