ChexSystems Coming Under Scrutiny?
Is your credit union violating the law simply by reviewing the banking history of potential members? This is not the type of existential question my compliance-warped mind ponders for the heck of it on a beautiful Wednesday morning. In fact, it is a question your credit union may want to review for itself in the coming months. The answer is no you are not, but be careful. Here’s why.
According to an article in the New York Times, more than a million people, including potential credit union members, are being denied bank accounts because of their poor credit history. The article explains that consumer advocates are getting increasingly upset by the potentially discriminatory impact of ChexSystems, which financial institutions have used for 20 years now to both prescreen applicants for credit offers and help determine whether or not someone can be trusted to repay their loans or avoid bouncing checks. It is the type of article that either gets the attention of financial regulators or indicates that regulators want to highlight what they see as a mounting problem, so you may want to double-check what your credit union does sometime soon.
Fortunately, NCUA has addressed the legality of ChexSystems for credit unions deciding whether or not to admit someone as a member. In a 1993 opinion letter that it cited in 2010, the NCUA’s legal eagles explained that a credit union Board of Directors may impose membership requirements in addition to those set forth under the Federal Credit Union Act so long as there is a rational basis for the additional requirements. However, NCUA has never been all that comfortable with the idea, explaining that while a credit union “may take an individual’s credit history into account” for membership purposes, when such a policy is misapplied it could potentially violate other federal laws such as the Fair Credit Reporting Act and even the bankruptcy code. For good measure, I will also throw in Regulation B, since I can see how a policy of reviewing someone’s banking history as a condition of membership could disproportionately impact minority groups.
NCUA also points out that credit unions always have the ability to limit the privileges of membership for those who have caused the credit union a loss. As a result, this whole issue can be avoided by admitting a qualified individual and letting them prove that they can be a responsible steward of their finances.
However, to me it just makes perfect sense to review someone’s history and decide whether membership is worth the risk. This is particularly true in an age where restrictions on fees are limiting the ability of credit unions to protect themselves against member malfeasance. From a compliance standpoint, just make sure that whatever policies and procedures you have in place regarding the use of ChexSystems or any other product to help prescreen potential members is applied consistently and is based on rational criteria.