Occasionally, we take a look at specific areas in the financial sector and this week, we thought we’d explore the controversial database known as ChexSystems. Here’s what it is and what it isn’t – fair warning – you’re likely going to be surprised at just how powerful this database actually is.
So you’ve just relocated to a new city for your job and now you’re going to a new bank with the goal of opening a checking and savings account. Instead of walking out of the bank with a “mission accomplished” mindset, you’re actually quite upset because you were told your name is in the ChexSystems database. How could this happen?
Consumers find their names in this peculiar database when they’ve bounced checks and then not paid them or if they owe money on a checking account that was overdrawn and subsequently closed. If you’ve ever committed fraud, your name could be included because of that as well. And if you think that kind of embarrassment is rare, think again. Millions are added to this database every year and it’s preventing them from opening new accounts. There are those who are repeat offenders, but unfortunately, there are many who find themselves on this list who either didn’t know they had ever bounced a check or perhaps their name is on there by mistake. And yes, that happens – and it happens more often than you’d think.
It’s interesting to note this company has been in business for four decades. If you’ve never been in the company’s database, it’s because you’ve never made subtraction mistake and then failed to see it through. Or, and this is what makes the company controversial – you’re on a database for a blunder you didn’t commit. Approximately 80% of all banks in the U.S. use ChexSystems.
Wondering how it works? So were we. Here’s what we discovered.
These reports that are maintained include the number of accounts in your name that were closed due to abuse or fraud, when those accounts were closed, the amount owed for each account and whether the balance of any of them have been paid. Some, though not all, will include how many payday loans you’ve ever taken out and how bounced checks you’ve amassed on the account. In our efforts of determining why payday loans and the number a consumer has taken out in the past would count against them, we weren’t able to find any definitive answers. After all, despite the controversy surrounding these types of loans, they’re not illegal and it’s not illegal to do business with a check cashing company. This information can remain in the database for up to five years. Of course, you can dispute the information and if it’s found to be inaccurate, it’s removed. That said, it requires the cooperation of the bank that supplied the information in the first place. That could take several days or longer.
It’s true that banks take a risk anytime they open a new checking account. If someone mismanages their account, it could be the bank that’s left to shoulder the expenses; however, there are those who found themselves with one minor subtraction error that resulted in a domino effect: with an already low balance, they’re hit with a $38 NSF fee and it could be they don’t realize it until they receive a notice in the mail. Within those couple of days, they could have written another check or two or three – and within days, not only are the checks being returned to the payee as unpaid, but they’ve also amassed a substantial NSF fee balance. It can be tough to dig out of those situations.
There are no hard numbers, but it’s believed close to three million Americans were denied checking accounts in 2011. And many of them are denied these accounts unfairly. A class action lawsuit was filed recently that resulted in ChexSystems settling. The plaintiff said she had been unfairly denied a checking account and soon, more than 3,300 other consumers had joined the suit. Instead of battling it out in court, the company opted to settle instead. It’s released no comments since the lawsuit settlement.
Another company which was founded by the nation’s five largest banks (conflict of interest, anyone?) doesn’t comment on its practices. The company, Early Warning Systems has been in business since 2006.
Here’s where the controversy grows further. These companies will often run traditional checking accounts and even criminal backgrounds. If that sounds deeply troubling, it is. The CFPB has now stepped up to the plate with the goal of changing the industry as a whole. There are concerns these databases aren’t following federal laws, but there are questions as to who’s been overseeing their practices. Now, those questions should be answered as CFPB begins to examine and investigate the companies.
So what do you think? Are these types of companies good for banks and consumers or has too little oversight and too much “flying under the radar” allowed them to play by their own rules?