Secret Creditor Reports, Overdraft Fees and the New Unbanked: The Perfect Storm
Did you know you have another type of credit report, something just as powerful as a traditional credit report? Your “other” credit report is an account screening report used by financial institutions to assess risk in their account opening processes. While technically not a credit report, this report can have just as much impact as a credit report and can result in denial of access to bank accounts and much higher costs for your everyday banking services. The problem? Most of us don’t even know this other credit report exists. I would not know about this myself, except that one of my seminar students in Consumer Law last semester, Ginger Chouinard, wrote her paper on this topic. You can download her paper here. Ginger is a former lending officer and wanted to learn more about the unbanked and underbanked, how this class of people has grown so quickly and how they got underbanked. Her prior experience in the field didn’t hurt, as she was well-versed in ChexSytems, your other credit report.
As the paper, explains, nearly 90% of financial institutions use ChexSystems or similar reports in their account opening process, yet they are under no duty to disclose this to consumers until an account is denied due to information contained in the report. For those consumers denied accounts, it is too late. They had no idea information was being collected on their checking account usage, much less that it could be used to deny them an account in the future, and are subsequently forced to go outside the mainstream and use expensive alternatives like check cashing services and money orders to conduct their everyday financial business.
Most consumers have at least some awareness of Fair Isaac credit reports and their importance, but not the ChexSystems’ report. While a Fair Isaac credit report provides details on a consumer’s credit background, it does not contain any information pertaining to that consumer’s deposit account history. For this information, a financial institution often turns to account screening reports provided by companies like ChexSystems or Early Warning Services. An account screening report provides information about a consumer’s checking account usage, primarily data relating to account mishandling. It aids the financial institution in determining whether it will even open a consumer’s account or, in the alternative, provide restricted access.
Unlike credit reports, little positive account information is included in an account screening report. The report provides no account details such as where the consumer has had a checking accounts, account opening dates, or voluntary account closure dates. With respect to account usage, the report essentially contains only negative information such as involuntary account closures or returned check information. For example, a consumer may have successfully managed the checking accounts for 20 years. After a job layoff, the consumer may have had his/her checking account closed for a negative balance. The report for this consumer would just show that closure and not the fact that the consumer had been a responsible checking account user for most of his or her financial life.
Ginger is seeking comments on this work in progress, which discusses how changes in overdraft practices have encouraged poor account management, which in turn may have resulted in even more negative reports. It also discusses how the Fair Credit Reporting Act applies to account screening reports and whether new overdraft practices technically result in loans, triggering additional obligations and disclosures under this Act.