As if credit unions didn’t have enough regulatory burden already, the CFPB threw another iron into the fire when it hosted an Oct. 8 forum on checking account accessibility.
Providing mainstream financial services to the unbanked is a noble effort. Just ask the thousands of credit unions that serve this market, and the thousands more that offer second chance checking accounts.
But rather than sing the praises of credit unions, CFPB Director Richard Cordray criticized them, shaming the practice of denying checking accounts due to negative records.
Same song, new lyrics. Yet again, credit unions were stunned that the CFPB included them in the “part of the problem” category along with reporting agencies and check cashers.
Yes, credit unions turn down consumers with Chex Systems records. The policy varies from credit union to credit union, based upon business plan and risk tolerance. A low-income credit union will naturally have a higher threshold than one that serves well-paid employees with stable jobs. The NCUA references this in guidance to examiners regarding LICUs.
However, that LICU is also expected to develop a detailed risk policy on the topic and price to cover risk. If it doesn’t, it has some ‘splaining to do to not only its examiner (hello, BSA regs) but also the insurer that issues its bond coverage.
For its part, the CFPB stressed it doesn’t take issue with credit unions screening checking applicants, and further clarified it is concerned with consumers denied accounts due to excessive NSF records and involuntary account closures, not those flagged for fraud.
Still, the CFPB clearly doesn’t understand excessive NSFs are an important component of risk management.
No institution likes to lose customers, and they don’t like to reduce the number of services per customer, either. So when an institution closes an account, it has a very good reason for doing so.
The CFPB is absolutely correct that access to mainstream transactional accounts is important to consumers. I’d go further and say it’s important for America’s economy.
And, as someone with a common name, I support the CFPB’s efforts to ensure reporting agencies produce accurate reports. Consumers should also have the right to contest records and rely upon a consistent reporting process. All noble causes.
However, the CFPB’s attitude toward overdrafts is troubling. While I support the bureau’s efforts to expose practices like reordering items to maximize overdraft income, the CFPB seems to be forgetting consumers also have a burden of personal responsibility.
A reader commented on our site that checking accounts aren’t a right, they’re a privilege. I don’t think the CFPB agrees with that position and neither do consumers.
Cordray also said that transactional accounts aren’t credit, and shouldn’t be screened as such.
Wrong. The traditional checking account is indeed structured to provide a bit of credit to qualified applicants. Accounts overdraw. Automatic payments are arranged before payroll funds arrive. And every day, customers ring up hundreds or thousands of dollars in negative balances before abandoning the account, leaving the institution to write off the loss. Like loans, credit unions must account for those potential losses.
For those who abused previous transactional credit, there are other options. They’re called prepaid debit cards, money orders and cash.
Wal-Mart’s new GoBank account will not require a Chex Systems screen, will not charge for overdrafts and will waive monthly account fees with a $500 monthly direct deposit. But make no mistake: The FDIC-insured GoBank will need to cover that risk somehow. Wal-Mart also said it will use “proprietary underwriting” to screen the accounts. Time will tell if the CFPB approves of Wal-Mart’s screening policy.
The combination of pressure from the CFPB and competition from disruptors like GoBank will likely produce two results. If forced to loosen checking screening standards, credit unions will raise fees to offset the risk. Others may potentially stop offering checking accounts altogether, electing to create a new transactional service that reduces loss risk.
For consumers, this could mean less access to mainstream financial services, not more. And it would certainly increase costs to consumers.
Believe it or not, the CFPB is a member of the FFIEC. That interagency body needs to be more proactive in working with the CFPB to explain financial institution risk responsibilities, so the relatively naïve agency can avoid the gaffes and unintended consequences that have plagued it so far.
Heather Anderson is executive editor of CU Times. She can be reached at firstname.lastname@example.org.