Checking account denial due to credit report

I've heard a disturbing story of a young Hispanic consumer who lost her checking account because of something that appeared on her credit report. There was nothing on her ChexSystems report, and she initially was able to open the account, only to see it closed because of a collections account on her TransUnion credit report.

No one in the dinosar media is talking about this yet, but it is huge news. How did banks get away with instituting this practice without anyone realizing it? This is the first I've heard of a credit check precipitating the opening of a bank account.

This is not a credit account, mind you; giving someone a checking account is not the same as extending credit to them. There's already a consumer reporting agency--ChexSystems--that banks can use as an excuse to deny people accounts. So why are they using credit reports?

There are a lot of dimensions to this; the bank who closed this account, when confronted, insisted that all the major banks are doing it now. When a financial institution pulls your credit report, that inquiry affects the consumer's score. [UPDATE--Two of the banks known to engage in this practice, Citibank and Wells Fargo, insist the inquiry is a "soft hit."] The consumer in this case has a very common name, and the collection account was put on the report by a junk debt buyer. (Which means I have NO confidence that the debt legitimately belongs to this particular customer.) In the credit recovery industry, we know how easy it is for collectors to abuse the credit reporting system to extort payments. Remember, one in four credit reports contains serious errors.

And here's another angle to all of this that must be explored: was this consumer's credit checked because she is Hispanic? Would any consumer have suffered through this, or just the ones with ethnic-sounding names? Sure, it seems like it could be the new redlining, but it could also be a coincidence--name confusion is more common with Hispanic consumers, which means they are more frequently punished for credit blemishes that are not legitimately theirs.

I looked around online, and I've seen a few banks disclosing credit checks in various ways. Citibank says they may "verify your identity using comercially-available databases containing information from public records, orther financial institutions and consumer reporting agenceis." They seem to be obscuring the fact that they use the credit report for more than just "verifying your identity."

Bank of America says flat out that they will collect and use information from a consumer report, including credit score and credit history. But their site co-mingles bank accounts and credit cards so thoroughly that it's hard to know what they're referring to specifically; it appears as though it could be that they only use credit reports for their credit card clients, but I've gotten confirmation that BofA does in fact check credit reports for new deposit accounts.

I downloaded a printable Wells Fargo checking account application, and it includes this disclosure "You are authorized to check my credit and employment history and to answer questions about your credit experience with me."

So that's Citibank, Wells Fargo, and BofA that are confirmed as pulling credit reports for new deposit accounts. No confirmation on Washington Mutual yet, though I've been told that they do. I understand that US Bank does NOT pull credit reports when opening new bank accounts.

Since all the big banks are major credit-card issuers, have they just decided to treat every checking account holder like a credit card customer? Or are they singling out certain races for more thorough scrutiny?

What every bank discloses is the Patriot Act connection:

To help the government fight the funding of terrorism and money laundering activities, U.S. Federal law requires financial institutions to obtain, verify, and record information that identifies each person (individuals and businesses) who opens an account.

Well, it's a far cry from 'verifying identities' to closing an account because of collection activities on a credit report.

Will the banks get away with this? Credit reports already affect or determine your access to housing, employment, insurance, car ownership, and credit. Will they now determine your ability to have a checking account? This is a very scary development.

Comments

[Thomas Blumer]

Jeff, I do believe this has been true for some time, but don't have a way to prove it. As to whether applying for a checking account pulls down a credit score -- they may be considered soft inquiries, but it calls for further investigation, and bears watching.

A better question would be: with ever-worse practices like these, how long will it be before any consumer who doesn't have business reasons to have a bank account at a traditional bank will be doing all of his or her banking at the local credit union?

[Gene Perez]

Anyone who pays their bills and manages their financial busines responsibly will have available to them all of the priviledges that banks offer. If a bank writes off an unpaid loan or a bad accout, it is the money of its depositors that is being lost. The system needs to avoid such losses if it - the backbone of the U.S. economy - is to thrive.

[Jeff Michael]

Tom, I'm trying to find out whether the inquiry is "hard" or "soft." A representative from the bank who closed this consumer's account did claim that the inquiry was a soft hit, but I really think the credit bureau is the better place to ask to get an authoritative answer.

And your second question, re: credit unions... get ready for massive rent-seeking from the traditional banks. As credit union membership opens up to more and more people, the banks are furious; they believe the nonprofit status of credit unions puts them at a competitive advantage. I'd argue that consumer-friendly practices are what really put the credit unions at an advantage, but that won't stop the banks from buying off members of congress to rein in credit unions.

Gene, I pointed out in the story that the consumer who lost her account had no negatives on her ChexSystems report, and the collection account on her TransUnion report was put there by a junk debt buyer. She's only 18. I believe the negative on her credit report is illegitimate. So as far as I'm concerned, she did "pay her bills and manage[d] her financial business responsibly". Her only offense was having a common name (one that happened to be Hispanic) that a junk debt buyer was able to exploit.

[SARA]

I HAD A CHECKINGS ACCOUNT BACK IN 2000 WITH A KNOWN BANK MENTIONED AND IT CLOSE FOR UNSUFICIENT FUNDS IN 2002. THEN ON JANUARY OF THIS YEAR, I WENT TO OPEN AN ACCOUNT ON A BANK NOT MENTIONED AND WAS DENIED. REASON WAS THAT WHEN THEY CHECK FOR MY PERSONAL INFORMATION. THEY CAME ACROSS A FRAUD ALERT FROM A BANK THAT I NEVER HAD CONTACT WITH. AND I DO FEEL BAD BECAUSE UNTIL TODAY ALL I KNOW IS THAT IT WASN'T ME AND I OWE THIS BANK $0 AND STILL BECUASE OF THEIR POPUSTROUSE INFO I CAN'T OPEN AN ACCOUNT AND WHAT'S WORTS NO ONE CAN HELP ME.

[Jane]

I tried to open a checking account with Regions Bank, but was denied based on a credit report from equifax..I have no records on check sytems....I strongly believed it was based on my credit score..or active collections accounts on my report...This sucks coz I went through a divorce, my ex filed bankruptcy and dumped all the debts in me...some of the credit cards he had was before we were married...he just odered cards with my name on it....How does the govt want people to get back on their feet, if they pass laws that doesn't allow you to have a bank account?? and to function???

[Zoe]

Does anyone know of a bank that'll allow me to open a checking account even though I have poor credit? I've tried B of A, Wachovia, and two credit unions, one of which is solely for city employees (and I've worked for this city for 5 years.) I've been denied by all because my credit score wasn't good enough.

So I know it's a new policy of most banks to pull potential customers' credit histories, but now I find out credit unions are doing the same. Can anyone give me some advice on where to open an account? I mean, I want to open an account so I can get back on track with my credit! How are you supposed to build credit when no one will give you a chance to?

[Abbey]

in as much as banks are quick to report you to the credit agencies, they don't appear to be as eager to report healthy and accounts that are operated responsibly in order to assist credit scoring. before the world of credit cards, banks and credit agencies ranked active and well run checking accounts highly in the credit scoring system - and I'm not that old!!

[Chris MacKenzie]

I was recently denied a checking account at Salem5 because of my credit score. I realize that my score may have dropped recently but I was just approved for a new credit card this weekend, but was denied by salem5 two weeks ago.