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Secret Creditor Reports, Overdraft Fees and the New Unbanked: The Perfect Storm

posted by Nathalie Martin

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.

 

Comments

My input is to question the interplay of this Chex Systems creature with those laws requiring that the consumer be provided a free copy of their credit report from the credit reporting agencies. If consumers are not being afforded similar protections from Chex Systems, et al, including disclosures of the consumer's rights in this respect, are these credit bureaus which secretly serve only their financial institution masters violating Federal Law?

Why isn't this considered an end run around these protections afforded to consumers in the other context?

My bank account (was ING, now acquired by Capital One...blech), charges a low apr on any small negative balance resulting from an overdraft, and my line of credit for this service has a maximum balance of $25. No overdraft fees; only an interest charge for the day or 2 it might be overdrawn. For millions living paycheck to paycheck, this is a more frequent occurence than anyone would like (except maybe Mr. Capital One). It is unquestionably a short term loan, without the required consumer disclosures, but I'm not holding my breath for that Federal Court ruling....

Candidly, the absence of overdraft fees led me to open an account at ING after using a credit union for years.

Thanks to all contributors on this and related issues, and for this great website!!

Sincerely,

It's great that there are more people writing in this area. I hope to be able to look at Ginger's paper soon.

To respond to Chris' comment though. I'd argue that the Chex Systems report is a consumer report under the Fair Credit Reporting Act (and they're a specialty consumer reporting agency). The CFPB seems to think so and more importantly, ChexSystems does as well, since in their (IMO unhelpfully named website): http://www.ConsumerDebit.com, they have information so that the consumer can get their free annual report.

They're not the only company in this category either: Certegy, Telecheck, and Early Warning Systems also have similar types of reports about check screening/check history.

Late last year, the CFPB did a survey of specialty consumer reporting agencies (an FCRA term) that maintain information about on consumers in the categories of payday loans, checking accounts, utilities, rental, medical, employment history, and "supplemental" (i.e., other). I count 40 specialty consumer reporting agencies and it's likely that's not all of them.

The CFPB helpfully listed what each company does and how to get your report from them (FCRA/The FACT Act requires them to give you a report for free every 12 months).

Chex Systems is at page 5:
http://files.consumerfinance.gov/f/201207_cfpb_list_consumer-reporting-agencies.pdf

This is how the CFPB report describes the company:

Collects checking account applications, openings, and closures, including reasons for account closure. When you apply for a new checking account many banks and credit unions will refer to this database before they approve the new account.

The company will provide one free report every 12 months.

The company will also provide a free report if an adverse action is taken against you based on information in your report or under other specific circumstances.

Website
http://www.ConsumerDebit.com

Address
Chex Systems Inc.
Attn: Consumer Relations
7805 Hudson Road, Suite 100
Woodbury, MA 55125

Phone
800-428-9623

Thanks for that, Dalie. Good stuff to know.

Nice. It makes sense, but they should be able to record that information on closure. It could be a way of reasonably resuming credit history building when they get back on their feet.

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