jsilver at ncrc.org
05-22-2001, 10:07 AM
Dear Friends:
Check out a new report from the National Community Reinvestment Coalition (NCRC) on ChexSystems! *This is a system similar to credit reports but is used by most banks in determining whether to open checking accounts. *The question is does ChexSystems lead to unfair denials of checking accounts! *
This report is on NCRC's web site, http://www.ncrc.org in the "What's New" section on top of the home page. *If you have any questions, we are on 202-628-8866. *The article below summarizes the report.
Josh Silver
Vice President of Research and Policy
NCRC
ChexSystems: *Blacklisting Bank Customers?
Ever heard of ChexSystems? *Consumers know about credit bureaus. *Some may know about their credit score that evaluates whether they are credit worthy for a loan. *Few consumers, in contrast, have heard about ChexSystems, a private sector database maintained by the Deluxe Corporation that 80 percent of U.S. banks use when deciding to offer checking accounts.
ChexSystems currently maintains the records of seven million customers that have either bounced checks or committed fraud in the last five years. *Banks contract with the Deluxe Corporation to send records of their customers with closed accounts to ChexSystems. *In return, banks have access to ChexSystems when reviewing an application of a new customer for a checking account. *
The ChexSystems database is huge; it contains the records of about seven million customers. *About 12 million Americans lack any relationship with banks. *Since many ChexSystemsı consumers may also be those without banking relationships, NCRC decided to conduct a survey to determine if banks are using the ChexSystems database in a punitive manner that effectively blacklists customers and increases their reliance on high cost check cashers and other fringe bankers. *Or are banks using ChexSystems in an appropriate manner to deny accounts to customers posing significant risks of overdraft or fraud?
In late 2000, NCRC surveyed banks that are members of our Banker Community Collaborative Council (BCCC). *The BCCC is composed of about twelve banks and an equal number of NCRC Board members that meet frequently to discuss credit needs and design affordable banking products. *Six of the banks completed the survey, but they all requested confidentiality when NCRC discussed survey results.
NCRCıs survey found that the banks use information in the ChexSystems in an inflexible and reflective manner that is most likely not related to risk. *For example, in 1999, five of the six banks denied checking accounts to customers whose ChexSystemsı records were five years old. *Four of the banks responded that they do not disregard a ChexSystems entry if a consumer repays the overdraft amount. *Only one of the banks used factors such as steady employment or paying rent on time in addition to the ChexSystems record when deciding whether to open checking accounts for applicants.
The survey found indications of positive change. *Starting in 2000, two of the banks indicated that they would disregard ChexSystems overdraft records that are more than three years old. *Likewise, two of them will disregard a ChexSystems entry that is more than one year old when the consumer has repaid his or her debt. *One bank will offer a non-check writing transitional account, the Federally subsidized Electronic Transfer Account (ETA), to those with ChexSystems records.
Not surprisingly, the banks with more lenient policies for referring customers to the ChexSystems database referred fewer customers. *One bank responding to the NCRC survey would report customers to the ChexSystems database only 30 days after an overdraft while another bank waited 60 days before reporting. *One bank considered $35 overdue as an overdraft while, all other banks, on average, considered $67 overdue as overdrafts. *The bank with the lowest dollar threshold referred about 4 percent of its customers to ChexSystems. *In contrast, the bank with one of the more lenient policies referred less than .2 percent of its customers to ChexSystems.
NCRCıs ChexSystems report ends with a series of recommendations for banks, regulators, and community groups. *NCRC urges BCCC banks and other institutions to continue experimenting with time and dollar thresholds when using ChexSystems. *Banks and regulatory agencies must also carefully assess which variables most accurately predict overdraft. *At this point, it appears that consumers are needlessly blacklisted because systematic study has not accurately assessed risk factors. *
Regulatory agencies should also use the service test of CRA exams to measure the number and percentage of checking and savings accounts that banks offer to minorities and lower income consumers. *Those banks that deny many customers and offer relatively fewer accounts than their peers due to arbitrary use of ChexSystems will be penalized by lower ratings. *Finally, community groups should survey banks in their area regarding their use of ChexSystems and the numbers of consumers of different racial and income groups with checking and savings accounts. *Community groups should develop an inventory of banks and use this list as a means of promoting the banks with the most affordable products and the most judicious use of ChexSytems.
NCRCıs report is on our web page (http://www.ncrc.org) in the report section of the "How to Use CRA" section. *We are on (202) 628-8866 to answer any questions.
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Check out a new report from the National Community Reinvestment Coalition (NCRC) on ChexSystems! *This is a system similar to credit reports but is used by most banks in determining whether to open checking accounts. *The question is does ChexSystems lead to unfair denials of checking accounts! *
This report is on NCRC's web site, http://www.ncrc.org in the "What's New" section on top of the home page. *If you have any questions, we are on 202-628-8866. *The article below summarizes the report.
Josh Silver
Vice President of Research and Policy
NCRC
ChexSystems: *Blacklisting Bank Customers?
Ever heard of ChexSystems? *Consumers know about credit bureaus. *Some may know about their credit score that evaluates whether they are credit worthy for a loan. *Few consumers, in contrast, have heard about ChexSystems, a private sector database maintained by the Deluxe Corporation that 80 percent of U.S. banks use when deciding to offer checking accounts.
ChexSystems currently maintains the records of seven million customers that have either bounced checks or committed fraud in the last five years. *Banks contract with the Deluxe Corporation to send records of their customers with closed accounts to ChexSystems. *In return, banks have access to ChexSystems when reviewing an application of a new customer for a checking account. *
The ChexSystems database is huge; it contains the records of about seven million customers. *About 12 million Americans lack any relationship with banks. *Since many ChexSystemsı consumers may also be those without banking relationships, NCRC decided to conduct a survey to determine if banks are using the ChexSystems database in a punitive manner that effectively blacklists customers and increases their reliance on high cost check cashers and other fringe bankers. *Or are banks using ChexSystems in an appropriate manner to deny accounts to customers posing significant risks of overdraft or fraud?
In late 2000, NCRC surveyed banks that are members of our Banker Community Collaborative Council (BCCC). *The BCCC is composed of about twelve banks and an equal number of NCRC Board members that meet frequently to discuss credit needs and design affordable banking products. *Six of the banks completed the survey, but they all requested confidentiality when NCRC discussed survey results.
NCRCıs survey found that the banks use information in the ChexSystems in an inflexible and reflective manner that is most likely not related to risk. *For example, in 1999, five of the six banks denied checking accounts to customers whose ChexSystemsı records were five years old. *Four of the banks responded that they do not disregard a ChexSystems entry if a consumer repays the overdraft amount. *Only one of the banks used factors such as steady employment or paying rent on time in addition to the ChexSystems record when deciding whether to open checking accounts for applicants.
The survey found indications of positive change. *Starting in 2000, two of the banks indicated that they would disregard ChexSystems overdraft records that are more than three years old. *Likewise, two of them will disregard a ChexSystems entry that is more than one year old when the consumer has repaid his or her debt. *One bank will offer a non-check writing transitional account, the Federally subsidized Electronic Transfer Account (ETA), to those with ChexSystems records.
Not surprisingly, the banks with more lenient policies for referring customers to the ChexSystems database referred fewer customers. *One bank responding to the NCRC survey would report customers to the ChexSystems database only 30 days after an overdraft while another bank waited 60 days before reporting. *One bank considered $35 overdue as an overdraft while, all other banks, on average, considered $67 overdue as overdrafts. *The bank with the lowest dollar threshold referred about 4 percent of its customers to ChexSystems. *In contrast, the bank with one of the more lenient policies referred less than .2 percent of its customers to ChexSystems.
NCRCıs ChexSystems report ends with a series of recommendations for banks, regulators, and community groups. *NCRC urges BCCC banks and other institutions to continue experimenting with time and dollar thresholds when using ChexSystems. *Banks and regulatory agencies must also carefully assess which variables most accurately predict overdraft. *At this point, it appears that consumers are needlessly blacklisted because systematic study has not accurately assessed risk factors. *
Regulatory agencies should also use the service test of CRA exams to measure the number and percentage of checking and savings accounts that banks offer to minorities and lower income consumers. *Those banks that deny many customers and offer relatively fewer accounts than their peers due to arbitrary use of ChexSystems will be penalized by lower ratings. *Finally, community groups should survey banks in their area regarding their use of ChexSystems and the numbers of consumers of different racial and income groups with checking and savings accounts. *Community groups should develop an inventory of banks and use this list as a means of promoting the banks with the most affordable products and the most judicious use of ChexSytems.
NCRCıs report is on our web page (http://www.ncrc.org) in the report section of the "How to Use CRA" section. *We are on (202) 628-8866 to answer any questions.
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