When you go to a financial institution to open a checking or savings account, a representative may obtain a consumer report from companies that track checking account related information. Checksystems is an example of such a company.
By law, certain “consumer reporting” companies can collect information from banks and credit unions relating to a consumer’s checking account, such as the reasons an account was closed. These companies are similar to credit bureaus that track how consumers meet their debt obligations.
Under the Fair Credit Reporting Act (FCRA), a checking account closed by an institution because of account holder mismanagement, and most other negative information, can continue to appear in consumer reports for up to seven years. When a consumer wants to open a new deposit account, the institution may access such a report.
- Anytime a consumer report provides a score (e.g., Qualifile score), if score Is NOT used in credit decision, it is recommended the score be suppressed to prevent potential issues with disclosure of score to the consumer.
On an interrelated issue, on May 5, 2016, FinCEN announced a customer Due Diligence (CDD) Final Rule, proposing Beneficial Ownership legislation, and regulations related to foreign-owned, single-member limited liability companies (LLCs) (NOT widely traded entities). The final rule became mandatory on May 11, 2018.
- The CDD Final Rule added a new requirement that financial institutions – and certain other entities – collect and verify the personal information of the real people (also known as beneficial owners) who own, control, and profit from companies when those companies open accounts.
- Commercial Accounts – To pull consumer reports on beneficial owners or authorized signers (without account liability) the institution must have written permission. Otherwise, the institution cannot pull consumer reports on these individuals since the commercial customer (ABC, Inc.) is the customer and not the beneficial owners.
- When pulling consumer reports on authorized signers (with written permission), if one of the individuals has derogatory information, the institution cannot divulge the derogatory information to the company without written permission.
Once consumer reports are pulled on potential individual account owners and/or those with account liability (in the case of the Beneficial Ownership rule), suppose the verdict is that the consumer is NOT eligible for the account? An example could be that the consumer is NOT eligible because an institution previously closed the consumer’s account due to unpaid overdrafts.
Just as a negative credit report can hurt the consumer’s ability to borrow from a financial institution, a checking account history that shows a closed account can hurt the consumer’s ability to open a new account.
If the financial institution used a report from a reporting service in deciding not to open a deposit account, it must inform the consumer of the name and contact information for the company. A disclosure is provided to the consumer denied the deposit account. If some information is wrong, getting it corrected may enable the institution to open a new account.
The reporting services also must provide guidance on how to dispute the information. Generally, the consumer should inform the reporting agencies, in writing, about information that is inaccurate, and provide copies of any available supporting documentation, although, supporting documentation is not required.
Under the FCRA, the consumer is entitled to one free copy of their report every 12 months and any time that a report is used against them, such as an “adverse action” when their application is denied. The consumer has a right to dispute any information in the report that is incomplete or inaccurate. Negative information in a report may include checks written without sufficient funds in the bank account, account closed with negative balances (fees owed to a bank), and transactions considered potentially fraudulent. Merchants may have also reported to these services any “bad” checks that the consumer wrote to them – those that were returned unpaid by the consumer’s financial institution.
Some financial institutions offer “second chance” accounts that give an option to some consumers unable to open a regular checking account.
Second chance accounts generally have higher fees and more restrictions than traditional accounts but are still less expensive and more convenient than the alternatives of paying check-cashing and money-order fees.
Potential second chance restrictions include: a lower dollar limit on daily withdrawals; deposits of only “official” checks, such as cashier’s checks or money orders; requirements to open and manage a savings account for several months before the consumer can have a checking account; and only allowing debit card transactions, which can limit withdrawals to the balance in the consumer’s account (i.e., overdrafts are not allowed).
Institutions may be less likely to allow consumers to open a checking account within a year after your account was closed due to overdrafts, suspected fraud or certain other issues. But if a balance at a previous institution has been paid in full, the new institution may be more willing to open a new account for the consumer.
As financial institution representatives, we should encourage our customers to be on guard against fraud artists and unscrupulous companies that offer to “repair” or “erase” checking account (or credit) history, particularly if these companies charge a fee and “guarantee” a specific result. If the history of a closed account is accurate, the reporting services have no obligation to remove that information and the account closing will remain in the customer’s file for up to seven years unless the bank or credit union that supplied that information asks that it be removed or there is a reason to do so under the law.
1. A consumer report containing negative information may cause your financial institution to deny a Customer a checking or savings account.
2. The institution can pull a consumer report on any Beneficial Owner on a Commercial applicable account.
3. A disclosure is provided to a consumer denied a deposit account on the basis of adverse action contained in a consumer report.
4. Negative information can remain in a consumer report for up to five years.
5. If a consumer is denied a deposit account on the basis of negative information contained in a consumer report, the institution should advise the consumer to contact a consumer history “repair” company.