CFPB Is Taking Far-Reaching Look at Checking Account Access

WASHINGTON — What initially appeared to be a listening session by a key federal regulator about access to checking accounts has sparked concerns that the agency may be seeking to go much further in dictating how and when banks open accounts for consumers.

The Consumer Financial Protection Bureau held a forum earlier this month on "access to checking accounts" in which it heard from industry representatives, consumer advocates and government officials on how banks screen customers who apply for one.

But in opening remarks, Richard Cordray, the agency's director, delved deeper, raising issues about overdraft protections, how banks report and use credit scores, and gauging a consumer's credit risk. Although some of these concerns have been raised individually in the past, observers said the speech was a turning point, indicating that the CFPB is taking a system-wide dive into how banks operate, not just in targeting the underbanked or underserved.

"The CFPB looking into the process of how bankers screen accounts is pretty much an unprecedented step," said Rich Walker, a managing director at Winterberry Group and former marketing executive at Capital One Financial. "They've been looking at disclosures, fair lending, student lending, overdraft, debt collection and other areas. But when you start to get into the process bankers use to open accounts, it's just a very different focus."

To be sure, the CFPB has looked at checking accounts in the past when it comes to areas such as overdraft fees and how checking accounts are marketed to consumers. The agency has also repeatedly warned against lenders and credit reporting agencies sharing inaccurate information about consumers.

Yet Cordray's remarks at the forum were the first time he put all of these issues together. It sparked concerns by the industry, particularly when he suggested the CFPB was looking at how banks screen a customer to assess their credit risk.

"Banks and credit unions also screen consumers to determine if they pose a credit risk. Now, this might seem counter-intuitive. After all, consumers are opening up a checking account to deposit money and spend it later, none of which would seem to pose any credit risk," Cordray said during the forum. "But most banks and credit unions also have overdraft policies that allow consumers to have negative balances. So the screening system is used to determine how likely it is that the consumer will incur overdrafts and pay them back."

A spokesperson at the agency cautioned that Cordray was not indicating banks should stop screening customers or assess their credit risk.

"We recognize the importance of institutions' risk mitigation work and support the work of our partner regulators," the spokesperson said. "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."

Still, Cordray's remarks tying credit risk to overdraft amplified speculation that the CFPB could put more restrictions on overdraft fees and policies when it issues its long-expected rulemaking on payday products.

"One of the things you could read between the lines here is that this could be a preview to the rule that's expected soon on short-term, small-dollar lending," said Donald Lampe, a partner in the financial services group at Morrison & Foerster. "The question is whether that rulemaking is going to cover deposit-advance products or overdraft features" and Cordray's remarks could be "his way of saying overdraft is nothing but credit."

The Oct. 8 forum was also timely considering that a day later, the CFPB cited M&T Bancorp for deceptively marketing a free checking account program. The $90 billion-asset bank based in Buffalo agreed to pay $3.1 million in fines and reimbursement and revise the credit reports of customers whose accounts were closed.

M&T is an example of at least two areas the CFPB warned about during its forum: that it would heavily scrutinize the accuracy of consumer reports and the types of checking accounts being offered to consumers, particularly when it comes to the underserved, underbanked or a protected class of people.

"For consumers who lose their account privileges and are put out of the banking system, they are forced to rely on other ways to manage their financial lives. These alternative financial services, such as check cashing and money orders, often are less convenient, more costly, and have fewer consumer protections," Cordray said. "One interesting area of innovation involves technology that may lead to improved, low-cost transaction accounts, which do not include any overdraft or other credit feature, and which are accessed either through traditional branch networks, or through alternative channels. As these innovations evolve they may change the dynamic considerably, especially if we can ensure the same kind of robust consumer protections that the law imposes on checking accounts offered by banks and credit unions."

Most observers said part of the reason the CFPB is looking into this area now is that there are broader regulatory concerns with so-called specialty consumer reporting agencies that are outside the main three credit reporting agencies. These agencies typically have databases on how many times a consumer overdrew their account or wrote a bad check.

Earlier this year, New York Attorney General Eric Schneiderman sent letters to six major banks, including Capital One and Bank of America, inquiring about the databases they use to block checking account access to certain New York consumers, according to published reports.

During the CFPB forum, Cordray said the information these agencies provide is "primarily derogatory about a consumer" and the system lacks not just accurate, but consistent information being reported by banks across the board.

Cordray "doesn't just talk about the credit reporting information being inaccurate, what he's really talking about is the type of information that banks are reporting to these agencies and the data they are receiving back, which is another matter," said James Huizinga, a partner at Sidley Austin LLP within the consumer financial practices area. "If the bureau is going to dictate what information banks must report to credit bureaus and what information they must use in making their business decisions, that's going a lot farther than current regulation.

Huizinga added that the industry already has incentives to open as many accounts as possible.

"I would be concerned that an effort to standardize the information that is reported or used could limit innovation to the detriment of both consumers and business," he said.

More than 80% of banks use specialty consumer reporting agencies to screen for a bank account, according to a letter released by the National Consumer Law Center and the Cities for Financial Empowerment Fund in conjunction with the hearing. But consumer advocates say using their databases has blocked millions of consumers from gaining access to a bank account because of negative histories that could have inaccurate information since there are no set standards for how banks report.

"At least with the major credit reporting agencies, they have a standardized system for reporting so everyone [including the banks] speaks the same language," said Chi Chi Wu, staff attorney at the National Consumer Law Center. With the specialty consumer reporting agencies, "the account screening system lacks such clarity. So some banks will only report a consumer based on an unpaid overdraft over a certain threshold, such as $100, while other banks will use a lower amount. Banks also vary on how long an account is overdrawn before they close the account and report the closure."

Consumer groups also question banks for denying a checking account to someone because of a negative history of overdrawing funds when overdraft fee practices are being heavily scrutinized by the CFPB. Wu said banks can flag a consumer for past "account abuse" when it was really an overdraft policy that triggered fees that caused the consumer to have a deficient account.

"With some banks, they are using the term 'abuse' with respect to the consumer when it was the overdraft practices that caused the problems in the first place," Wu said. "We hope there will be continued focus and attention paid to this because there are a lot of consumers that we think have been unfairly shut out of system he banking system."