Past mistakes keep low-income Americans out of banks

Databases that track minor financial errors like bounced checks bar people from opening bank accounts

Major banks like Bank of America use databases to determine who can have bank accounts. (Justin Sullivan)

Databases containing information about banking infractions like overdraft fees and bounced checks have kept more than one million low-income Americans out of the banking system, in some cases for as long as seven years, a report by The New York Times revealed on Tuesday.

Unlike credit reports, which contain information about an individual’s payment history and debt ratio, these databases keep records of consumers banking offenses. While many Americans grasp the importance of credit reports, few know about these separate databases that can prevent them from opening bank accounts altogether.

ChexSystems – a division of financial services company FIS – runs the largest database which Bank of America, Chase, HSBC, Citi, US Bank and virtually all credit unions subscribe to. Wells Fargo is also listed on the website, but a representative of the bank says they no longer utilize ChexSystems. The banks use the information to prevent fraud and keep risky consumers off their books.

When a bank reports a customer’s financial mistake to ChexSystems, it can prevent that person from opening a bank account at another institution. Such databases have a greater impact on lower-income Americans, who often live paycheck to paycheck, because they are more likely to incur overdraft fees or have bounced checks.

“It can be devastating for low-income people,” Susan Shin, an attorney at the New Economy Project, told Al Jazeera. “Here they are, they had an account and maybe because of an error or something that the bank is at fault for that leads people to being reported to ChexSystems. They are forced to turn to these fringe financial systems,” like payday loan programs, which charge large fees and are even illegal in some states.

Without a bank account, it can be extremely difficult to save money for the future, pay bills or build credit. There are now roughly 10 million households in the United States that are “unbanked,” reports the Federal Deposit Insurance Corporation (FDIC). Making matters worse, many banks are moving from less-affluent neighborhoods to wealthier ones where residents have more money to deposit and invest.

“The requirements for having a bank account can be really onerous and difficult for low-income customers; the overdraft fees, the maintenance fees, high minimum balance requirements,” Shin said. “For us this is a big concern. It’s another way banks are saying to low-income people that they aren’t really welcome as customers.”

It can also be a problem for people who have experienced fraud, Shin says. If banks fails to resolve fraud claims, they could report customers to ChexSystems or similar databases, so it would appear as if these customers owed the banks substantial sums of money when it really wasn’t their fault.

Frank Caruana, ChexSystems chief marketing officer, told The New York Times that banks use his company’s database to “mitigate fraud from going into the system,” but they face increasing scrutiny from federal authorities who say removing inaccurate data or getting a copy of a report, which is mandated by law, can be difficult for consumers to do.

The Consumer Financial Protection Bureau is currently investigating these database companies to ensure that they are in compliance with the Fair Credit Reporting Act, a law designed to curb the gathering of inaccurate consumer data.

Phone calls and e-mails to representatives from Bank of America, Citi Bank, Wells Fargo, J.P. Morgan Chase, HSBC and US Bank were not returned by deadline. 

Dexter Mullins contributed to this report.

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