Capital One Financial said Monday that it will no longer use a popular screening program to weed out potential customers with a history of overdrawing their accounts, an industry-wide practice that has pushed thousands of people out of the banking system.
Before opening a checking or savings account, banks and credit unions screen would-be clients through databases such as ChexSystems that document bounced checks, unsatisfied balances, repeated overdrafts and other behavior that could signal fraud. Instead of barring fraudsters from getting accounts, regulators say institutions are using these databases to exclude people who have simply had trouble managing their money.
The practice is at the heart of an ongoing investigation by New York Attorney General Eric T. Schneiderman into the use of consumer databases by the nation’s biggest banks. Capital One was one of six banks, including JPMorgan Chase, Wells Fargo, Citigroup and Bank of America, to receive requests for information from his office last summer, according to people familiar with the inquiries who were not authorized to speak publicly.
Schneiderman initiated the probe amid concerns from advocacy groups that the screening process adversely affected low-income New Yorkers and people who have fallen victim to identity theft. Advocates have warned that if nothing is done to curb the restrictive policy, New York will continue to have more than 825,000 adults without bank accounts who are forced to turn to pricey fringe outfits to cash checks or pay bills.
“No one — least of all struggling New Yorkers — should be forced to rely on high-cost alternatives to banks just because they bounced a check or were a victim of identity theft,” Schneiderman said. “Equal access is the least we can do to ensure that all New Yorkers have access to widely used services such as our nation’s banking system.”
McLean, Va.-based Capital One is the first of the six banks under investigation to agree to only use ChexSystems to screen customers for past fraud, not to predict whether they are a credit risk. The policy change, which takes effect by the end of this year, extends to all of the bank’s branches throughout the country, not just those in the state of New York.
“We greatly appreciate the work of the Attorney General’s staff in bringing these concerns to light, and we’re pleased to be able to work together to expand access to critical banking services,” Kleber Santos, senior vice president of retail and direct banking at Capital One, said in a statement.
Advocates say banks blindly discredit anyone listed in ChexSystems without any review of the circumstances that may have landed them in the database.
Lisa Allen, 26, said that days after she opened a checking account with Wells Fargo in 2011, the bank sent her a letter stating that the account would be closed because her name appeared in ChexSystems. She immediately requested a copy of her file from ChexSystems but found no black marks in the report.
“There was no explanation why I was even in the system,” said Allen, a resident of Santa Cruz, Calif., who works in purchasing at defense contractor Lockheed Martin. “But when I told the bank, they still wouldn’t keep me as a customer.”
Allen suspects the mix-up has something to do with her Social Security number being issued to another person, a mishap that was cleared up the same year she tried to open the Wells Fargo account. Yet the only financial institution willing to work with her was a small credit union, Patelco, that overlooked the ChexSystems file and allowed her to open an account.
Founded in 1970, ChexSystems gathers information from banks on mishandled checking and savings accounts. Under the Fair Credit Reporting Act, consumers have the right to request a copy of their file and dispute any erroneous information. But few people even know the database exists until they are blocked from opening an account, and advocates say they often have trouble having incorrect information removed from their reports.
Consumer lawyers say complaints about ChexSystems exploded around 2000, when banks began instituting aggressive policies to maximize fee income from customers who overdraw their accounts. At the time, banks increased overdraft fees and changed how they process transactions from the highest amounts to the lowest, a practice that often resulted in multiple overdrafts.
“These practices left consumers with unpaid negative balances that often led the bank to close their account,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center. “That shows up in ChexSystems.”
A report from the Consumer Financial Protection Bureau found that banks involuntarily closed 6 percent of consumer checking accounts because of unpaid negative balances. While the bureau said that not all negative balances are caused by overdrafts, the majority of them result when consumers overdraw their accounts.
Consumer Financial Protection Bureau spokeswoman Moira Vahey said the bureau is monitoring banks’ use of specialty consumer reporting agencies to screen consumers applying for checking accounts.
“It is important that consumers have access to these reports, that information in them is accurate, and that these practices do not inappropriately restrict consumers’ access to the banking system,” she said.