On September 28, 2021 the House Financial Services Subcommittee on Diversity and Inclusion held a hearing entitled, “Access Denied: Eliminating Barriers and Increasing Economic Opportunity for Justice-Involved Individuals.” The purpose of the hearing was to discuss how limited access to banking, housing, and employment results in economic hardship for justice-involved people and contributes to a high rate of recidivism. First Step Alliance submitted a letter for the record describing the specific issues that prevent many returning citizens from accessing mainstream financial services. The letter also presented potential modifications to financial institutions' policies and procedures to help improve access.
Prior banking problems and a criminal record can effectively shut out many justice-involved individuals from mainstream financial services. Specialty consumer reporting agencies, like ChexSystems and Telecheck, offer banks and credit unions a means to track and report consumers across the banking system.¹ Negative remarks on a consumer’s report indicating they are a “high risk” can lead to a checking or savings account denial by a financial institution. About 80% of banks and credit unions use ChexSystems to assess consumer risk, and so blemishes on a report can prevent many individuals with prior convictions or banking issues from opening accounts at the majority of financial institutions.²
Additional barriers to achieving economic wellbeing for returning citizens include the lack of valid identification (e.g., driver's license or passport), inability to obtain credit, high fees charged by both traditional and non-traditional banking providers (payday lenders, check cashers, fintechs, etc.), and limited access to financial education resources.
First Step Alliance suggested several actions financial institutions can take to help reduce these barriers to entry for justice-impacted individuals:
When assessing consumer risk, in addition to the “black box” information obtained from reporting agencies, such as ChexSystems, FICO and VantageScore, financial institutions should incorporate more holistic quantitative and qualitative evaluation criteria. Current algorithms used by these agencies to calculate risk scores are primarily based on historical information; for many impacted individuals, this will result in a negative outcome. To address this issue, banks and credit unions might also consider using current and forward-looking data about the individual and their financial behavior, such as on-time bill payments, length of employment, and other metrics that point to responsible money management.
For identity verification purposes, financial institutions should consider accepting alternatives to a driver’s license or passport, when these documents are not readily available – such as a prison or other state-issued photo id. Government regulations permit the use of other forms of identification that enable financial institutions to form a reasonable belief they know the customer’s true identity.³
All banks and credit unions should offer low-cost, no overdraft second chance programs to improve access to safe and affordable banking products for justice-impacted households. Credit counseling services and financial education resources should also be provided to these customers to help them create a roadmap to financial wellbeing.
To further address these issues, based on information contained in the House Financial Services Committee memo dated September 23, 2021, the following legislation and/or amendments may be considered by the Committee:
"Expanding Opportunities in Banking Act,” would expand employment opportunities at banks and credit unions for certain formerly incarcerated individuals.
“Fair Chance at Housing Act,” introduced by Rep. Ocasio-Cortez (NY) would reform the eviction and screening policies for federally assisted housing to remove barriers to housing, family reunification, and rehabilitation for justice involved individuals.
"Fair Credit Reporting Act" amendment to prohibit consumer reporting agencies that furnish consumer reports for tenant screening purposes from providing certain information, to establish duties of users of consumer reports for housing purposes, and for other purposes.This bill is a discussion draft from Rep. Ayanna Pressley (MA) that would reform the Fair Credit Reporting Act to better regulate tenant screening companies when providing reports on the criminal histories of people applying for housing.
"Securities Exchange Act of 1934" amendment to prohibit the consideration of convictions older than 5 years when making certain determinations under the securities laws, and for other purposes. This bill would expand employment opportunities and consideration at SEC regulated entities for certain justice-involved individuals.
The financial services industry should take a more holistic, supportive approach to addressing the financial challenges of this highly marginalized community. First Step Alliance respectfully requested the Committee take steps to encourage banks and credit unions to examine their existing account opening policies and procedures, incorporate additional risk assessment criteria into their decisioning processes, and offer affordable, second chance programs for formerly incarcerated individuals. Removing some of the current financial services barriers will help drive economic empowerment and can result in more positive outcomes for many justice-involved people and their families, while also helping reduce recidivism.
For additional information, you can view the First Step Alliance letter here.
¹ Mehrsa Baradaran, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy (Harcourt 2017)
² Spencer Tierney, NerdWallet Blacklisted by ChexSystems? What to Know (December 17, 2020)
³ FFIEC BSA/AML Examination Manual, Customer Identification Program dated February 2021 (accessed September 23, 2021)