People are being denied bank accounts based on what’s in reports that most of us never even knew existed.
Most people are familiar with the idea of a credit score — usually a FICO score or a VantageScore — that determines whether or not a lender will let you borrow money, and at what rate. But there’s a lesser-known credit reporting system that dictates what you’re allowed to do with your own money. And in some cases, these little-known systems end up giving banks reason to turn down consumers who are trying to open up accounts.
In a new investigation, the New York Times chronicles the financial rabbit hole a growing number of Americans have fallen into: They’re locked out of mainstream banking for relatively minor slip-ups like overdrawing an account, or because of mistakes in a file they didn’t even know existed.
“Hundreds of thousands of Americans are being shut out for relatively small mistakes,” commissioner of New York City‘s Department of Consumer Affairs Jonathan Mintz tells the paper. One woman was turned down when trying to open an account with a credit union because of a $40 overdraft she incurred three years ago, even though she paid the amount back, plus interest and fees.
One of the biggest players involved in this world is ChexSystems, which is owned by financial services giant Fidelity National Information Services; another service many banks rely on is Early Warning Services. One of the purposes of these businesses is to keep tabs on fraudsters and check-bouncers who try to game the system, but consumer advocates say efforts to stamp out fraud have gone into overdrive and unfairly penalize ordinary people — often low-income earners who are more likely to bounce a check or overdraw an account.
Obtaining one’s credit information and ensuring its accuracy can be a headache. Many people don’t know where or how to get their files, so last November, the Consumer Financial Protection Bureau published a resource where people can go to obtain reports from operations like ChexSystems, categorized as “specialty consumer reporting companies” by the CFPB.
If there are errors in your report, attempting to have them corrected can be an exercise in frustration. In 2011, ChexSystems settled without admitting wrongdoing a class-action lawsuit over how it handled disputed items in people’s files.
The blog Deposit Accounts published the saga of one bank customer snared in a ChexSystems product called FraudFinder. After he was denied an account, he looked up his report and found that his address was listed as being in a commercial zone — even though it had been converted into an apartment complex several years earlier. It took two letters to get this error corrected.
Another item the reader says got him flagged as suspicious was that he was issued a Social Security number at the age of 30. That was when he immigrated to the United States, he said, so the information was technically true — but he argued it shouldn’t have put him on some special “watch” list.
The other big drawback to these reports, points out Ginger Chouinard in a report for the University of New Mexico School of Law, is that they’re one-sided. “Unlike credit reports, little positive account information is included in an account screening report… With respect to account usage, the report essentially contains only negative information.”
One estimate has it that 2.3 million Americans who applied for bank accounts online in 2011 were rejected, and an FDIC-commissioned report says 25% of banks will jettison an applicant for a single negative item in their file.
These denials often blindside consumers. “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,” the blog Credit Slips states concerning consumers shut out by banks due to reports from ChexSystems and the like.
“Most of my clients have no idea these databases exist, let alone what they did to end up in them,” Neighborhood Trust Financial Partners financial counselor Kristen Euretig tells the Times.