Are banks and credit unions overusing credit reports to blacklist consumers from engaging in banking activities?

Speaking at the Consumer Financial Protection Bureau’s (CFPB) Forum on Access to Checking Accounts, Director Richard Cordray expressed concern that the answer might be “yes.”

While considerations such as the ability to repay a loan or a history of overdrafts are relevant to the industry, Cordray said such information may be “overused” and the Bureau finds it “troubling that banks or credit unions may use a credit report to exclude some consumers” from basic financial services, such as opening a checking account.

Checking accounts are one of the most widely used financial products, with 200 million Americans receiving their wages and paying their bills using their accounts. Consumers who open a new account are screened for various risks, Cordray explained, such as fraudulent or illegal conduct (such as money laundering) as well as credit risks, typically used to gauge how likely a consumer will incur overdrafts and pay them back.

Credit reporting agencies and specialty consumer reporting agencies – with data on a consumer’s history with regard to medical payments, tenancy, employment, or insurance claims – can “greatly affect how consumers are treated,” Cordray said, causing the CFPB concern in three areas: the accuracy of the reports, consumers’ ability to access the reports and dispute any incorrect information, and the ways the reports are being used.

Specialty consumer reporting agencies, in particular, generate reports focused on “derogatory” customer information, such as charged-off amounts, past nonsufficient funds, overdrafts, involuntary account closures, and unpaid or outstanding bounced checks.

Cordray queried the accuracy of such reports, with broad variations between how items are reported. For example, “we believe the definitions used to report an involuntary account closure may vary industry-wide on some central points, such as how long a negative balance may go unpaid before it is charged off and the account is closed and reported to the consumer reporting agency,” ranging from 30 days to 120 days.

Other variations exist on how frequently reports are updated and whether principal and fees are separated when overdue debts are reported. Such variations can have a negative impact on consumers, Cordray said, and the Bureau is interested in “whether better data might enable a financial institution to make more nuanced decisions in account screening rather than simply reaching a binary ‘yes or no’ result,” which could yield greater access to the banking system.

A second area of concern for the CFPB: consumer access to their reports, whether they are able to get inaccuracies fixed, and consumer awareness of how the screening system affects their ability to access a checking account. “A financial institution’s qualification process is likely quite opaque,” Cordray told attendees. “At the Consumer Bureau, we believe it is important for consumers to know why they are turned away.”

Finally, the Director addressed worries about how the reports are being used. Most consumers do not use checking accounts as credit vehicles but 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,” shunting them into more expensive alternative financial options, such as check cashing and money orders, or joining the ranks of the unbanked, he said.

Asking questions such as “How can the screening process be improved to identify consumers who could or should be given second chances at checking accounts?” and “Can checking account products be made available to consumers more broadly that minimize risk, thus making screening less important?” Cordray said the Bureau envisions “a process that better understands consumers’ needs and can provide an account that is appropriate to their personal circumstances.”

“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,” he said.

To read Director Cordray’s prepared remarks, click here.

Why it matters: Cordray closed his remarks with a reminder that the CFPB has the authority to supervise the larger depository institutions and consumer reporting agencies for compliance with federal consumer protection laws, adding that the Bureau has issued a warning to specialty reporting companies to provide consumers with access to their reports. “We will continue to research and monitor this market carefully,” he warned. “The information used to determine [consumers’] eligibility for an account needs to be accurate so that the account screening process does not unfairly restrict their access to the banking system. We need to move from screening processes designed to make banks safe from consumers to ones designed to make them safe for consumers.” Banks and credit unions should expect that Director Cordray’s remarks will result in increased attention from examiners regarding their use of consumer reports during the deposit account opening process.