How to Deal with ChexSystems

Why Do Banks Use ChexSystems?

Banks use ChexSystems because there is sufficient data that proves beyond any statistical variance that a bank that opens an account for someone with a ChexSystems record is much more likely to take a monetary loss on that account than if they opened an account for an individual not on ChexSystems. This is not necessarily a apples to apples comparison because of course, those that are on ChexSystems already have obviously in one way or another already had trouble managing a bank account or their personal finances. One could ask the question, just because a higher percentage of those with ChexSystems records will create a monetary loss to the institution, how much greater is that chance relative to the group that does not have a ChexSystems record?

While that statistic is not made public by ChexSystems nor from its member institutions, there is substantial anecdotal confirmation from bank loss specialists that tips the scales against those with a record. In fact, most have argued that any account opened for an individual with a record is likely to create a monetary loss for the bank. This combined experience of bank loss specialists explains the predominance of ChexSystems use across the United States and the strict adherence to banning all of those with a ChexSystems record from opening an account. Though no single predictive mechanism can be 100% accurate, the statistical correlation between those with ChexSystems records and future bank monetary losses in undeniable.

Are These Actual Losses To The Bank?

Even though any type of ChexSystems record will stop a person from being allowed to open an account with a ChexSystems member institution, some consumer advocates for ChexSystems leniency have argued the very nature of the supposed loss the institution took that placed the person on ChexSystems in the first place. They have also stipulated that there is a core difference between a loss that is based on fraud versus a loss that is based on a negative balance due to uncollected service charge, non-sufficient funds, or overdraft fees. Never has there been statistical proof correlating different types of ChexSystems records, covered later in this article, and specific types of bank losses.

It is entirely possible for a person to have repeated overdraft fees in the $30-$50 range per occurrence, with a maximum of 10 charged per evening, for debit card purchases that amount to only a few dollars. Take for example, a debit for a fast food meal that appears for $5 and yet the account has a $3 balance due to a service charge for the account of $10 that the customer forgot to record. That $5 debit creates an non-sufficient funds charge of $50 and the bank returns the debit. The next day the account is again debited $5 and another $50 charge occurs and again the debit is returned. The account is now negative $97. If this customer then plans to make a $50-$75 deposit to cover some automatic debits that are going to hit their account for a total of $20-$30, they will be surprised to find that their small deposit will not cover the outstanding overdraft let alone the new expected debits. If they are on a fixed income and all they have is the $50-$75, those new debits will hit their account forcing it into a negative balance amounting to hundreds of dollars. This person, if they cannot pull together enough extra money to cure the negative balance, will find themselves on ChexSystems, have their account closed, and not be able to open another account for five years. This type of example happens every day at every bank location across the United States.

The first question is, did the bank actually take a loss, a true loss of hundreds of dollars or was it that the bank was charging hundreds of dollars for a situation that cost them pennies to process? Is this person then a risk to the new bank for a loss and if so, what type of loss? A paperwork loss similar to the one described above caused by a record keeping error or a true economic loss where the person involves themselves in an illegal act, such as depositing fraudulent checks, in order to create a loss to the bank?

Yet the punishment is the same. A ChexSystems record and losing the ability to open an account for five years.

This is the issue that every retail bank employee faces every day. They cannot differentiate between those that will create a true malicious loss and those that simply do not manage money well. Consider that when a person comes into a bank they are an unknown summation of qualities, once the bank account is opened the bank is in an immediate position to take an economic loss from its association with that individual. The single barrier to entry the bank has in opening the account is ChexSystems, therefore if ChexSystems can significantly mitigate the risk of loss by providing their scoring system, then a bank would be welcoming losses every time they opened the doors for business. This single risk management safeguard is highly effective and has saved banking institutions a statistically provable amount of money reaching into the millions of dollars per year.

The ChexSystems Process

A person is said to have a ChexSystems "record" if that individual has been reported to ChexSystems by a ChexSystems member institution as one with a recent history of mishandling a checking account in such a way that the reporting institution lost money or was at significant risk for losing money. It also identifies those who have had their bank accounts closed by intentional action on behalf of the reporting bank for unpaid outstanding checks and debits, account and ATM abuse, outstanding debits, fraud, depositing fraudulent items, etc. and it identifies those that have a proven track record of abusing checking accounts. These ChexSystems "records" are in fact very difficult to explain away and more often than not result in an account being denied.

Although not widely known, ChexSystems is actually a suite of services that offer banks identity theft protections as well as a cross reference database that helps to identify red flags about the new customer information that has been provided by the prospective customer to the new account employee. Red flags are identified through a complex database system where ChexSystems instantaneously cross references and processes validation tests against the prospect's address, telephone number, social security number, and date of birth. Discrepancies are reported to the bank employee as red-flags. These red-flags can be reviewed and waived by the new accounts personnel if a satisfactory answer is given to resolve the discrepancy. This power in the hands of the bank employee may lie with the front line employee or with their supervisor or manager, but do not mistake the ChexSystems reports of discrepancies with the actual report of a ChexSystems "matching record". A matching record is much more difficult and more often than not impossible to overcome in attaining an account.

The following describes the different levels of a ChexSystems analysis as well as the process the bank employee follows when provided with this information.

When a bank searches for ChexSystems verification they provide ChexSystems with the following information on the new account applicant:

• Name
• Address
• Social Security Number
• Date of Birth

Once ChexSystems processes this information the employee is given a hard decision from ChexSystems on whether or not an account should be opened. The decision will either be approved, denied, or inconclusive. Some ChexSystems clients may also receive decisions with other names such as record, no record, or possible match or several other variations on the hard decision.

If ChexSystems finds a record for the applicant on their system they will report to the new account employee the nature of that record. These types of records are most commonly one of the following:

1. Accounts closed by another institution and reason.

1. Non sufficient funds activity.
2. Depositing non collectible items.
3. ATM abuse.
4. Debit card abuse.
5. Money owed or No money owed. This last item will be given in all instances of a found record.

2. Accounts closed by the inquiring institution with the same reasons listed above. This happens when a bank's computer system is not sufficient to already have cross referenced the new customer data.

All of the above information is reported to the bank employee. Therefore any explanation that the customer gives to that employee must be consistent with the reason given for the record. The bank employee is not allowed to communicate to the customer the exact reason for their ChexSystems record, they have been provided the information, therefore any discrepancy between the record and the customer's explanation helps the employee can know if the story is likely true of possibly a fabrication. Unfortunately, the bank employee is banned by bank rules for communicating that information and is forced to give you the contact information for ChexSystems for further information.

Understanding this is important because a common critique of ChexSystems is that the bank is basing their decision of whether to follow the ChexSystems hard decision or not without having information on why the person was reported. The people that claim this are either uninformed or being dishonest in order to further their anti-ChexSytems cause. ChexSystems does communicate reasons for account closure.

The second screening aspect of ChexSystems occurs after the determination of whether a record has been found. The following information is provided by ChexSystems and it too is used by the bank employee to determine if a person should be allowed to open account:

1. Other ChexSystems inquires using the same information in the last 90 days. This helps the bank employee know if the person is opening several bank accounts in a brief period of time. Using this information the bank employee may ask about the behavior seeking a reasonable explanation. The reason it is important to the current bank is because bank fraud is oftentimes perpetrated between multiple accounts at different institutions. A person should have a reason for opening multiple accounts across institutions.
2. Previously reported address information and social security information in the past 90 days. This builds upon the concerns in item "1" above. Multiple accounts opened within a 90 day period across multiple institutions is a red flag. Yes, there are many justifiable circumstances, yet at the same time this is a typical "set-up" for a kiting or fraudulent check writing and deposit scheme.
3. Issuance date and state of issue for a social security number. This is a simple cross reference check where the employee compares the new account applicant's date of birth with the year of issuance. Most United States citizens have social security numbers issued when they are young. This is especially true because it is the easiest way for a parent to take an IRS tax deduction for that child on their tax return. There are instances when a social security number is issued at a later age, but this is rare for native born citizens. Certainly if the number was issued prior to the birth date of the applicant, it is a fraudulent number. The state of issuance is oftentimes used within probing questions from the employee to ensure the story, explanations, and answers by the applicant are consistent.
4. Discrepancies in the same address, name, or social matched with other names, addresses or social security numbers. In this instance the name, address, and social security number are all cross referenced. If there are any differences amongst these three variables they are reported to the employee for further verification. In addition to this there is a cross reference of matching names and addresses that have been used for ChexSystems inquiries over the previous several years. All of this information is provided to the bank employee who is then charged with asking questions to sort out the discrepancies and determine whether or not an account should be opened.
5. A cross reference of same names with different social security numbers. This cross reference is not always useful to the bank employee when confronted with a common name, but when names are used that are not as common it is surprising how many times a person who is opening the account for fraudulent reasons is in fact caught with a simple cross reference of unusual names using multiple social security numbers. At times these are reported through ChexSystems they may have the same address or simply cause the the person who is trying to open the fraudulent account to get "caught up in their excuses" leading to confusion and the bank employee refusing to open the account.
6. A cross reference with same names and different addresses. Similar to number 5 above it is a testament to the lack of creativity of those opening accounts for fraudulent reasons that they do not prepare simple excuses as to why they have several addresses. This cross reference is once again more about catching the fraudulent individual off guard with unexpected questions than it is an exact science of determining a person's malicious intent. As with all discrepancies, a legitimate person using their own information will have no difficulty in answering questions or explaining discrepancies whereas a person using fraudulent information is ill prepared for probing questions.

After this entire screening process a customer is allowed or denied a new account. If they are denied they are not given any specific reason for the denial other than that they have been denied due to information provided by ChexSystems. The employee is not allowed to explain the information found or whether the denial was due to a record being found or for the presence of other inconsistencies. The denied customer is simply directed to contact ChexSystems themselves in order to seek further clarification.

Read the introduction to ChexSystems

This fundamental information is very important. Read it!

Written by Mark Heinrich.