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03/09/2017

Why the CFPB Thinks Your Data Stinks, and What You Must Do About It

Russ Newman March 9th, 2017

How good is the data your financial institution shares with consumer reporting agencies — the same data other FIs may rely on when deciding whether to approve or decline consumers’ applications for second-chance checking accounts? Not good enough, according to the Consumer Financial Protection Bureau.

Earlier in 2016, the CFPB sent out a compliance bulletin to banks and credit unions reminding them of their regulatory obligation to “establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information relating to consumers that they furnish to consumer reporting agencies.”

The bulletin goes on to attest “the supervisory experience of the Bureau suggests that some financial institutions are not compliant with their obligations under Regulation V with regard to furnishing to specialty CRAs.”

Making a big deal about bad data

Of course, the bulletin is part of a bigger push by the CFPB to ensure all consumers have fair access to the banking products they need, especially checking accounts. In a press release, the Bureau noted its goal is to “improve checking account access amidst Bureau concerns that consumers are being sidelined by the lack of account options and by inaccurate information used to screen potential customers.”

The CFPB’s objections seem rooted in the cyclical nature of consumer data used to make decisions about checking account applications. Banks and credit unions rely on information from CRAs when considering account applications. That information is typically provided by other financial institutions based on their experiences with the consumer. “Banks and credit unions should expect accurate information from checking account reporting companies to make fair assessments of deposit account applicants. If the system is tainted with incomplete, inconsistent, and inaccurate information, banks and credit unions cannot make informed decisions.”

Bad data and misinformed decisions can harm consumers who find their application for a deposit account denied. What’s more, the cycle is also detrimental to financial institutions that miss out on the opportunity to build their business with underserved and unbanked consumers.

Calling for more, better options

In addition to reminding FIs of their regulatory obligations to ensure their data is as accurate as possible, the CFPB has also urged banks and credit unions to “make available and widely market lower-risk deposit accounts that help consumers avoid overdrafting.”

Overdrafts, of course, are among the types of negative information that can show up in consumers credit reports — and the kind of problem that could prevent them from obtaining a new deposit account after their bank closes the overdrawn one, or block their attempts to get credit in the future. The prevalence of automated overdraft programs has spurred financial institutions to place “greater emphasis on screening new applicants for potential risks that may arise if a consumer exceeds his or her account balance,” the bureau says.

In response, the CFPB has urged banks and credit unions to help consumers avoid overdraft fees by offering them deposit account products that won’t authorize overdrafts. Such accounts would negate the need for overdraft fees since FIs would no longer “authorize (consumers) to spend money they don’t have.” What’s more, the Bureau urges FIs to market the value of such products to consumers. Nearly half don’t yet offer such deposit accounts, the CFPB says.

Better data is the answer

If the CFPB is right that 50 percent of FIs don’t offer overdraft-proof, second-chance deposit accounts, it’s easy to understand why. Historically, FIs have viewed consumers who’ve had an account closed because of unpaid overdraft fees as less desirable customers. Doing any kind of business with them has been viewed as risky.

Even FIs willing to offer unbanked customers a second chance with an overdraft-proof account may be unsure of the value of doing so. Many banks are unclear on how they might create more profitable relationships with those consumers.

Better data is the answer, one that will allow FIs to address the CFPB’s regulatory concerns and ensure FIs can develop more profitable relationships with second-chance consumers. Online customer acquisition solutions can help FIs identify potentially profitable new customers, reduce false positives and increase ROI. Products like Deluxe Detect offer the most up-to-date consumer information, including applicants’ histories, so FIs are able to make better, more informed decisions about whether to approve applications. With that kind of information at their fingertips, FIs can feel more confidence in offering overdraft-proof second-chance accounts.