IBA Compliance Connection

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We are using ChexSystems to review customers before they open a checking account. If a customer receives a “declined” rating from ChexSystems, we will not decline the customer’s request to open an account but will offer a different type of checking account designed for that rating. Do we need to obtain customer authorizations before using ChexSystems? Do we have any UDAAP concerns here?

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No, we do not believe that you need to obtain a customer’s authorization before obtaining a report from ChexSystems. Under the Fair Credit Reporting Act (FCRA), your bank has a permissible purpose to pull a consumer’s credit report when it has “a legitimate business need for the information in connection with a business transaction that is initiated by the consumer.” When a consumer applies to open a deposit account, we believe that your bank has a permissible purpose to obtain the consumer’s report from ChexSystems.

We do not believe that offering a special account to consumers with “declined” ratings would raise any UDAAP issues. In fact, the CFPB has encouraged banks to offer lower-risk deposit accounts to customers who otherwise do not qualify for a deposit account, with an emphasis on providing and marketing accounts that prevent overdrafts and overdraft fees. We do recommend reviewing the account terms to ensure that they do not impose any unfair fees or unfairly restrict these customers’ transactions.

Note that in addition to providing a copy of the report to the “declined” rated consumers, your bank also should provide a formal adverse action notice. If any of the terms of the alternative checking accounts are less advantageous than the terms of your ordinary checking accounts, we believe that this would constitute an adverse action requiring notice under the FCRA. The FCRA requires an adverse action notice for any decision on a transaction initiated by a consumer that is “adverse to the interests of the consumer.” The FCRA applies to both credit and non-credit transactions, and it does not include an exception for instances in which the consumer is provided with a counteroffer (unlike the Equal Credit Opportunity Act (ECOA) adverse action requirements).

For resources related to our guidance, please see:

  • FCRA, 15 USC 1681b(a)(3)(F)(i) (“Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other: . . . (3) To a person which it has reason to believe . . . (F) otherwise has a legitimate business need for the information (i) in connection with a business transaction that is initiated by the consumer; . . .”)
  • CFPB Letter (February 3, 2016) (“We are pleased that a growing number of institutions already are finding ways to offer this full range of product choices to their prospective customers, and we applaud these efforts. We further recognize that some banks and credit unions have considerately designed their overdraft programs in ways that significantly limit the risk of accountholders incurring negative balances and related overdraft fees.”)
  • FCRA, 15 USC 1681a(k)(1)(B)(iv) (“The term ‘adverse action’ . . . means . . . an action taken or determination that is (I) made in connection with an application that was made by, or a transaction that was initiated by, any consumer . . . ; and (II) adverse to the interests of the consumer.”)
  • FCRA, 15 USC 1681m(a)(1) (“If any person takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person shall (1) provide oral, written, or electronic notice of the adverse action to the consumer . . . .”)