United States: Financial Missteps And Equal Access: Is Bounced Check History Now Private Information?

Last Updated: July 18 2014
Article by Elena A. Lovoy

A consumer reporting agency may collect and compile this information, and it may be accessed, but others cannot use it

If you want to open a consumer checking or savings account at a bank, credit union or other financial institution, the institution will usually review your consumer report obtained from a third-party vendor. These reports include information from other financial institutions regarding your deposit account activities, including the reasons your prior accounts were closed, your overdraft check history and information regarding fraudulent activities impacting your accounts, such as identity theft. An institution will then evaluate the positive and negative information in this report to determine whether to open the account and/or the type of account available to you. There are a number of companies that collect this information and provide this service to financial institutions, such as ChexSystems Inc. and Early Warning Services, LLC. These vendors are considered specialty consumer reporting agencies, are subject to the federal Fair Credit Reporting Act (FCRA), and have been providing these account screening services to financial institutions for years.

Normal business practices

Account applicants generally receive and sign disclosures that authorize the financial institution to obtain a consumer report and advise the applicant that they will be notified if the institution decides not to open the account due, in whole or in part, to adverse information in the consumer report. The Federal Deposit Insurance Corporation (FDIC) has noted that "[e]very bank decides for itself how to evaluate the information in a consumer's report" and "just as a negative credit report can hurt your ability to borrow from a financial institution, a [negative] checking account history ... can hurt your ability to open a new account." These account screening practices have been an integral component of know your customer due diligence and risk management programs at many financial institutions. A financial institution may not, after all, want to open a checking account for someone with a history of writing bad checks and incurring nonsufficient funds fees that may remain unpaid.

New perspective

The New York State Attorney General, however, has a different point of view. On June 16, 2014, Attorney General Schneiderman announced that Capital One had agreed to revise its policies on the use of these specialty consumer reporting services in evaluating new deposit account applicants. Capital One will, as of year-end, no longer use these consumer reports to predict whether prospective account customers present credit risks. Prospective customers do not need to opt-out to restrict the use of this information by Capital One. Capital One will continue to use these consumer reports to screen for past frauds, but any reports of overdraft check history or other financial missteps in a prospective customer's past will be ignored.

If the FCRA permits consumer reporting agencies to collect this information and financial institutions to access this information, and Capital One and its vendor were complying with all of the requirements under the FCRA, what was the problem? The Attorney General alleged that such databases disproportionately affect lower income Americans by punishing them for relatively small financial errors, such as bouncing a check, and forcing them to resort to other financial services providers and products that are more costly than the checking and savings account products offered by most traditional financial institutions. The Attorney General claimed the use of prior financial missteps, such as bounced check history, was an unnecessary screening criterion that prevented lower income individuals from having "equal access" to Capital One's banking services and to the nation's banking system.

These comments are interesting — since most states consider the bouncing of checks, in certain situations, to be a criminal activity. Financial institutions may also be required to file a Suspicious Activity Report with the Financial Crimes Enforcement Network regarding certain bounced check activities of its customers. Also, absent from the Attorney General's announcement was any statistical analysis documenting that lower income consumers bounce checks more often than other groups. The middle class, wealthy, and 1 percent among us bounce checks too.

The press release was short on data and drama. It is interesting to see a regulator or enforcement authority raise a disparate impact claim without any supporting statistical data. The press release noted only some general data regarding the number of unbanked or underbanked residents in New York, but this data was not tied in any way to Capital One's account screening practices. There may be statistical data documenting that lower income individuals had been disproportionately harmed by Capital One's practices, but the Attorney General did not trumpet any such documented disparities in his press release. Also, absent from the press release were the "victim stories" we often see in these announcements.

Next steps

Financial institutions and other companies should take note of this recent agreement between Capital One and the New York State Attorney General. Certain information lawfully collected by consumer reporting agencies and lawfully used by financial institutions may now be off-limits. Financial institutions should review their deposit account opening procedures and consider making appropriate changes to ensure that the criteria used to evaluate applicants for new accounts does not present similar disparate impact concerns. Financial institutions and other companies may also want to review their routine screening criteria used in evaluating prospective employees, vendors, and others to determine whether the criteria may also raise "equal access" concerns.

Open for discussion

The end result — some consumer financial history may now be private. A consumer reporting agency may collect and compile this information and a financial institution or others may access this information, but they cannot use it. What other consumer information will become off-limits to financial institutions and others in this information-based economy to promote more "equal access" to products and services?

Previously published in Inside Counsel

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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