Why it matters

Taking a deep dive into the area of checking accounts, the Consumer Financial Protection Bureau (CFPB) sent a letter to 25 of the largest retail banks "encouraging them to make available and widely market lower-risk deposit accounts that help consumers avoid overdrafting" and issued a Compliance Bulletin warning banks and credit unions that the failure to meet accuracy obligations when they report negative account histories to credit reporting agencies could result in Bureau action. "Consumers should not be sidelined out of the basic banking services they need because of the flaws and limitations in a murky system," CFPB Director Richard Cordray said in a statement. "People deserve to have more options for access to lower-risk deposit accounts that can better fit their needs." The letter urged banks to offer lower-risk products (such as "no-overdraft" accounts) and advertise them during sales consultations and on their websites. As for the Bulletin, the CFPB cautioned financial institutions that they must have systems in place to ensure the accuracy of information passed on to consumer reporting companies such as negative account histories of overdrafts, fraud, or bounced checks—or face enforcement action.

Detailed discussion

Hosting a field hearing in Louisville, Kentucky, to address the topic of checking accounts, the Consumer Financial Protection Bureau (CFPB) took a multifaceted approach to the issue. In addition to issuing the first Compliance Bulletin of the year emphasizing the obligation of banks and credit unions to comply with the requirements of the Fair Credit Reporting Act (FCRA), the Bureau sent a letter to some of the country's top retail banks with "a suggestion" to consider while servicing customers.

Compliance Bulletin 2016-01 provides a warning to banks and credit unions about their obligations under the statute and its regulations.

Regulation V of the FCRA mandates that furnishers establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information relating to consumers that they furnish to consumer reporting agencies (CRAs). This requirement applies to the furnishing of all CRAs, including specialty CRAs, and encompasses the furnishing of deposit account information, the CFPB said.

But according to the Bulletin, the Bureau's supervisory experience suggests that some financial institutions are not compliant with these obligations.

"Furnishers' establishment and implementation of reasonable policies and procedures regarding the accuracy and integrity of information are essential components of a fair and accurate credit reporting system," the CFPB wrote. "Such policies and procedures protect against the furnishing of inaccurate information that could potentially cause adverse consequences for consumers when included in a credit report, such as being denied a loan at a more favorable interest rate or being unable to open a transaction account."

The policies and procedures must be appropriate to the nature, size, complexity, and scope of each furnisher's activities, the Bureau explained, and furnishers should consider the factors found in the Interagency Guidelines Concerning the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies, such as the types of business activities in which the furnisher engages, the nature and frequency of the information the furnisher provides to CRAs, and the technology used by the furnisher to provide information to CRAs.

The policies and procedures must encompass the financial institution's furnishing to all types of CRAs, the Bureau said, from nationwide CRAs to specialty CRAs. Recognizing that the type, frequency, and nature of the information furnished to CRAs can "vary significantly," the Bulletin reminded financial institutions that the burden falls to them to have "reasonable written policies and procedures" for each of the CRAs to which it furnishes.

"The CFPB will continue to monitor furnishers' compliance with the Regulation V requirement to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of all furnished information," the Bureau warned. "Furnishers must ensure that they have such policies and procedures in place with respect to all information furnished. If the CFPB determines that a furnisher has engaged in any acts or practices that violate Regulation V or other federal consumer financial laws and regulations, it will take appropriate supervisory and enforcement actions to address violations and seek all appropriate remedial measures, including redress to consumers."

But the CFPB wasn't done. The Bureau also sent a letter to 25 of the top retail banks in the country, suggesting that they consider a third possibility to the current binary system of either opening a checking account for consumers that pass a screening process to identify credit risks or denying an account to those deemed too risky.

Offer all applicants a lower-risk account, the CFPB proposed, whether a checking account or a prepaid account, where the applicant cannot pose the same level of risk to the institution. An estimated 10 million American households are currently "unbanked," the letter from Director Cordray said, and "we have come to think that banks and credit unions can do more to provide consumers with opportunities to access appropriate products that will give them a better chance to handle their inflows and outflows more effectively."

Such lower-risk products that are specifically designed to prevent overdrafts and overdraft fees can help consumers manage their spending and maintain accounts in good standing, limit risk to financial institutions, and enable banks and credit unions to accept more applicants, the Bureau wrote.

A review of the websites of the letter recipients revealed that only eight of them marketed a "no-overdraft" product on the same page as the traditional checking account option, while seven other institutions offered a product with no authorized overdrafts but did not feature it on the main menu of checking account offerings. Ten of the banks and credit unions did not appear to offer any options for a lower-risk account designed to prevent overdrafts, the CFPB said.

"We therefore are urging all financial institutions to make these lower-risk offerings broadly available to consumers," according to the letter. "We urge banks and credit unions that do not currently offer transaction accounts designed to help consumers avoid overdrafts to do so. We further urge institutions that already offer such accounts to feature them among their standard account offerings both in their branches and online. The lack of marketing for these products, in particular, has lessened their visibility and undermined their rate of uptake among consumers who might otherwise benefit from their availability."

The CFPB also released resources for consumers, including a guide to selecting a checking account and a consumer advisory about handling checking account denials.

To read Compliance Bulletin 2016-1, click here.

To read the letter from the CFPB to financial institutions, click here.