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#2170101 - 03/26/18 05:28 PM Reason for Decline: "No active checking account"
bziegler Offline
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We have a lending partner that would like to decline applicants for a consumer credit card if they do not have an open or active checking account. They have completed a test using their own empirical data that shows that applicants without a checking account default prior to first payment at a rate 300% higher than those that have an active checking account; however, they have received feedback that this practice would potentially be viewed as discriminatory against "the under-banked" and could result in regulatory violations. Given that the "under-banked" are not a protected class, any opinion on the risk of implementing a process to decline applicants that don't have a checking account? To me, this doesn't seem materially different from declining based on "limited credit experience" which is listed as a sample reason in the Reg B model forms. Any thoughts would be greatly appreciated.

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Fair Lending
#2170104 - 03/26/18 05:47 PM Re: Reason for Decline: "No active checking account" bziegler
rlcarey Offline
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Galveston, TX
Other than the outside potential of a fair lending issue, there is no problem with tying loan and deposit account requirements together. Sounds like they already did their "business necessity" analysis.
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#2170203 - 03/26/18 09:22 PM Re: Reason for Decline: "No active checking account" bziegler
bziegler Offline
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Thanks. When I read the official interpretation of 1002.6, it sounds as if the "business necessity" argument minimizes the risk associated with any potential unintended disparate impact. Would you agree?

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#2170298 - 03/27/18 03:33 PM Re: Reason for Decline: "No active checking account" bziegler
Rocky P Offline
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Florida
" Given that the "under-banked" are not a protected class, any opinion on the risk of implementing a process to decline applicants that don't have a checking account?"

My 2 cents - while the "term" under banked is not a protected class, a significantly higher percentage of under banked are protected class members. Think about it from a regulator's standpoint - if you want to discourage minorities from applying, make it a requirement that they already have an account. A greater portion of the people that could not apply would be minority classes compared to white applicants.

What the bank did for justification and a business necessity is a good start, but potentially limited in nature. You indicated 300% higher first payment default. To be in the safe side, the bank may want to look at the life of loan experience and if the empirical data is limited, get data for credit cards from a CRA.
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#2170306 - 03/27/18 03:40 PM Re: Reason for Decline: "No active checking account" bziegler
Skittles Offline
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TN
Does the OP mean a checking account with their financial institution - or just a checking account anywhere?
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#2170352 - 03/27/18 04:50 PM Re: Reason for Decline: "No active checking account" bziegler
Rocky P Offline
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Florida
I was taking it an an account - anywhere. Trouble without a better definition is it could be opened and immediately closed, or open with a minimal balance and never used.
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#2170357 - 03/27/18 05:02 PM Re: Reason for Decline: "No active checking account" bziegler
bziegler Offline
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Thanks for all of your feedback. To answer Skittles' question: The requirement is to have a a checking account anywhere, at any bank. It is not a requirement to have an account at the bank issuing the CC.

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#2170360 - 03/27/18 05:09 PM Re: Reason for Decline: "No active checking account" bziegler
bziegler Offline
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One last thought to play devil's advocate - It is completely permissible from a fair lending perspective to decline applicants for "limited credit experience" or "no credit file/score". To me, these populations would be considered "under-banked", and declining these applicants would likely also result in disparate impact to protected classes. How is this different than declining for not having a checking account? Why is one okay and the other potentially risky?

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#2170405 - 03/27/18 06:22 PM Re: Reason for Decline: "No active checking account" bziegler
Rocky P Offline
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Florida
With limited credit, a lender could potentially ask for a co-borrower - adding strength to the credit - not payment ability. Credit is necessary for a loan - one of the 5 C's of credit - character - the intent to repay..

There is nothing in the credit basics that reference maintaining a checking account. Other types of accounts (savings) are available too.

As far as underwriting without a credit report, it is possible, and many banks do it to get people started. Credit can take the form of rent, cell phone payments, payments to utilities (gas, water, phone), corner grocery store, etc. In inner cities, informal (not credit bureau) credit has a significant place. I believe that one of the secondary market buyers has a program for making loans without a credit bureau.
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