The New York attorney general's office is probing allegations that some top U.S. banks are using credit bureau databases to unfairly disqualify people seeking to open bank accounts, and that the banks’ alleged actions have denied banking access to more than a million Americans.
Six U.S. banks including Citibank Inc, JPMorgan Chase & Co (NYSE:JPM) and Bank of America Corp (NYSE:BAC) have received letters from Attorney General Eric T. Schneiderman, according to a New York Times report, citing people briefed on the matter.
A growing number of banks, in an attempt to guard themselves against fraud and loan defaults, are depending on databases from credit bureaus to assess the creditworthiness of people who seek to open a banking account. However, this alleged practice by banks, which have made backgrounds checks more stringent following the 2009 financial crisis, has adversely affected millions of lower-income Americans, who are being disqualified over unsatisfactory credit scores, according to the report.
It's not difficult for low-income customers, who are in precarious financial situations and struggle to manage their monthly budgets, to get negative credit reports for financial mistakes such as bouncing a check or not maintaining the appropriate cash balance in their accounts.
This means, the banks’ dependency on credit reports could keep this particular segment of customers outside the financial system, and a lack of bank accounts could also prevent people from accessing health insurance policies.
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According to a September 2012 survey by the Federal Deposit Insurance Corporation, or FDIC, about 8.2 percent of U.S. households, or nearly 10 million, did not have a bank account in 2012, up from 7.7 percent, or about 9 million households, in 2009.
And, a lack of direct access to banking services has forced such people to rely on expensive alternative products and services such as prepaid cards, payday loans and pawn shops, to pay their bills or cash a check, according to the FDIC report.
The credit-reporting databases -- which give detailed information about an individual’s credit history, including loans, credit lines, opened and closed accounts, check bounces, mortgages, foreclosures, liens and application inquiries -- help the banks and other credit unions to form credit scores to measure the creditworthiness of individuals seeking bank services.
Credit reports are compiled by the big four credit bureaus: Equifax(NYSE:EFX), Experian (LON:EXPN), ChexSystems and TransUnion, which among them have about 700 million files that can be accessed by lenders under the federal Fair Credit Reporting Act.
According to the Times report, the attorney general’s office has sought specific details from the banks on how they select their customers. The banks have time until Tuesday to schedule a meeting with Schneiderman’s office to discuss the matter.
The databases could harm “African-Americans, Latinos and other minority groups,” and deny their federal right to equal access to credit, the Times report said, quoting the attorney general’s office.
Schneiderman's office did not immediately respond to a request by International Business Times for comment.