What is the Banking ChexSystems?
ChexSystems, a financial reporting organization that keeps records on consumer banking activity, provides new account verification services to a number of financial institutions. Though the organization has a controversial record, it uses the information in its database to protect banks and limit financial fraud in compliance with government regulations.
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Function
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Financial institutions incur a considerable amount of risk when they agree to hold a customer’s funds and process transactions against the customer’s bank account. To help mitigate this risk, according to the financial website WealthJunkies.com, many banks verify new customer accounts with the ChexSystems organization. Each time a bank customer performs an action the bank deems undesirable, whether that action is as simple as accidentally overdrafting an account or as malicious as intentional fraud, participating banks report the activity, along with the customer’s personal identifying information, to ChexSystems. The resulting record with the ChexSystems organization serves as a warning to other financial institutions that the customer has a history of undesirable financial activity.
Controversy
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Because of the nature of the ChexSystems database, many financial institutions turn away customers who have a record with the organization. Some customers, according to a spate of anti-ChexSystems websites like CreditInfoCenter.com and StopChex.com, believe the system allows for unfair treatment of individuals who mistakenly and innocently overdraft their accounts. In addition, according to the bank fraud website CkFraud.org, neither ChexSystems nor member banks bear any responsibility for removing records with the organization once a customer rectifies any negative account balances. For this reason, customers who overdraft an account but return the account to good standing may find themselves on a ChexSystems “black list” despite having resolved any outstanding debts.
Regulation
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According to the organization’s official website, ChexSystems operates in compliance with the federal Fair Credit Reporting Act. The organization’s own rules require it to remove adverse records after five years, though the ChexSystems website indicates that it may remove entries sooner should local or state law limit the retention of such records. Because the company retains records on consumer habits and acts in a role similar to a credit bureau, it falls under the regulatory jurisdiction of the Federal Trade Commission.
Exceptions
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Though many banks protect themselves by checking new account applicants against the ChexSystems database, not all banks subscribe to the organization’s services. Many websites dedicated to resolving problems with the organization, like CreditInfoCenter.com and StopChex.com, maintain a list of banks that do not rely on the ChexSystems database, and some offer advice for requesting removal of a ChexSystems record.
Benefits
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ChexSystems allows banks to keep costs low, according to the organization’s website, by warning the financial institution of an applicant’s prior undesirable and potentially costly activity. The organization also helps reduce financial crime by limiting access of malicious individuals to new checking or savings accounts.
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