Mistakes like a bounced check or a small overdraft have effectively blacklisted more than a million low-income Americans from the mainstream financial system for as long as seven years as a result of little-known private databases that are used by the nation’s major banks.
The problem is contributing to the growth of the roughly 10 million households in the United States that lack a banking account, a basic requirement of modern economic life.
Unlike traditional credit reporting databases, which provide portraits of outstanding debt and payment histories, these are records of transgressions in banking products. Institutions like Bank of America, Citibank and Wells Fargo say that tapping into the vast repositories of information helps them weed out risky customers and combat fraud.
But consumer advocates and state authorities say the use of the databases disproportionately affects lower-income Americans, who tend to live paycheck to paycheck, making them more likely to incur negative marks after relatively minor banking missteps like overdrawing accounts, amassing fees or bouncing checks.
When the databases were created more than 20 years ago, they were intended to help banks guard against fraud artists, like those accused of writing bogus checks. Since then, the databases have ensnared millions of low-income Americans, according to interviews with financial counselors, consumer lawyers and more than two dozen low-income people.
Rejection for would-be bank customers can come as a shock. Tiffany Murrell of Brooklyn says a credit union denied her checking account application in September 2012 even though she had a job as a secretary and was up to date on her bills.
The obstacle, it turned out, was a negative report from ChexSystems, a consumer credit reporting firm that provides customer data to virtually every major bank and credit union in the nation. The black mark stemmed from an overdraft of roughly $40 in June 2010, according to a copy of a letter that Murrell, 31, later received from ChexSystems. While she repaid the amount, plus interest and fees, before applying for a new account, the incident, she says, has barred her from opening an account at nearly every bank she has tried.
The largest database, founded in the 1970s, is run by ChexSystems, a subsidiary of FIS, a financial services company in Jacksonville, Fla. Subscribers — Bank of America, JPMorgan Chase, Citibank and Wells Fargo among them — “regularly contribute information on mishandled checking and savings accounts,” ChexSystems says on its website.
The Consumer Financial Protection Bureau has fielded complaints about the databases and is determining whether they comply with the Fair Credit Reporting Act.