Thursday, May 5, 2016

CFPB Proposes Banning Mandatory Arbitration Clauses That Deny Groups of Consumers Their Day in Court (May 5, 2016 press-release re-post)

FOR IMMEDIATE RELEASE: May 5, 2016
CONTACT: Office of Communications Tel: (202) 435-7170

CONSUMER FINANCIAL PROTECTION BUREAU PROPOSES PROHIBITING MANDATORY ARBITRATION CLAUSES THAT DENY GROUPS OF CONSUMERS THEIR DAY IN COURT 

Bureau Seeks Comment on Proposal to Ban a Contract Gotcha that Prevents Groups of Consumers from Suing Consumer Financial Companies 
WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) is seeking comments on proposed rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court. Many consumer financial products like credit cards and bank accounts have contract gotchas that generally prevent consumers from joining together to sue their bank or financial company for wrongdoing. These widely used clauses leave consumers with no choice but to seek relief on their own – usually over small amounts. With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.
“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”
In recent years, many contracts for consumer financial products and services – from bank accounts to credit cards – have included mandatory arbitration clauses. They affect hundreds of millions of consumer contracts. These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for cases brought in small claims court. Where these clauses exist, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. As a result, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.
Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also gave the Bureau the power to issue regulations that are in the public interest, for the protection of consumers, and consistent with the study.
Released in March 2015, the CFPB’s study showed that very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration. The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies. According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct. The study showed that at least 160 million class members were eligible for relief over the five-year period studied. Those settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. In addition, these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. However, where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.
The CFPB proposal is seeking comment on a proposal to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal would provide the specific language that companies must use.
The proposal would also require companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases. This would allow the Bureau to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The Bureau is also considering publishing information it would collect in some form so the public can monitor the arbitration process as well. 
The benefits to the CFPB proposal would include:
  • A day in court for consumers: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law. Most consumers do not even realize when their rights have been violated. Often the harm may be too small to make it practical for a single consumer to pursue an individual dispute, even when the cumulative harm to all affected consumers is significant. The CFPB study found that only around 2 percent of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute. With class action lawsuits, consumers have opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.
  • Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers. Further, public attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly.
  • Increased transparency: The proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.
The proposed rules which the CFPB is seeking comment on would apply to most consumer financial products and services that the CFPB oversees, including those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money. Congress already prohibited arbitration agreements in the largest market that the Bureau oversees – the residential mortgage market.
In October 2015, the Bureau published an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback from small companies. In addition to consulting with small business representatives, the Bureau sought input from the public, consumer groups, industry, and other stakeholders before continuing with the rulemaking. That process concluded in December 2015 with a written report to the Bureau’s director, which is also being released today. 
The public is invited to comment on these proposed regulations when they are published in the Federal Register. Written comments will be carefully considered before final regulations are issued.
The March 2015 CFPB report on arbitration is available at: http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/
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Prepared Remarks of Richard CordrayDirector of the Consumer Financial Protection Bureau 
Field Hearing on Arbitration Clauses 
Albuquerque, N.M.May 5, 2016
Thank you to Albuquerque for the warm welcome you have given us.  This is our 34th field hearing since the Consumer Financial Protection Bureau first opened its doors and started traveling the country to listen to the everyday concerns of American consumers.  Each one of these field hearings has been valuable for us.  They give us insight and substance to inform our work, and they humanize the challenges posed in the financial marketplace.  So we thank you all for joining us today.  Hearing people’s stories, as told by them, sometimes in voices of steely determination, other times through tears as they recount their difficulties and frustrations, leaves an indelible mark on us as we turn back to analyze and address the issues they raise.  Let there be no doubt that these sessions motivate us to keep moving forward in our efforts to help make consumer finance markets work better for consumers.
Today we are proposing a new regulation for public comment and further consideration.  If finalized in its current form, the proposal would ban consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their customers the right to band together to seek justice and meaningful relief from wrongdoing.  This practice has evolved to the point where it effectively functions as a kind of legal lockout.  Companies simply insert these clauses into their contracts for consumer financial products or services and literally “with the stroke of a pen” are able to block any group of consumers from filing joint lawsuits known as class actions.  That is so even though class actions are widely recognized to be valid avenues to secure legal relief under federal and state law.
We have investigated arbitration, and our research found that very few consumers know anything about these “gotcha” clauses.  Even fewer consumers know how they actually work.  Based on our research, we believe that any prospect of meaningful relief for groups of consumers is effectively extinguished by forcing them to fight their legal disputes as lone individuals.  These battles – frequently over small amounts of money – would often have to be fought against some of the largest financial companies in the world.  When faced with the daunting prospect of spending considerable time and effort to recoup a $35 fee or even a $100 overcharge, it is not hard to see why few people would even bother to try.
The fact is that certain corporate policies and practices can be lucrative to businesses but harm large numbers of individuals only on a minor basis.  There was a long time in the history of this country where the legal system struggled for a solution to this problem.  Courts and legislative bodies sought to develop a workable mechanism whereby people could band together and aggregate their claims into a single action that could provide accountability and justice within the legal system.  Some of these efforts go back hundreds of years, but about a half-century ago, the concept of the modern class action came to fruition in the American civil justice system.  As this procedure was refined to allow the courts to handle and process such cases efficiently and fairly, both Congress and the federal courts embraced and approved this approach.  So did legislatures and courts in nearly every state.  It has proved particularly meaningful in the arena of consumer finance, where companies that violate the law may do small amounts of harm to thousands or even millions of consumers.
It is important to recognize that the legislative and judicial branches of government not only have recognized and validated this mechanism for group lawsuits, but they also tightly control its use in particular cases.  Congress and state legislatures have the authority to determine whether any violation of law can give rise to a private lawsuit in the first place, under what conditions, and for what types of relief.  If a class action lawsuit is filed, the courts have specific processes for determining whether the claims can proceed in that format or not.
This is notable because for some provisions of the consumer financial laws, Congress has in fact authorized private lawsuits.  Thus, over many years of enacting federal consumer financial laws (all of which post-date the adoption of the modern class action procedures in the federal courts), Congress has explicitly determined that such actions further the purposes of those particular statutes.  And in so doing, Congress has permitted consumers to bring lawsuits (including class actions) to seek meaningful relief for the harm done them by such violations of law.
These provisions of the consumer financial laws thus provide a right to sue for relief, with one consumer representing the interests of a group who have all been harmed in the same way.  If the lawsuit is successful, the company can be made to rectify the problem for all affected customers.  It also can be required to clean up its practices moving forward.  Yet a mandatory arbitration clause can negate all of this, leaving consumers with few practical avenues to secure adequate relief when they are harmed by violations of the law.
***
The justification for this approach is found in the Federal Arbitration Act, a statute that dates from 1925 and whose application has evolved over time.  At the outset, its primary and virtually sole focus was on business-to-business disputes, in cases where the parties negotiated and agreed that it was in their mutual interest to have their disputes resolved by an arbitrator rather than by the courts.  Over the years, arbitration came to be used in other types of disputes as well, such as those between unions and employers.  It is generally recognized as one of several methods of “alternative dispute resolution.”
More recently, many businesses have sought to use arbitration clauses not simply as an alternative means of resolving disputes, but effectively to insulate themselves from accountability by blocking group claims.  For many years, courts wrestled with the question of whether to allow arbitration clauses to be used in this way.  Several years ago the Supreme Court concluded that arbitration clauses could in fact block class actions even though the state courts in that case had deemed that result to be unconscionable under state law.
In the past decade, however, Congress has expressed growing concern about whether mandatory arbitration is appropriate in the realm of consumer finance.  First in the Military Lending Act, passed in 2007, Congress barred arbitration clauses in connection with certain loans made to servicemembers.  In 2010, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further by barring arbitration clauses in mortgages, which make up the largest consumer finance market.  In so doing, Congress expanded on a ban that Fannie Mae and Freddie Mac had imposed several years earlier on mortgage contracts they purchased.
Similarly, in the Dodd-Frank Act Congress authorized the Securities and Exchange Commission (SEC) to regulate the use of arbitration clauses in contracts between investors and brokers and dealers.  Here Congress was building on work by the Financial Industry Regulatory Authority (FINRA), which has long required that arbitration clauses adopted by its broker-dealer members cannot be used to block class actions by customers.  Each of these measures reflects concern about how mandatory arbitration clauses may undermine the welfare of individual consumers (or, in the case of the SEC, investors) in the financial marketplace.
Congress also spoke to our subject today by directing the Consumer Bureau to conduct a study and provide a report to Congress on the use of mandatory arbitration clauses in other consumer financial contracts.  Once this work was completed, Congress stated that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and such findings are “consistent with the study” we performed.  We finished that work a year ago and heard from stakeholders about our findings and analysis.  We then put forward an initial framework, subject to further review through our small business review panel process and with others as well.  All of this leads up to our proposal today for a potential new rule that would address this issue.
***
To explain what we are proposing, it is useful to recap the results of our extensive study and report to Congress, which spans 728 pages of findings and analysis.  Perhaps the most striking finding from our study is that consumers rarely file individual disputes involving financial products or services in any forum.  We believe in part this is because consumers often do not recognize when their rights have been violated.  It can be difficult for consumers to know, for example, when they have received inadequate or even misleading information or when they have been subject to discrimination.  Even when consumers do feel aggrieved by something their financial service provider has done – for example, by charging an unwanted back-end fee – consumers rarely know whether the company’s conduct is unlawful.  And for the overwhelming majority of consumers, we believe it simply does not make sense to try to find a lawyer to take issue with a small fee or other such practices.
Our study further found that when individual consumers choose to step forward and bring a class action on behalf of all similarly-situated consumers, such group lawsuits can be an effective way to provide relief when they are allowed to proceed.  This includes those who may not realize that their rights have been violated or those who may have felt they simply had to resign themselves to the way they were treated.  Indeed, by examining five years of data on several distinct markets, the study found that group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases.  Customers were also able to obtain substantial prospective relief by forcing companies to improve compliance and adopt more consumer-friendly practices.  Of course, the class action lawsuit is by no means a perfect mechanism for addressing such issues.  But class actions do happen to be the most practical solution that has been worked out to date.  And the precise parameters of class action procedures have remained constantly subject to further critique, reform, and improvement over time.
The study showed that many companies use mandatory arbitration clauses to block consumers from ever securing any meaningful relief from violations of the law.  Tens of millions of consumers use financial products or services that are subject to arbitration clauses.  Those clauses deter class action lawsuits from being filed and often prevent those that are filed from moving forward.  Yet without group lawsuits, those consumers who feel they may have been wronged are often left with very limited options.  They can pursue their dispute with the company individually in arbitration, in small claims court, or sometimes in state or federal court, yet our study showed they rarely do so.  They can simply accept the unlawful terms and absorb the harmful treatment, as is too often the case for many consumers.  They can pursue some type of informal dispute resolution with the company through complaint lines, which will lead to relief in some instances as a matter of good customer service, but falls far short of any systematic resolution that eradicates unlawful practices.  Or they can “vote with their feet” by moving on to another provider, though this is not always possible.  Even when it is, there may be less incentive to do so if other companies have also inserted arbitration clauses in their own contracts.
So our study indicated that simply by inserting the magic words of an arbitration clause, financial companies can avoid being held directly accountable for their actions affecting their customers.  Of course, the laws may empower certain government officials, such as those of us at the Consumer Bureau, to bring actions to enforce their terms.  Yet public resources devoted to this purpose are limited, to the point where we cannot hope to cover the waterfront of consumer financial harm by such means.  Indeed, the study found that class actions supplement government enforcement actions and seldom overlap with them.  And several state attorneys general have told us they favor limitations on arbitration clauses because their enforcement resources are also limited.
Under the proposed regulation we are releasing today for public comment, companies could still include arbitration clauses in their contracts.  For new contracts, however, these clauses would have to say explicitly that they cannot be used to stop consumers from grouping together in a class action.  As noted previously, this is the same approach FINRA has taken in regulating similar provisions in certain investor contracts and it does not go as far as Congress did for mortgage contracts or certain credit contracts for servicemembers.  In our study, we found that individual arbitrations are not commonly filed in consumer finance matters, and we do not believe we have enough data to justify restricting them further at this time.
If arbitration truly offers the benefits that its proponents claim, such as providing a less costly and more efficient means of dispute resolution, then it stands to reason that companies will continue to make it available.  If they do, then companies which retain these more limited arbitration clauses would have to submit claims, awards, and other information to the Bureau.  This would enable better monitoring of consumer finance arbitrations to ensure that the process is fair for individual consumers.  It would also enable further review of the substantive allegations raised in these arbitration processes to see if they warrant action by the Bureau.  Finally, we are considering publishing these materials on our website to promote transparency and enable the public to learn more about the arbitration process.
***
So the essence of the proposal issued today is that it would prevent mandatory arbitration clauses from imposing legal lockouts to deny groups of customers the right to pursue justice and secure meaningful relief from wrongdoing.  From the results of our study, we believe that doing so would produce three general benefits, about which we seek further comment.
First, consumers would have a more effective means to pursue meaningful relief after they have been hurt by violations of consumer financial laws.  At the same time, it would stop the same prohibited practices from harming consumers in the future.  Many of these laws confer the right to an effective remedy to redress harms consumers suffer from violations of the law.  This reflects an important element of personal liberty, that people should have the ability to protect themselves by acting to pursue their rights.  But as we have already noted, it may not be practical or worthwhile for consumers to undertake the burden and cost of bringing an individual case just to challenge small fees and charges.  Without the opportunity to pursue group claims, they may be effectively cut off from having their grievances addressed.
Second, another important benefit that would potentially flow from our proposal is that it would deter wrongdoing on a broader scale.  Although many consumer financial violations impose only small costs on each individual consumer, taken as a whole these unlawful practices can yield millions or even billions of dollars in aggregate harm.  Mandatory arbitration clauses that bar group actions protect companies from being held accountable for their misdeeds.  Thus, companies have less reason to ensure that their conduct complies with the law.  We plainly recognize that this may cause financial companies to incur higher compliance costs and forgo some revenue from engaging in risky behaviors.  But we believe that is exactly how accountability should change company behavior.
Put differently, it matters if companies are aware that group lawsuits can lead to relief to thousands or even millions of victims of unlawful practices.  The likely result is to create a safer market for current and future customers of that company.  That is because the potential for a substantial monetary award often leads a company to rethink its practices by reassessing its bottom line.  And the public spotlight on these cases can influence business practices at other companies as well.
Third, by requiring companies to provide the Bureau with arbitration filings and written awards, which we might end up making public in some form, the proposal would enable the Bureau to monitor and assess the pros and cons of how arbitration clauses affect resolutions for individuals who do not pursue group claims.  We believe this would improve our understanding and enable policymaking that is better informed.  The Bureau would also collect correspondence from administrators about a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s fairness principles.  The purpose here would be to provide insight into whether companies are abusing arbitration or whether the process itself is unfair.
In short, we believe our proposal would promote consumers’ ability to pursue claims, bring greater accountability, and enhance the transparency and fairness of arbitrations.
***
Our democracy allows, encourages, and indeed depends on citizens who band together to demand political or legislative change.  Many consumer financial laws likewise presuppose that groups of customers can join together in our legal system to demand changes in unlawful practices that affect them all in common.  But our study shows that an important avenue for reform can be cut off by mandatory arbitration clauses that affect millions of consumers.  Our proposal would reopen that avenue by ensuring that consumers can take action together if they have been hurt together.
Under our proposed rule, companies would not be able to deny consumers their day in court.  Companies would not be able to evade responsibility by blocking groups of consumers from the legal system and reaping the favorable consequences.  Everyone benefits from a marketplace where companies are held accountable for treating their customers fairly and in accordance with the law.
Our proposal will be open for public comment for the next three months.  We will carefully consider the comments we receive before issuing a final rule.  We have found this process is always instructive and enables us to reach sounder conclusions in the end.  We look forward to the public comments as well as the initial feedback we will hear today.  Thank you.
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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov



Monday, March 7, 2016

On-line lenders to come under CFPB scrutiny; consumer complaints invited (press release re-post)

FOR IMMEDIATE RELEASE: March 7, 2016
CONSUMER FINANCIAL PROTECTION BUREAU NOW ACCEPTING COMPLAINTS ON CONSUMER LOANS FROM ONLINE MARKETPLACE LENDERS 
Bureau Releases Consumer Bulletin with Information and Tips on Marketplace Lending
WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) announced it is accepting complaints from consumers encountering problems with loans from online marketplace lenders. The Bureau is also releasing a consumer bulletin that provides an overview of marketplace lending and outlines tips for consumers who are considering taking out loans from these types of lenders. 
“When consumers shop for a loan online we want them to be informed and to understand what they are signing up for,” said CFPB Director Richard Cordray. “All lenders, from online startups to large banks, must follow consumer financial protection laws. By accepting these consumer complaints, we are giving people a greater voice in these markets and a place to turn to when they encounter problems.” 
Millions of consumers take out personal loans online. Marketplace lending—often referred to as “peer-to-peer” or “platform” lending—is a relatively new kind of online lending. A marketplace lender uses an online interface to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan. Generally, the marketplace lending platform handles all underwriting and customer service interactions with the borrower. Once a loan is originated, the company generally makes arrangements to transfer ownership to the investors while it continues to service the loan.
Marketplace Lending Consumer BulletinA marketplace lender may offer different types of financial products such as installment loans, mortgages, student loans, or auto loans. Marketplace lending platforms generally market both new loans and loans that can be used to refinance or consolidate existing debt. Today’s consumer bulletin offers information for consumers who are considering a loan from a marketplace lender, including:
  • Important consumer protections apply: Marketplace lenders are required to follow federal and state consumer financial protection laws.
  • Be careful about refinancing certain types of debt: While some marketplace lenders may advertise lower interest rates, in some cases consumers could lose important loan-specific protections by refinancing an existing debt. Specifically, consumers should know that they may sign away certain federal benefits, such as income-driven repayment for federal student loans or servicemember benefits related to debt incurred prior to entering active duty.
The consumer bulletin also highlights general steps consumers should take when shopping for a loan, including a loan from a marketplace lender. Key tips include:
  • Look at income and spending: Before taking out a loan, consumers should evaluate how much they can afford and really need to borrow. Consumers should understand the total cost of the loan as well as what the total monthly cost will be each month.
  • Check credit reports: Consumers should check their credit report to make sure there are no errors that could keep them from getting credit or getting the best available terms on a loan. Consumers should be sure the information in the report is accurate and up-to-date.
  • Shop around: Consumers who consider interest rates offered by multiple lenders or brokers may see substantial differences in the rates. Consumers should compare the costs and terms of loans to find the deal that is best for them.  
Marketplace Lending ComplaintsThe CFPB began accepting complaints as soon as it opened its doors nearly five years ago in July 2011. It currently accepts complaints on many consumer financial products, including: mortgages, bank accounts and services, credit cards, student loans, auto and other consumer loans, credit reporting, debt collection, and payday loans.
Because marketplace lenders offer several types of consumer loans, a consumer submitting a complaint should select among the different complaint categories for products and services that best apply to their situation. For example, a consumer can select products such as “mortgage,” “consumer loan,” or “student loan.” The CFPB forwards complaints to the marketplace lender and works to get a response – generally within 15 days. Consumers are given a tracking number after submitting a complaint and can check the status of their complaint by logging on to the CFPB website. The CFPB expects companies to close all but the most complicated complaints within 60 days.
To submit a complaint, consumers can:
  • Go online at www.consumerfinance.gov/complaint
  • Call the toll-free phone number at 1-855-411-CFPB (2372) or TTY/TDD phone number at 1-855-729-CFPB (2372)
  • Fax the CFPB at 1-855-237-2392
  • Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244
The CFPB provides complaint-handling services to consumers in more than 180 languages and to consumers who are deaf, have hearing loss, or have speech disabilities via the Bureau’s toll-free telephone number.
Additionally, through AskCFPB, consumers can get clear, unbiased answers to their questions about financial products and services at consumerfinance.gov/askcfpb or by calling 1-855-411-CFPB (2372).

Wednesday, February 3, 2016

CFPB Takes Steps to Improve Checking Account Access for Consumers (press-release re-post)


RELEASED FEBRUARY 3, 2016: 

CONSUMER FINANCIAL PROTECTION BUREAU TAKES STEPS TO IMPROVE CHECKING ACCOUNT ACCESS

CFPB Concerned that Screening Inaccuracies and Lack of Account Options are Keeping Consumers Out of the Banking System
WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) is taking steps 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. Today the CFPB sent a letter to the 25 largest retail banks encouraging them to make available and widely market lower-risk deposit accounts that help consumers avoid overdrafting. The CFPB also issued a bulletin warning banks and credit unions that failure to meet accuracy obligations when they report negative account histories to credit reporting companies could result in Bureau action. And finally, the CFPB is providing consumers with resources to help navigate the deposit account system.
“Consumers should not be sidelined out of the basic banking services they need because of the flaws and limitations in a murky system,” said CFPB Director Richard Cordray. “People deserve to have more options for access to lower-risk deposit accounts that can better fit their needs.”
Almost nine out of 10 American households have at least one checking account, and many also maintain a savings account. In recent decades, technology has made it possible for consumers to access funds in their accounts in a variety of ways. More and more banks have also introduced automated overdraft programs. As these changes have occurred, banks have placed greater emphasis on screening new applicants for potential risks that may arise if a consumer exceeds his or her account balance.
One way that banks and credit unions screen account applicants for risk is to use information provided by checking account reporting companies, which have databases of information on involuntary closures of consumer checking accounts supplied by banks and credit unions. In October 2014, the CFPB laid out concerns about the information accuracy of these reports, people’s ability to access the reports and dispute incorrect information, and the ways in which the reports were being used.
Today, the CFPB is warning banks and credit unions of their obligations when reporting. And while some banks and credit unions currently offer products that help consumers avoid overdrafts and other risks, the CFPB is also encouraging the industry more broadly to provide account options for consumers so they are less likely to overspend their funds.
Lower-Risk Deposit AccountsToday the CFPB sent a letter to the nation’s top 25 retail banking companies urging them to do more to create or promote deposit accounts designed to meet consumers’ financial needs. The CFPB is urging banks and credit unions to offer consumers accounts that do not authorize them to spend money they don’t have. Separately, the CFPB is weighing what additional consumer protections are necessary for overdraft and related services. Among today’s CFPB recommendations: 
  • Offer lower-risk products: Today the CFPB is encouraging banks and credit unions to offer products that are designed not to authorize overdrafts and that do not charge overdraft fees. A number of institutions have introduced “no-overdraft” accounts and offer them alongside more common checking account products. However, in a recent CFPB review of the top retail banking websites, the CFPB found nearly half do not appear to offer any deposit account that ensures consumers can’t overspend. Such a product would give consumers an opportunity to choose an account that helps them avoid overdrafting.
  • Advertise the lower-risk products: The CFPB is concerned that even when companies have these accounts available, consumers don’t know about them. So the CFPB is also urging banks and credit unions to feature such products prominently in their marketing efforts, their online and in-store checking account menus, and during sales consultations. 
The letter sent to the financial institutions is available at:http://files.consumerfinance.gov/f/201602_cfpb_letter-to-banks-on-lower-risk-accounts.pdf
Screening Accuracy ImprovementsThe bulletin issued by the CFPB today warns banks and credit unions that they must have systems in place regarding accuracy when they pass on information, such as negative account histories, to checking account reporting or other credit reporting companies. The consumer reporting companies focused on checking accounts typically generate reports on charge-off amounts, past non-sufficient funds activity, unpaid or outstanding bounced checks, overdrafts, involuntary account closures, and fraud.
The CFPB is concerned about inaccuracies and inconsistent information provided by the financial institutions to the reporting companies. In a recent Supervisory Highlights, the CFPB noted that examiners found that one or more financial institutions failed to “establish and implement reasonable written policies and procedures regarding the accuracy of the deposit account information provided to the consumer reporting companies.” Examiners also found that at least one entity violated its federal obligation to handle consumer disputes about these issues.
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.
Empowering Consumers to Navigate the SystemThe CFPB is also releasing resources to encourage consumers to shop for lower-risk checking and prepaid accounts that will not authorize them to exceed their account balances. These products can help consumers maintain their accounts longer, and the banks and credit unions that offer them are often more accepting in their screening practices. The resources include tips and information about choosing an account and managing an account.
The CFPB also released a consumer advisory to help people know what to do if they have been denied a deposit account or have an involuntary account closure. The CFPB is concerned that most consumers are unaware of what to do if they are rejected by a bank; and most are probably unaware of the screening system that provided the information to the bank about their checking-account profile. A consumer who had an account closed and goes to open a new account at another institution may be equally unaware of how this screening information will be used to judge his or her account application. Today’s advisory tells consumers: 
  • How to obtain a copy of their checking account history: If a bank or credit union makes its decision to deny a new account based on negative reporting, the bank or credit union is required to provide the consumer with the source. The consumer should contact that source and has the right to obtain a free copy of his or her consumer report.
  • How to dispute items with the consumer reporting company: If the consumer thinks the information provided by the checking account reporting company is inaccurate, he or she should file a dispute with the company. The company is required to conduct a reasonable investigation. The CFPB is providing a sample letter to help consumers dispute the inaccurate information with the checking account reporting company.
  • How to dispute items with a bank or credit union that reported inaccurate information: If the consumer thinks some of the information on the consumer report is inaccurate, then he or she also should contact the financial institution that reported it, such as his or her old bank. The consumer can then request a correction. Federal law requires financial institutions to promptly correct inaccurate information. The CFPB is releasing a sample letterthat consumers can use to contact a financial institution to dispute inaccurate information.
  • To shop around for lower-risk products: Consumers can shop around to find banks or credit unions that offer accounts without features like overdraft, many of which are available despite prior negative account history. Prepaid products are also a viable option for consumers looking to ensure they only spend the money they have. 
The consumer advisory about being denied a checking account can be found at: http://files.consumerfinance.gov/f/201602_cfpb_consumer-guide-to-being-denied-a-checking-account.pdf
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Prepared Remarks of Richard CordrayDirector, Consumer Financial Protection Bureau 
Field Hearing on Checking Account Access 
Louisville, KentuckyFebruary 3, 2016
Thank you for joining us today in Louisville to talk about individual checking and savings accounts.  When I think about these deposit accounts, I am reminded of my Dad, now 97 years old, who lost all his paper route money in a bank failure during the Depression.  Of course, banking today has little in common with the banking of my Dad’s boyhood.  In his day, consumer finances were transacted primarily in cash, and financial panics frequently caused liquidity crises that did severe damage to the economy.  Today, people can rely on the security of federally insured accounts.  And how we use deposit accounts has changed profoundly – with much greater access to our money and more convenient ways of paying without cash.
At the time my parents helped me open my first passbook account as a child, the deposit account experience was pretty simple and straightforward.  Banks accepted people’s money with the promise of holding on to it safely.  When consumers went (in person) to withdraw funds, they either had the money in their account or they did not, and the bank would only provide as much money as was available in the account.  But a few decades ago, all of this changed dramatically when people began to be able to overdraw their accounts as a more routine matter.
Today, for a wide variety of reasons, there are nearly 10 million unbanked households that have no checking or savings account.  Some consumers may have been rejected when they tried to open an account before, or they might have lost an account after it became overdrawn and they were unable to recover.  Others might simply choose not to participate in the banking system, perhaps because they are uncomfortable with the costs or risks they believe it poses for them.
At the Consumer Bureau, we believe that people who want the benefits and convenience of some kind of deposit account deserve a fair opportunity to have one.  We are concerned that some people are being inappropriately sidelined by two things.  The first is the lack of account options that fit their financial needs and situations.  The second is inaccurate information used to screen some potential customers.
Today the Bureau is taking three steps to address these concerns.  First, we are encouraging banks and credit unions to make lower-risk accounts more accessible to more consumers.  Second, we are pressing the banks and credit unions, as well as the consumer reporting companies, to improve the accuracy of the checking account reporting system.  Third, we are providing new resources to help consumers better understand how to navigate their options.  If we can make it a point to do all of these things, consumers will benefit by having more choices and more predictable costs.
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On the first point, today we are urging banks and credit unions to make more product choices available to consumers; after all, a healthy market thrives when people have multiple options that can better fit their needs.
In the 1980s, as automated teller machines and electronic payment channels emerged, banking changed in important ways.  Many banks and credit unions began to authorize overdraft transactions on a more regular basis both for electronic transactions and for checks.  This willingness to advance funds helped people avoid bouncing checks or having debits returned unpaid, but it also allowed the institutions to collect more fees.  Over the years, overdraft programs have become a significant source of industry revenues, and a significant reason why many consumers incur negative balances. Too many problems with overdrafts can cause people to give up on the banking system or force them out of it altogether.
To ensure that people have account options that meet their needs, the Consumer Bureau is encouraging banks and credit unions to offer the choice of enrolling in deposit accounts that are designed to help consumers manage their spending and avoid overdrafts and fees.  Although a majority of customers seem to be well served by the deposit accounts now offered at virtually all financial institutions, others struggle to deal with certain riskier aspects of those accounts.  Rather than ending up stuck outside the banking system or incurring costs they can ill afford, these consumers can better manage their money and avoid financial distress by signing up for accounts designed to prevent overdrafts and overdraft fees.  By simply offering consumers a bit more choice, banks and credit unions could help more people enjoy the many benefits of a banking relationship.
In particular, we support the FDIC’s efforts to encourage financial providers to offer lower-risk account options on a broader basis.  We also applaud the work being done nationally by the Bank On movement, and specifically by Bank On Louisville, which is a coalition that includes Louisville Metro, a number of banks and credit unions, and nonprofit partners.  The “national account standards” established by Bank On exemplify the kind of lower-risk products that could be offered as an option for consumers.  Thus far, too few of our financial institutions have developed such products or marketed them as much as they do their other products.
Who is the audience for these products?  One substantial group of potential customers gets screened out right now when their past history shows they may have trouble handling the risks posed by traditional deposit accounts.  Yet if these customers are matched with accounts that have more fitting terms, then they need not be excluded from the banking system.  Instead, they can become depository customers with the potential to develop healthier financial lives as they find success and grow into other banking products and services.
A second potential audience is consumers who have chosen to drop out of the banking system because they found themselves paying high fees they did not anticipate or, in hindsight, wanted to avoid.  In the FDIC’s latest survey of unbanked households, almost one-third identified the unpredictability of fees as a reason for not having a bank account.  Lower-risk accounts could minimize or eliminate their exposure to such fees.
A third potential audience is consumers who are new to checking accounts, including young adults just entering the banking system, some of whom experience more risk of losing control of their spending and hence their accounts.  Some banks that have added lower-risk accounts to their offerings have expressed surprise at the strong uptake they have seen from millennials in particular with these accounts.
Finally, many other consumers who have shown themselves to be perfectly capable of managing their accounts successfully might prefer to have a choice between a traditional deposit account and a lower-risk account that helps them avoid overspending, stay on a budget, and not be subject to unforeseen fees.
The existence of these several audiences seems to offer a powerful response to the financial institutions that have implicitly or explicitly rejected these safe banking products as idealism or mere charity.  By unnecessarily limiting their product choices, these institutions have missed a substantial segment of the population rather than finding a way to include them and help develop their economic potential.  Among young people just entering the financial system, banks and credit unions may be missing an opportunity to build loyalty and dispel prevailing mistrust of the banking system.  That is not charity at all; instead, it is a hard-headed business judgment that takes the longer view and seizes opportunities to build sustainable customer relationships.
To this end, I sent letters today to the CEOs of the top financial institutions in this country urging them to consider how to address these issues more effectively.  We recently reviewed the websites of the top 25 retail banks, and we found that only eight of them marketed a “no-overdraft” product option on the same page as their traditional checking account options.  We also found that seven others offered a product with no authorized overdrafts but did not feature it on their main menu of checking account offerings.  And 10 institutions did not appear to offer any options at all to allow consumers to open a lower-risk account designed to prevent overdrafts.
We encourage institutions to offer such products and, if they already do so, to feature them more prominently in their online and in-store checking account menus, and as part of their sales consultations.  What is clear enough is that if consumers do not know about a product, even one that is well fitted to their needs, they cannot be expected to sign up for it.
These safer products do not even have to be checking accounts as we typically know them.  Many general purpose reloadable prepaid cards are specifically designed to help consumers manage their spending while limiting their transactional costs and risks.  While prepaid cards were developed by entrepreneurs as an alternative to banking, the funds in these accounts are almost always held by a bank or credit union and enjoy federal deposit insurance.  Moreover, some prepaid cards are made available right now by banks and credit unions to their existing customer base.  The Bureau will finalize a rule this spring to ensure, among other things, that prepaid card consumers have error correction and dispute resolution rights comparable to those for checking accounts.  Prepaid cards may not be the first choice for every consumer, but everyone deserves the opportunity to choose what is best for him or her.
Let me also take a moment to acknowledge another positive development, which is the decision some banks and credit unions have made to provide consumers with real-time information about the funds in their accounts available to be spent.  They are doing this through various means, including online banking and text and e-mail alerts, which can reduce the risks that consumers inadvertently overspend their accounts. Still, we encourage the banks and credit unions to press harder as they think about how they can tailor their products more effectively for a larger base of potential customers, which includes making funds available as early as they can.  All these steps will help ensure consumers have more ways to take control of their financial lives.  Wider use of safer account features will also enable financial providers to relax their screening criteria without increasing their risk.  By expanding access, they can create more successful and sustainable customers.
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The second step we are taking today to improve checking account access is to remind banks and credit unions of their obligations with respect to the accuracy of the information they report about consumer use of checking accounts.  In addition, the consumer reporting companies also have an obligation to ensure accuracy when they sell this information to others.
Banks and credit unions have obligations to foster accuracy when they submit information to the specialty consumer reporting companies about accounts that were closed for fraud or unpaid balances.  Those companies, in turn, assemble or evaluate all of the information provided, then sell it to third parties.  All of this information is clearly related to preventing fraud and screening for credit risk.  But because many banks and credit unions use this information to make decisions about whether to offer account products to consumers and on what terms, the accuracy of the information is crucial.  If it is not accurate, then consumers will be inappropriately shut out of the banking system, with little or no effective recourse.
Indeed, accuracy is expressly required by the Fair Credit Reporting Act.  So we are concerned about the levels of accuracy in the information furnished to the consumer reporting companies that serve the deposit account market.  Through our supervisory work, we have found that some of the largest banks lack the appropriate systems and procedures to furnish accurate information on millions of accounts.
Today we are issuing a bulletin warning banks and credit unions that they must meet their legal obligation to have appropriate systems in place with respect to accuracy when they report information, such as negative account histories, to the consumer reporting companies.  More effort and rigor are needed to make sure that the risks consumers actually pose to potential financial providers can be evaluated correctly.
Of course, the specialty consumer reporting companies that track deposit accounts also merit our scrutiny as we work on these issues.  They have important legal obligations with respect to the accuracy of the information they sell, as specified in the Fair Credit Reporting Act.  Ensuring that they are adopting and implementing reasonable procedures to assure maximum possible accuracy of the credit reporting information they provide, as the law requires, is an important area for regulatory oversight.
The Consumer Bureau will continue to insist, through its oversight authority, that banks and credit unions furnishing information, as well as the consumer reporting companies collecting information and selling reports, must comply with their respective duties under the law.  When we see this is not being done, we will take appropriate supervisory and enforcement actions.
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Living outside the banking system can be costly and time-consuming, especially for those who are the most financially vulnerable.  They often come to rely on expensive nonbank money services that can take a big bite out of their earnings.  So the third step we are taking today is to help pull back the curtain on the checking account options available to consumers and to point out the rights they have if they are denied access to a checking account or if misinformation is reported about them.  We are issuing a consumer advisory and additional resources on choosing, managing, and re-opening an account.  All are available on our website at consumerfinance.gov.
We are releasing a consumer advisory to alert people that lower-risk accounts do exist in the marketplace and can help them take more control of their spending.  These accounts may serve as the gateway for more consumers to enter the banking system, even those who have struggled to maintain an account in the past, because the accounts pose less risk and hence less reason to screen those consumers out.
Many consumers who had an account closed and later seek to open a new one do not understand how their application will be judged.  The qualification process can be confusing and opaque.  Until they are rejected for a bank account, people often do not know that their prior account usage has been recorded and shared with other institutions.  Some consumers find that the information being attributed to them and preventing them from getting a new account is inaccurate.  Others are entirely unaware that they would be likely to qualify for a lower-risk account where such accounts are offered.
Today’s advisory also helps people know what to do if they have been denied a deposit account or have had one closed involuntarily.  In most cases, the denial would be based on information supplied by a checking account reporting company.  Our advisory explains how to get a copy of your checking account history from the company if you are blocked from opening an account.  In addition, you also have a right to dispute any inaccurate information contained in these reports, and the consumer reporting company is required to investigate it and correct any inaccuracies.
To help consumers pursue any such disputes, the Bureau is issuing two sample letters – one to dispute the accuracy of the information with the consumer reporting company and the other to dispute it with the financial institution that furnished the information in the first place. 
Under federal law, negative information can remain in a credit report for seven years or more, so it is clear that inaccurate information can damage a consumer’s reporting profile for a long time and cause enormous harm.  Consumers need to understand how they can participate more actively in this system so they can take more control of their financial lives.
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The bottom line is that we are working steadily to ensure that the banking system is open to all consumers who want a banking relationship and will not engage in fraudulent conduct.  This requires that the information banks use to screen customers is reliable and that the information is used to match consumers with deposit account products that fit their needs and promote their successful use of the banking system.                                                                                                            
The Consumer Financial Protection Bureau is in a unique position to make a difference in improving how the checking account reporting system actually works.  We are the only federal financial regulator with the authority to supervise both the larger depository institutions and the larger consumer reporting agencies for compliance with federal consumer financial law.  Thus we can consider and address these issues comprehensively, engaging directly with both sets of industry participants.  We have already released several groundbreaking reports on the credit reporting system.  We have also worked with consumers to expand their knowledge and awareness of the importance of credit reporting to their lives, through consumer advisories and by championing the Open Credit Score initiative.  But as we can see from the discussion today, we need to devote more attention to improving the checking account reporting system as well.  And we are committed to doing just that.
One key point we need to grasp is how hard it is to live in this country without somewhere to store your money safely and access it promptly and easily.  Those who would like to have a traditional checking account but are unable to get one should be given a fair opportunity to manage their day-to-day finances effectively and affordably by other means, such as a lower-risk checking account or prepaid card.  And so we envision a system that recognizes and responds to consumer needs by providing checking accounts and prepaid accounts that better fit their personal financial circumstances.  This is good for consumers.  It is good for responsible businesses.  And it is good for the economy as a whole.  Thank you.
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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.