Mistakes like a bounced check or a small overdraft have effectively blacklisted more than a million low-income Americans from the mainstream financial system for as long as seven years as a result of little-known private databases that are used by the nation’s major banks.
The problem is contributing to the growth of the roughly 10 million households in the United States that lack a banking account, a basic requirement of modern economic life.
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 Fargosay that tapping into the vast repositories of information helps them weed out risky customers and combat fraud — a mounting threat for banks.
But consumer advocates and state authorities say the use of the databases disproportionately affects lower-income Americans, who tend to live paycheck to paycheck, making them more likely to incur negative marks after relatively minor banking missteps like overdrawing accounts, amassing fees or bouncing checks.
When the databases were created more than 20 years ago, they were intended to help banks guard against serial fraud artists, like those accused of writing bogus checks. Since then, though, 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.
Jonathan Mintz, the commissioner of the New York City Department of Consumer Affairs, says banks’ growing reliance on customer databases has frustrated efforts to help an estimated 825,000 New Yorkers without bank accounts gain access to the mainstream financial system.
“Hundreds of thousands of Americans are being shut out for relatively small mistakes,” Mr. Mintz said.
As a result, many have no choice but to turn to costly fringe operations to cash checks, pay bills and wire money. Saving for the future, financial counselors say, can be especially difficult.
The ranks of those without bank accounts have swelled — up more than 10 percent since 2009, according to the Federal Deposit Insurance Corporation — as banks have sharpened their focus on more affluent customers who typically generate twice the revenue of their lower-income counterparts. Many banks are closing branches in poor areas and expanding in wealthier ones, according to an analysis of federal data.
Rejection for would-be bank customers can come as a shock. Tiffany Murrell of Brooklyn says a credit union denied her checking account application in September 2012 even though she had a job as a secretary and was up to date on her bills.
The obstacle, it turned out, was a negative report from ChexSystems, a consumer credit reporting firm that provides customer data to virtually every major bank and credit union in the nation. The black mark stemmed from a overdraft of roughly $40 in June 2010, according to a copy of a letter that the 31-year-old Ms. Murrell later received from ChexSystems. While she repaid the amount, plus interest and fees, before applying for a new account, the incident, she says, has barred her from opening an account at nearly every bank she has tried, an experience she called “insulting and frustrating.”
While many Americans have at least a vague idea that their credit report is crucial when applying for a loan, few realize that a parallel report is used for bank accounts.
“Most of my clients have no idea these databases exist, let alone what they did to end up in them,” said Kristen Euretig, a financial counselor with Neighborhood Trust Financial Partners, a nonprofit group in New York.
The largest database, founded in the 1970s, is run by ChexSystems, a subsidiary of FIS, a financial services company in Jacksonville, Fla. Subscribers — Bank of America, JPMorgan Chase, Citibank and Wells Fargo among them — “regularly contribute information on mishandled checking and savings accounts,” ChexSystems says on its Web site. “A consumer may dispute any information in their file and ChexSystems will facilitate the resolution of the dispute on the consumer’s behalf,” the company said in a statement. A rival, Early Warning, which is owned by Bank of America, BB&T, Capital One, JPMorgan Chase and Wells Fargo, says roughly 80 percent of the 50 largest American banks pay a fee to subscribe to its deposit-check service.
“Client banks are focused on leveraging intelligence to mitigate fraud from going into the system,” said Frank Caruana, the company’s chief marketing officer.
But 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. Mr. Caruana of Early Warning says the company gives the fine details to its clients, outlining, for example, how much of outstanding debt is principal and how much is fees.
Culling information from the databases is one prong in an assessment, as lenders vet potential customers and screen for fraud. Losses from fraud on new bank accounts surged to $9.8 billion last year, up 50 percent from a year earlier, according to Javelin Strategy and Research.
JPMorgan says a negative report in ChexSystems will rarely bar someone from obtaining an account. Others, like Bank of America, Citibank and Wells Fargo, say they use the information carefully, distinguishing between people who have made mistakes and those who have a history of fraud. Some banks have introduced second-chance checking accounts for people who do not qualify for traditional bank accounts.
Ultimately, Mr. Caruana said, the decision rests with the banks. He noted the soundness of the reports — of the 50 million the company issued last year, only 3,600 were disputed for inaccuracy. And banks and credit unions say that they work to ensure that customers are not penalized for minor mistakes.
Yet the interviews with officials, consumer advocates and the people denied accounts offer a starkly 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.
The sting of being rejected, though, can make lower-income individuals feel like second-class citizens.
“I just don’t understand why they wouldn’t want me,” said Ms. Murrell, the Brooklyn secretary. “It feels unfair.”
The costs of not having a bank account for seven years — the longest amount of time that a negative report remains in the databases — can quickly add up. David Korzeniowski, 23, said an employee at a bank in Lansing, Mich., had told him that an overdrawn account reported to ChexSystems very likely scuttled his chances of a checking account until 2016.
Mr. Korzeniowski, who acknowledges “he made a mistake,” says the fees he pays for cashing checks, paying bills and wiring money cannibalize the paycheck he gets from part-time construction work. “Everything is more expensive,” he said.