Natalie Martin has a post up at Credit Slips about an paper by Ginger Chouinard on a form of credit reporting that has managed to remain beneath the policy radar despite its considerable importance, and how it can do even more harm that the sort we’ve all come to know and hate.
This is Martin’s overview:
nearly 90% of financial institutions use ChexSystems or similar reports in their account opening process, yet they are under no duty to disclose this to consumers until an account is denied due to information contained in the report. For those consumers denied accounts, it is too late. 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, and are subsequently forced to go outside the mainstream and use expensive alternatives like check cashing services and money orders to conduct their everyday financial business…
Unlike credit reports, little positive account information is included in an account screening report. The report provides no account details such as where the consumer has had a checking accounts, account opening dates, or voluntary account closure dates. With respect to account usage, the report essentially contains only negative information such as involuntary account closures or returned check information. For example, a consumer may have successfully managed the checking accounts for 20 years. After a job layoff, the consumer may have had his/her checking account closed for a negative balance. The report for this consumer would just show that closure and not the fact that the consumer had been a responsible checking account user for most of his or her financial life.
And the article itself makes clear these reports are very powerful:
A quarter of the banks surveyed reject an account application automatically if an account screening report contains any negative information. Further, only 25% of banks offered a “second chance” account to consumers whose reports contain negative information…
Since many financial institutions refuse to open an account if negative information is contained in a ChexSystems’ report, the impact on the consumer can be huge. In today’s world, access to the financial services market is considered essential to entering into and remaining in the middle class, and having a bank account is a first step towards credit services, which in turn allow a consumer to build assets. Being “unbanked” also means a consumer has no convenient or safe way to save and has limited access to modern payment systems.
An unbanked consumer must resort to costly alternatives like check cashing services, prepaid debit cards, money orders, payday lenders, and title lenders to handle his daily financial needs. While some states regulate check cashing fees, others do not, and consumers can pay anywhere from 1% to 5% of their check amount to cash their paychecks at check cashers, with even more dollars being spent to purchase money orders to pay bills. The result? A household with a net income of $20,000, cashing biweekly paychecks and purchasing an average of six money orders per month, could end up paying as much as $1,200 annually for these services, an outrageous amount in any respect.
ChexSystems says it is a consumer reporting agency, but the paper discusses some ways that CRA protections may not be applicable, since they provide to credit reporting, and opening a checking account is not a credit transaction.
I strongly suggest you read the article in full. It is a quick and important read.