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What is ChexSystems?
ChexSystems provides deposit account verification services to its financial institution members to aid them in identifying account applicants who may have a history of account "mishandling" (for example, people whose accounts were overdrawn and then closed by them or by their bank). ChexSystems is also licensed to do business as ChexSystems Collection Agency providing debt collection services to members participating in this service.
ChexSystems is a service provided to banks by Deluxe Corporation. Their database keeps track of negative information regarding checking and savings accounts. Negative information usually consists of NSF (non-sufficient funds), which is also known as bouncing checks. Unpaid overdrafts are also a major contributor to the database.
Is ChexSystems a credit bureau?
ChexSystems is a consumer-reporting agency governed by the Fair Credit Reporting Act (FCRA) and other laws. ChexSystems Collection Agency is a debt collector subject to the Fair Debt Collection Practices Act (FDCPA) and other laws.
A minor mistake with major consequences:
Sometimes it doesn't take much to land on ChexSystems' list of naughty account-holders. A vocal critic of the agency says his former bank reported him to ChexSystems after an insurance company automatically debited $60 from a closed account. On the other end of the spectrum, ChexSystems alerts a bank when an account applicant furnishes a phony Social Security number or when the applicant has a history of fraudulent check-kiting schemes.
Critics complain that financial institutions use ChexSystems indiscriminately, weeding out not only checking-account applicants who intend to commit fraud, but also law-abiding people who wrote a bad check or two by mistake, or who were irresponsible with their checking accounts but have since learned their lesson. They want Congress to specify which offenses merit reporting to the agency. A negative ChexSystems report stays in the database for five years and can doom your chances of getting a checking account for that period. ChexSystems has records of 19 million accounts closed for cause. That's one record of a closed account for every 14 U.S. residents.
Eighty percent of U.S. banks and credit unions belong to the ChexSystems network, which testifies to the agency's importance in preventing fraud and losses to hot-check writers. Financial institutions lose $15 billion a year because of check fraud and abuse, according to ChexSystems. The agency estimates that every dollar spent on fraud protection saves $6 in administrative costs, a savings of hundreds of millions of dollars a year.
Speaking softly, carrying a big stick
For all its clout, ChexSystems wields its power quietly. Many people who ended up in its database never heard of it until they tried to open a checking account and were turned down because of their ChexSystems file. Most have much difficulty finding a bank that will let them open an account because someone with a ChexSystems file is considered more likely to be a fraud risk.
If you are reported to ChexSystems
Don't close any savings accounts or other checking accounts, and keep the balances in the black.
Pay all overdraft fees as soon as you can.
Make good on the checks: Once you have paid the overdraft fees and you have satisfied everyone who received a bounced check, get a short explanation inserted into your ChexSystems file. Bill Meninga, questions the fairness of the file hanging around for five years like a stale but juicy rumor. "My life has been a living hell because of ChexSystems," he says, although he acknowledges that he shares the blame: "The reason I am in ChexSystems is best summed up by irresponsibility of youth," he admits.
Meninga wrote a few of bad checks when he was 22. He says he paid his overdraft fees immediately and paid the recipients of the bounced checks. Three years later, Bill tried to open a checking account. Banks rejected him based on his record of bad checks on file with ChexSystems. Thomas believes that ChexSystems performs a valuable function by protecting banks from the unscrupulous, but he is angry at the agency for keeping files on people for half a decade after making honest mistakes.
"I do think that five years is a little harsh and maybe they should shorten it to one or two years," he says. Only by making repeated calls did he persuade the bank to report to ChexSystems that he had repaid the $60 and overdraft penalties. "I had gray hair and no fingernails after a week of this," he says. Thomas criticize ChexSystems for what he says is a lack of accountability to consumers, although they have no kind words for their banks, either.
Try, try again
Theoretically, at least, bank and credit union managers have the option of letting customers open accounts even if they are listed in the ChexSystems database.
You can always try to convince the new-accounts manager that your business is worth the risk. Keep in mind, though, that one of the products that ChexSystems offers is Audit Check, which tracks cases in which managers overrode a negative report from ChexSystems and let a customer open an account anyway. With upper management peering over the new-account manager's shoulder, you might not be worth the potential hassle. Finally, you can try to find a bank or credit union that doesn't use ChexSystems using our service. Studies show 80 percent of financial institutions use ChexSystems; so ferreting out an institution that doesn't use ChexSystems can be a challenge.
There is hope.
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