ChexSystems
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ChexSystems is a check verification service and consumer credit reporting agency like Experian, Equifax and TransUnion. While most credit reporting agencies broker data about how a consumer handles credit relationships, ChexSystems provides data related to how a consumer has handled deposit accounts at banking institutions. "ChexSystems" is a registered service mark of eFunds Corporation headquartered in Delaware[1] and was previously registered to "Chex Systems, Inc".[2]
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[edit] Services
Eighty percent of all commercial banks and credit unions in the United States use ChexSystems as a step in the consumer checking or savings account application process.[3] eFunds claims that their services are used in 9,000 banks, including over 100,000 individual bank branches in the United States. The ChexSystems products offered by eFunds are DebitBureau, DebitReport, FraudFinder, Identity Theft, ID Verification, ICMS, ProspectChex, QualiFile, and Transaction Monitoring.[4]
[edit] Reporting
A consumer's ChexSystems report contains banking irregularities such as check overdrafts, unsatisfied balances, depositing fraudulent checks, or suspicious account handling that other banks have reported in the past five years. The majority of banks that use ChexSystems will not open a new deposit account for a customer that has a negative item reported. In 1999, ChexSystems was successfully deemed a consumer reporting agency, and therefore, governed by the Fair Credit Reporting Act. Consumers are now able to retrieve a free ChexSystems report annually, dispute negative items and demand proof of the data contained in the report.[5]
[edit] Criticism
While eFunds claims to provide fraud prevention products to the general public, many people have criticized the company for what they consider to be unfair reporting practices. For instance, while many CRAs report both positive and negative account histories, ChexSystems reports only contain negative information. Also in comparison to traditional CRAs, ChexSystems does not provide a risk analysis score like the FICO score; Therefore, many consumers who have kept positive banking relationships for 30 years may have their accounts closed and be blacklisted from opening new accounts based on a single banking error. The Greenlining Institute has published a report indicating wide disparities in the criteria banks were using when reporting negative items to a consumers ChexSystems report.[6]
[edit] Banks Respond
Beginning in August 2000, the Greenlining Institute, a public policy center headquartered in San Francisco, and the Federal Reserve Bank of San Francisco held four meetings to discuss possible reform in the treatment of individuals reported to ChexSystems. These meetings included a discussion of potential best practices which a financial institution could implement to reduce its dependence on ChexSystems data in its decision process on opening accounts. Practices identified include:
- Training staff to use judgment to assess risk when opening accounts
- Setting minimum limits to activate the use of ChexSystems
- Considering the possible override of a customer denial for situations that are beyond the customer’s control, such as a prolonged illness
Since the meetings at the Federal Reserve Bank of San Francisco, all participating financial institutions have announced that they will implement positive changes in the way they use ChexSystems.[7] In September 2000, Bank of America was the first financial institution to announce specific changes in its use of ChexSystems. Revised practices include:
- Disregarding all ChexSystems entries greater than three years old provided the entry is not fraud-related
- Disregarding all ChexSystems entries greater than one year old if the consumer has repaid the debt
- Disregarding certain other ChexSystems entries if the consumer has repaid the debt and completes a course in financial responsibility
- Increasing the loss threshold for reporting closed accounts from $50 to $100 in overdrafts
- Increasing the length of time a customer has to repay the debt
During a December 2000 meeting, Bank of America reported that in the first two months under the revised standards, its new ChexSystems policies had resulted in approximately 1,800 ChexSystems "overrides." This allowed 1,800 individuals to open deposit accounts that would have been denied under the bank's former policies. Best practices to address the barriers ChexSystems reports may create for low-and moderate-income individuals include:
- Increasing the negative balance threshold for reporting customers to ChexSystems from $25 to $100
- Removing customers from the ChexSystems database if the negative balance is repaid within 90 days (previously, repayment was required within 30 days)
- Improving the overdraft notification process to include more visible language that explains how the institution uses ChexSystems and the consequences of being reported
- Refraining from reporting customers until numerous attempts have been to contact them and providing ample opportunity to settle their accounts before a report is submitted to ChexSystems[8]
