Blunders from your past could come back to haunt you when applying for a checking account. Banks and credit unions can reject consumers based on specialized reports that track everything from your credit score to your banking history, including past bounced checks and overdrafts. And that has drawn scrutiny from federal regulators concerned about unfair exclusion from the mainstream financial system.
Around 200 million Americans use checking accounts, the Consumer Financial Protection Bureau says. But this screening process effectively creates a blacklist, one that in 2011 contributed to the 34 million people who remained unbanked or underbanked, according to the Federal Deposit Insurance Corp.
Unflattering information
More than 80% of banks use these special reporting services to decide whether to let someone open a checking or savings account, according to the National Consumer Law Center in Boston. Often, the reports contain unflattering financial information most consumers would rather forget, such as past non-sufficient funds situations and overdrafts.
“I think both of those combined is one of the root problems that are causing people to get screened out of their bank accounts and end up in the alternative system, where they’re much more vulnerable,” says Nancy Yuill, executive director of Innovative Changes, a nonprofit community development financial institution in Portland, Oregon. The group helps low-income consumers improve their finances and avoid the alternatives Yuill cites.
They can include buying money orders to pay bills, using check-cashing stores to obtain cash and payday lenders to make ends meet, moves that can spin them closer to financial trouble, according to a U.S. Postal Service study of the nation’s unbanked. It says consumers spent about $89 billion on interest and fees related to alternative financial services in 2012 alone.
Not credit reports
Separate from the traditional credit data compiled by TransUnion, Equifax and Experian, the specialized reports in question come from organizations like Early Warning and Chex Systems. As with credit reports, consumers are legally entitled one free copy each year and each time a report is used against them. Consumers can dispute information that they believe to be incorrect by appealing to the reporting agency, the FDIC says.
Low-income consumers are disproportionately screened out of checking accounts, Yuill says. As they tend to move frequently in search of affordable housing and job opportunities, bank statements and even bills don’t always follow in a timely way. That can lead to a cyclical trap where people struggling to pay rent or buy food incur overdraft fees and wind up shut out of the banking system. It doesn’t have to be this way, she says.
“If someone’s in that situation now, I suggest they look local,” Yuill says. “Look for local community banks and local credit unions that are going to listen and give them a chance to explain their situation and give them a chance to try again.”
Regulatory focus
The consumer bureau is spearheading efforts to ensure the accuracy of data collected by specialty consumer reporting agencies (CRAs) and to make it easier for consumers to review and correct their reports. Currently there are inconsistencies between various CRAs and financial institutions, which aren’t aligned on how information is compiled and used.
“We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude “blacklists” where consumers are turned down for an account simply because their name appears on the list,” Richard Cordray, the bureau’s director, said in a statement prepared for an Oct. 8 forum on access to checking accounts.
Consumers may not even know the specialized reports exist until they are denied a checking account because of the information they contain.
“A consumer who had an account closed and goes to open a new account at another institution may be utterly unaware of how his or her application will be judged,” Cordray said.
So if you’re looking to open a checking account soon and your financial history could be described as checkered, be prepared to dive into your past to remedy mistakes before you face a nasty surprise.
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