Many Americans in these cash strapped times can relate to incurring an overdraft fee or bouncing a check. Ii's happened to nearly all of us and, mostly, we don’t expect it to impact our financial choices for the next five years to seven years.
Unfortunately, these seemingly small mistakes are preventing over a million low-income Americans from opening bank accounts, according to a recent New York Times article. And it’s all because of private databases like Chexsystems, that most Americans of all income levels have never heard of until it’s too late, but which 80% of banks use to decide who is worthy of an account.
Chexsystems is not a credit report. Credit reports record outstanding debts and payment histories; Chexystems, and the other private databases like it, record transgressions in banking products and activities. As Time reported, “These black marks stay on your record for five years, and can keep you from opening a bank account. According to an FDIC-commissioned study, 25% of banks won’t let you open an account with them if you have even a single derogatory item.”
No one is suggesting that banks not prevent fraud, the reason for using these databases in the first place, but it's a problem that so many people are being prevented from opening accounts. There are roughly ten million households, according to a 2011 FDIC survey, remaining unbanked, leaving them at the mercy of products and services like prepaid debit cards and check-cashing businesses whose fees cannabalize their paychecks.
As New York City Department of Consumer Affairs Commissioner Jonathan Mintz told the Times, “Hundreds of thousands of Americans are being shut out for relatively small mistakes.” Chexsystems has thwarted efforts by Mintz’s agency to get 825,000 New Yorkers their first bank accounts.
Non-profits that serve low-income communities are also feeling the strain. Kristen Euretig, a financial counselor for Neighborhood Trust Financial Partners told the Times, “Most of my clients have no idea these databases exist, let alone what they did to end up in them.” In fact, the banks “are under no duty to disclose this to consumers until an account is denied due to information contained in the report.”
Customers may be entitled to their credit reports under the Fair Credit Reporting Act, but Chexsystems reports aren’t available through the obvious places like annualcreditreport.com. You have to request it from the company, which many consumers probably won’t know about until rejected from opening a new account. This delay, as Time points out, can leave many in “unbanked limbo if they had already closed the old account the denied one was intended to replace.”
Instead of trusting the authority of secretive reports that do more to push Americans out of banks than protect against fraud, we should be supporting efforts to get them into the economic mainstream.