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The Hidden Credit Report That Shuts People Out of the Banking System

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Jessica Silver-Greenberg at the New York Times has an important account of how a system created by banks to catch scam artists like check-kiters has morphed over 20 years into a shadow credit reporting system. Given how hard it is to get the credit bureaus to fix errors in a system that is visible (for instance, you can get your credit report for free once a year from each bureau), imagine what it would be like to have a bank tell you they wouldn’t let you open a checking account due to reports you had no idea even existed.

Here’s the nut:

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 — a mounting threat for banks…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 in California, Illinois, Florida, New York and Washington.

What has happened is that banks are trying to focus their retail banking services on more affluent customers and dump poorer ones (I can see this with the mushrooming of bank branches in my neighborhood, displacing wine and food stores. I wonder what is happening with Community Reinvestment Act enforcement to allow this withdrawal os services from poor areas, particularly when banks are posting record profits). These databases provide the justification for refusing to take customers as a result of comparatively minor mishaps, like bounced checks (which may not even be their fault if a check they deposited turned out to bounce). And since customers who are low income will often be living paycheck to paycheck, it’s not hard for them to have short term cash flow problems.

Of course, this system is wonderfully convenient for the banks, since by denying potential customers access to bank accounts, it forces them to use much more costly services like payroll cards. The article estimates that one million consumers have been denied banking accounts thanks to these reports, a 10% increase since 2009.

These services may be be out of compliance with consumer credit reporting requirements:

….the databases are coming under scrutiny from consumer lawyers and federal regulators, who say it can be challenging to remove inaccurate information or get copies of the reports, a requirement under federal law.

The Consumer Financial Protection Bureau has fielded complaints about the databases and is determining whether they comply with the Fair Credit Reporting Act, a federal law meant to stanch the flow of inaccurate consumer information, according to people familiar with the investigation. Banks are required to provide a reason for rejecting an applicant.

Some databases, though, provide scant details of the reason for the negative mark, according to a review of more two dozen letters.

While banks maintain that they look to work with customers and don’t rely solely on these reports, and the error rate in them is low, customers and consumer advocates paint a different picture:

“We have had too many experiences where even banks that have offered to be flexible with us find their own internal risk management systems mean that their hands are tied,” said Mr. Mintz, New York’s commissioner of consumer affairs.

The problem, said Jerry DeGrieck, a senior policy adviser to Mayor Mike McGinn of Seattle, is that “lenders just don’t want to take a risk on these clients.”

Recent regulations, which rein in the fees that banks can charge — including overdraft protection, a big moneymaker on lower-income customers’ accounts — have made lenders more reluctant to take gambles on customers with tarnished records, analysts say. Simply put, it is less economical for banks to provide inexpensive financial services and it is tougher for banks to generate revenue on lower-income customers who typically maintain small account balances. Still, banks say they are committed to provide banking services broadly.

I’m not a fan of the banks’ actions, but this outcome is a result of having customers expect to get free checking accounts. When I was in Australia, it was close to impossible to have a relationship with a bank and not incur $25 to $30 a month in fees. Now Australia is a comparatively small market and the banks had an oligopoly. Nevertheless, banks in the US finessed the “free checking account” problem by having all sorts of sneaky income earners, like overdraft charges. Customers would do better to accept more explicit fees on routine services (for instance, the account I chose in Oz ave me only a certain number of checks for free a month, and after that, there was a charge). But just the way people been conditioned to expect information on the internet to be free, they think the payment system should be free, which instead means the costs get buried in funny ways and hit some users a lot more than others. Now that neofeudalism is in, the new strategy for profit enhancement is more aggressively abusing those who have low incomes.

Of course, the more logical alternative would be to regulate banks as utilities, given how massively they are subsidized, or promote the creation of a Post Office bank to provide bare bones bank services on a low fee basis. But we can’t do anything sensible in the US if it will cut into the rentiers’ profits.

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43 comments

  1. Susan the other

    Maybe do both: regulate banks as utilities and create a Postbank system for smaller accounts – which will be the majority of accounts soon. And ban those nasty payday loan sharks while we’re at it.

    1. A Real Black Person

      The U.S. banning payday loan sharks is as likely as the U.S. banning the for-profit schools of higher learning.

    2. Carla

      Many payday lenders and the even more nefarious auto title loan stores are, in fact, owned by Wall Street banks. It’s all the same creeps.

  2. mcgee

    A little torn on this issue. The unbanked do have significant costs incurred in cashing their checks and paying bills but there are options, notably Walmart, where banking services are offered at a reasonable cost. The upside is not being in a position to be prey to the predatory practices of large banks and not having access to further debt accumulation. A few overdraft charges can eat a big hole in a tight budget and push low wage earners into having to utilize payday loan establishments and a cycle of neverending interest payments.

    Might be better off being unbanked in this age of greed. Though in a perfect world there would be protections and better choices available to the unbanked but unfortunately my horses to beggars ratio is still decidely lopsided.

    1. YankeeFrank

      I am “unbanked” as the lame moniker goes. I use these debit cards nowadays — the ones that have been in the news for making penniless workers a scosche more penniless — and they’re working for me, though I’d say for someone who earns much less the expense would be painful. I pay ridiculous $5-6 for a withdrawal but I just take out my cash all at once and it comes out to around 1%.

      Some are better than others. Netspend is kind of douchey as they charge you for each purchase a couple dollars. Ripoff artists, scamming profit coming and going. Mango seems a lot better, with much higher atm withdrawal limits and no per-transaction charges, and a better website.

      One cool thing about these frickin cards is that you get a bank routing and account number so you can basically treat it like a bank account, sending and receiving ACH payments. Sending/bill pay features fluctuate between the different cards. It seems a few banks are heavy into this including those green dot a-holes, metabank, bancorp bank and another I forget. Each of them may have a variety of cards with differing features and limits and names.

      Another very nice “feature” is no credit lines, no overdraft fees and no getting royally pissed at the bank for ripping you blind.

      The final, and most important feature is no credit or “chex” system for one to fail. You apply with your social security number and they send you the card.

  3. Foppe

    Yves: in NL a regular checking account with debit card costs around €4 per quarter, the interest on short-term loans (via an overdraft facility, which itself is free) is between 8-11ish % annually, and there is no bullshit going on with ‘amount’ as opposed to temporal ordering of transactions.. (Students and children pay nothing for this type of account, and you can disable the ability to go into ‘red digits’.)
    I find it quite odd to hear that this is so expensive in Oz, as I don’t believe I paid anything for my checking account when I was there about a decade ago on a work/travel visa. What type of account did you have, that you had to pay 30$/mo in fees?

    1. Yves Smith Post author

      I won’t bore you, but a friend who worked for a bank said she considered it an accomplishment when she spent only $20 to $25 a month in fees. And she was a resident, had been there 10 years at that point. Point is that the charges were not the result of my being a rube or not caring or in a weird category by being on a visa, this was bog standard for Oz then (2002-2004).

      You may not have looked closely enough. They charged fees for deposits on certain accounts. The “no monthly fee” accounts had you paying per check fees IIRC on every check, unless you kept a really large non-interest balance and didn’t let it drop below that level (gotcha fees if that took place).

      You might have been willing to keep a very large non-interest balance, but that wasn’t free given that interest rates were pretty good on savings accounts in Oz. I wasn’t because I was keeping all my balances low to avoid reporting my accounts to the IRS (instant audit red flag). So I was taking money out of my US accounts on ATMs and didn’t get a local credit card (that might also have gotten you a cheaper account, if you had a credit card and were paying annual fees on that).

    2. LAS

      Recently had to cancel a lost check at Chase. They charged me $30 and then they said the hold is in force for 12 months only and I’ll have to pay $30 each year I want to extend it. This – to me – is a scam.

        1. pepe

          Per the UCC, banks are not obligated to cash checks older than 180 days, but that doesn’t necessarily mean that they won’t.

  4. Sufferin' Succotash

    Thanks to that dyed-in-the-wool socialist William Howard Taft the US did have a Postal Savings Bank once upon a time.
    One major reason was to encourage saving among low-income people, especially newly-arrived immigrants, while protecting them from, er, illegal and/or unethical banking practices.
    Luckily, the US managed to survive that Long Dark Totalitarian Night to bask in the light of the economic freedom that we know and love today.

  5. ScottS

    I support the Postal Bank idea 100%. Makes complete sense, may save the Postal Service too.

    1. lakewoebegoner

      “or promote the creation of a Post Office bank to provide bare bones bank services on a low fee basis. ”

      IIRC, the USPS is explicitly banned from providing financial services by statute/lobbying. obviously as a USPS bank would cut into the turfs of banks and Western Union.

  6. Lambert Strether

    Not “unbanked,” as if this were some sort of accident or natural phenomenon. Debanked, as a matter of policy, for profit (and also for the sheer joy of putting the boot into the underclasses).

    Exactly like “unemployment” vs. “disemployment.”

  7. jfleni

    If Occupy Wall Street (still in business) gets its payment card operation up and running (promised soonest), then let the bankers choke on the missed revenue they didn’t get by dumping on poor people.

    1. A Real Black Person

      To be fair, it’s not just the bankers and the 1% that are dumping on the poor. The upper middle class and up closely identify with the rich, in many ways. Since higher education has expanded, in the U.S., America overall has become more economically conservative to the point that I see that most of the upper classes worship credentialism, and unproductive economic activity that redistributes wealth from the bottom to the top, regardless of their professed political views. Identifying with the rich means ‘dumping’ on the lower classes. As social beings in a diverse, stratified society, we need a group of people who are worse off than us to give a sense of status. In America, the belief is that one is raised in America and is poor as an adult, it is because they choose to be poor. The mainstream belief is that there is so much opportunity in America, that it is impossible for anyone with a work ethic to stay poor so those who remain poor deserve a certain amount of contempt.

      1. hunkerdown

        I was under the impression that the need to be better than was a learned behavior, part of the pathology of unbridled Exceptionalism. Anyone care to dump on my parade and tell me that’s not actually so in any human society anywhere?

      2. LucyLulu

        Rep. Broun (R)-GA explained the situation earlier this week when he introduced an amendment to an appropriations bill on the House floor.

        He said the economy is tight, and we’re all having to cut back. Nobody is being spared. That was why he was introducing an amendment reducing the amount of funds set aside to help the homeless.

        Even those who have nothing must share in the pain (by sacrificing what they don’t have).

        Broun’s amendment was rejected.

    1. Massinissa

      Might not be the worst idea.

      Shit cheap banking for shit cheap services.

      At least you would know what youre getting, since alot of times folks get almost-shit service for normal or even exorbitant pricing.

      1. Massinissa

        Oh and they could probably hire all the bank clerks as temps to avoid paying them anything.

  8. Conscience of a Conservative

    Part of the cost of being a tax payer insured banking institution(Fed member bank,FDIC insured etc) should be a requirement to offer a basic no-frills check account and/or pass-book savings account to its customers at a regulated rate. Since our banking system is not capitalist and free-market by any means it’s only fair to impose on banks a requirement that benefits the greater economy. By forcing cusotmers onto costly debit card plans the banks are effectively taxing our economy and creating negative value.

  9. Phil

    Banks shuold be nationalized, with strict regulations re: customer care, and servicing. It’s high time; bankers are Robber Barrons who have to be CONSTANTLY watched for abuse. It’s a cat and mouse game that ends up with banks paying “fines”, while the criminals go scott free.

  10. alex morfesis

    we used to have a postal savings bank system

    It was created on Jan 25, 1910 to begin operations in 1911

    it was designed for small savers which the banks
    were refusing to properly service…

    sound familiar…

    at its height in 1947 it had over 4 million customers with
    over 8000 branches having the capacity to service
    americans

    when it was officialy killed in the mid 1960′s there were over 600k accounts that had not been redeemed with over 50 million dollars in them…

    technically if someone had purchased or finds a postage savings stamp or postage savings bond it can still be redeemed, but otherwise on July 13, 1985, the Treasury Dept ate the unclaimed money…god bless paul volcker…such a lover of the little man, creator of the rust belt and all around lover of moving jobs overseas…

  11. Funonymous

    “But we can’t do anything sensible in the US if it will cut into the rentiers’ profits.”

    Just thought that bared repeating. I say something similar more often than I’d like to have to, basically that most of our national problems would have straightforwrard, sensible fixes, if each of those problem’s did not have a massive wealthy power center standing over it that benefits outrageously from the dysfunction, fighting tooth and nail to ensure it continues.

    1. hunkerdown

      I see you have independently rediscovered the Shirky Principle: “Institutions try to preserve the problems to which they are the solution.”

  12. Well cooked serf

    I’m familiar with chex systems and im not a fan. However, contrary to this article’s tone, It’s not just one bounced check that puts you in the system. You have to have a bank account closed involuntarily with a negative balance. That can happen by too many uncovered overdrafts or through a BK on a day with a negative bank account balance. The fact of the matter is that a small percentage of people can’t bank responsibily and they get shut of the banking system. This should not be a shocker. Yes, overdraft fees are exorbitant and bankers are scum, but like any business owner, you keep track of the clients who systematically don’t pay, and that’s what check systems is for. It also keeps track of the scammers who deposit fake checks and withdraw the money before it clears the bak officially(which for int’l banks can take a few weeks). Huge problem with scams for. Eastern Europe and Africa with these scams. More transparency would be nice so it doesn’t perpetuate myths about the system.

    1. YankeeFrank

      “You have to have a bank account closed involuntarily with a negative balance.”

      You make that sound as if its an unlikely proposition. And then you really tainted the tap water when you wrote “[t]he fact of the matter is that a small percentage of people can’t bank responsibily [sic] and they get shut of the banking system.”

      You should’ve written *sniff sniff* after that sentence. What a hoser you are. You admit that banks are scum, yet that doesn’t dissuade you from sitting on those who can’t manage to NOT get screwed who, most commonly, are the poor and are constantly balancing due dates with bank balances.

      So… I don’t see your point herb. What was it again?

    2. Klassy!

      Wrong! I was denied a savings account because unbeknownst to me, I had a bad check on my record. I’ve posted this before– it was written in another city on an account I never had, in a store I had never been in, in a city two hours away. I had to go through a lot of hassle to finally find out that license numbers had been transposed incorrectly. I was under the assumption that I had really good credit– an assumption upheld by the fact that the credit union where I opened a checking account checked my credit and told me I was “golden”. They did not use Chexsystem. So, it really is secret. And no one helps you. And the fact that the credit unionn did not use Chexsystem and the bank did tells you that it probably does serve as a way to keep undesirables away.

  13. Ms G

    A note on a dog that is not barking in this story.

    Where is the CFPB (and Warren) on this?! I hear only ***crickets***.

    If this isn’t an issue squarely within CFPB’s jurisdiction that should be at the top of its list for aggressive enforcement, I don’t know what is.

  14. Benjamin

    I have personal experience with this. In 2002-2003 I was the victim of identify theft. It took me until about 2005 to completely clear my credit reports as additional fraudulent activity would pop up from time to time. Somewhere in about 2003 I was contacted by a bank about an overdrawn checking account in New Jersey; I live in california. They wrote it off as ID theft and I never heard from that bank again. In 2006 I needed to close a joint account (had about 10k in it) and re-open a single account at Washington Mutual. The manager closed my account, then promptly refused to open me a new account as my name popped up in ChexSystems. This despite the sum of money they had just confirmed was already in my account. They finally did open my account after I yelled at them in the branch long enough. Absolutely ridiculous and I had no way of knowing the bank in NJ that told me they had resolved the issue had reported me to some agency I had never heard of.

  15. Lyle

    Create a new type of account that is bill pay only no check writing. This would be online only. Since Bill pay can send paper checks if need be it should be able to handle things. Now if the bank ran the account in real time since only e-transactions would be allowed, then it would be easy to deny overdrafts. With this sort of system there would be no checks to bounce. Bill pay apparently costs $3 per month on top of a checking account fee. If this account did not mail statements, and did not allow teller access, one might get the fee to the neighborhood of $10 if you don’t have a direct deposit of like 500 or maintain a 1500 balance.

  16. whocanyoubelieve

    There are options other than what the writer mentions. You can just avoid banks altogether. Some people do it, in fact my brother-in-law does. Pays everything in cash.

    But it wasn’t all that long ago when you couldn’t get a checking or savings account without some fee associated with it. I realize I’m dating myself now, but be thankful there are some banks with 0 cost checking/savings accounts and then just avoid using their debit/credit cards in different banks.

    1. AbyNormal

      i spent 15 years raising my daughter alone…there were times i felt physically and mentally vulnerable and never so strongly as when i was forced to deal in cash

  17. AbyNormal

    “I believe that we can create a poverty-free world because poverty is not created by poor people. It has been created and sustained by the economic and social systems that we have designed for ourselves; the institutions and concepts that make up that system; the policies that we pursue.”
    Muhammad Yunus, Banker to the Poor: Micro-Lending and the Battle Against World Poverty

    1. Nathanael

      Al Gore would have been a pretty good President — he was the single best major-party Presidential candidate in my lifetime, and he *got the majority of the votes*.

      Since the coup by several traitors to the United States in high places (may they rot in hell) in 2000, we’ve had a lot of trouble.

  18. econ studen

    I gave up on banks years ago. Credit Union was a great replacement. Fees vary by institution but the former institution that I was using (before moving out of the area) had free checking, savings, debit card use, free checks. Free money in january as profits were distributed among all members – even ones that didn’t carry balances. New one isn’t quite as generous – I have to buy my blank checks. I will never go back to a bank.

  19. AndyLynn

    i’ve used credit unions exclusively for the past 10 years – and have for the most part been impressed & happy.

    but recently – after watching “Chasing Madoff” again, i realized that i didn’t know who my cu’s “counterparties” were and that was potentially a big mistake. (eg: if my cu used BofA for “correspondent bank” services, i could still be exposed to “bail-in” despite eschewing BofA directly.)

    and so far, my cu’s attempt to answer my questions have been clumsy & sub-par and they act sightly offended and openly wonder why a member would want to know of such arrangements.

    uh-oh. better get that USPS postal bank spun up – quickly!

    1. Lyle

      Note that credit unions typically belong to the NCUA which has the same access to the federal treasury as the FDIC, so the money is just as safe there. Note that as long as you stay under 250k you don’t have to worry about counterparties, just like in the case of Cyprus if you had under 100k euros you were protected as that was the insurance limit. Essentially what happened in Cyprus was very similar to what happened with IndyMac, folks above the insurance limit took a haircut. So you won’t be exposed directly below the limit, and if you have more than 250k in the bank bankers will be very very nice to you. (You will be a profitable customer).
      So I don’t see how unless you don’t view the federal guarantee as worth much there is much of a problem, and if you don’t view that as worth much, then you must be buying gold and silver as paper is worth only what the feds say it is.

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