On Wednesday, in a speech at the Forum on Access to Checking Accounts CFPB Director Richard Cordray returned to two of his most frequent themes – the consumer reporting process and urging actions that he is unable to mandate. Specifically, he raised concerns that some consumers are being unfairly prevented from opening checking accounts. These concerns stem from the practice of using consumer reports from specialty consumer reporting agencies to screen prospective accountholders based on their past checking account activity, e.g., involuntary closures, account history, and overdrafts. Director Cordray raised three specific areas of concern: (1) checking account screening is being based on inaccurate consumer reports, (2) consumers may not be aware that they can access and dispute incorrect information in these reports, and (3) that the reports were being used “unfairly.” With respects to the alleged inaccuracies in the consumer reports, Director Cordray indicated that these specialized reports generally focus heavily on negative information, like charge-off amounts, insufficient funds, overdrafts and the like. He further stated that differences in how institutions investigate fraud, define involuntary account closures, the timing when accounts are closed, and how different depository institutions report this information to the reporting agencies is causing too many inaccuracies in these reports. Other material differences he noted included whether principal and fees are separated out, if charged-off balances are sold or assigned, and the quality of the information that is passed along to the reporting agencies. Director Cordray said that the CFPB was interested in understanding what procedures are followed by the various depository institutions, how the quality of the information can be improved, and whether improved information would allow financial institutions to engage in less binary screening practices.
The second area of concern was whether consumers are aware that they can access their report and correct any inaccuracies. Director Cordray re-iterated the CFPB’s November 2012 warning that nationwide specialty consumer reporting agencies have an existing obligation to, upon request, provide a free copy of the consumer’s report each year and correct any inaccuracies. Director Cordray said that the CFPB wanted to “explore” how consumers are being informed of these rights. He also expressed an interest in understanding how frequently consumers were taking advantage of these rights by requesting a free copy of their report or making a dispute.
Lastly, the speech characterized the screening practice as being too broad. Director Cordray posited that since these accounts have a very limited credit risk, rigid credit screening was causing financial institutions to exclude too many consumers from this basic financial product. He concluded that this exclusionary impact is forcing these consumers to use alternatives to checking accounts that are “less convenient, more costly, and have fewer consumer protections.” His proposal is to have the industry develop low-cost transactional checking accounts that do not have any overdraft protections. The removal of overdraft protection, a form of credit, alleviates the need for risk screening. Without risk screening, more consumers would be able to open checking accounts.
The speech concluded with both a prediction and a warning. Director Cordray sees a future where financial institutions are less reliant on rigid screening and more consumers are able to open checking accounts, including consumers with past checking account problems. He warned that the CFPB will continue to research and monitor this issue.
A copy of the full prepared remarks is available here.
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* Thumbnail image from REUTERS/Joshua Roberts