Who's watching your bounced checks?

This article was published by MSN.

Overdrawn? Your name could end up in a national database warning away banks and lenders. And there's not much you can do about it.

Irresponsibility breeds consequences.

Too many traffic tickets and you'll lose your driver's license. Too many wrecks and your insurance company will drop you like a hot potato.

The same is true of your checking account. Too many overdrafts and your bank may close your account "with cause," meaning you just crossed over from valued customer to liability.

From there, it gets worse. If your bank or credit union belongs to the ChexSystems network, as roughly 80% of the nation's financial institutions do, a record of that account closure will be promptly entered into the ChexSystems database, where it will remain for five years, warning banks, lenders and even potential employers that you could be a credit risk.

Quietly tracking
You may never hear the name ChexSystems until you try to open a checking account elsewhere and are turned down. Again. And again. And again. At which point this altogether unassuming consumer-reporting company can seem like the Devil incarnate, out to ruin your credit rating, your reputation, even your life.

"It can haunt you for years," says Steve Rhode, founder of Myvesta, formerly called Debt Counselors of America. "On the one hand, it does serve a very good, legitimate service in that it's supposed to be a recordkeeping system of exactly how responsible you are with bank transactions. On the other hand, you can find yourself on the database, and when you go to the grocery store they won't honor your check."

An unlikely villain
Few financial topics (with the exception of ATM surcharges) have raised public ire to the degree that ChexSystems has in recent years.

Opponents to ChexSystems tend to fall into two camps: those who ended up on the database legitimately but feel their five-year sentence is too stiff, and those who erroneously found their way onto the ChexSystems list and had a whale of a time getting off of it.

Lisa Nelson, chief privacy officer for parent company Efunds, fields most of the media heat. Nelson says that, as a consumer-reporting agency, ChexSystems compiles the facts on closed-for-cause accounts from some 90,000 bank and credit union locations nationwide and makes this data available to its members. ChexSystems is regulated by the Fair Credit Reporting Act (see link at left) in much the same manner as credit bureaus.

Controlling checking costs
Banks rely on ChexSystems primarily to help them screen applicants for new accounts, especially checking accounts. Checking accounts don't generate much money for banks; many institutions offer them free in hopes of enticing you to invest in more lucrative products.

But issued indiscriminately, checking accounts can expose the bank to considerable fraud and eat into profitability. Since past account problems are considered a key predictor of potential risk, many (though not all) member banks will deny an account based on a ChexSystems report.

In these scenarios, the customer frequently considers ChexSystems the bad guy even though it has nothing to do with any decision a financial institution might make based on information in its database.

"The data that is stored within ChexSystems is factual, accurate data; it's what happened. Now, how the bank uses that information is completely at their discretion," says Nelson. "Just because there is an account closure on file in ChexSystems is not an automatic decline at every bank. Each financial institution sets its own parameters."

Sympathy for the devil
So why is everybody yelling at ChexSystems?

Two reasons: It seems excessive that a few overdrafts theoretically could land you on a blacklist for five years, and once on that list, it can be nearly impossible to get off of it.

Here again, both problems reside primarily with the banks, not ChexSystems. The bank decided to close your account based on its own policies and procedures, not ChexSystems'. It and other banks are perfectly free to give you a second chance. And although ChexSystems asks its members to remove inaccurate entries and note when an outstanding debt has been paid, banks are under no obligation to show you this small kindness.

Blaming ChexSystems for preventing you from obtaining a checking account is a bit like blaming the TV weatherman for the weather; they just report it and are rightly focused on maintaining the integrity of the information.

"The (banking) industry has responded to some degree by placing filters on the data they draw out," says Nelson. "For example, I may be an institution that doesn't want to see any closure files that were less than $100. Our approach has been not to impact the data itself. If you want to make that change in how you use the data, that is every bank and credit union's prerogative. We are only removing inaccurate reports."

If you landed on its list through an error, ChexSystems will help you square things with your bank and remove you from the database. Contact ChexSystems through its customer service Web site (at left, under Related Sites) where most can order a consumer report for an $8 fee (Connecticut residents pay $5; Maine residents $3; Colorado, Georgia, Maryland, Massachusetts, New Jersey and Vermont receive free reports).

Those who wound up on ChexSystems' database legitimately have limited options. The company allows you to insert an explanatory note to explain extenuating circumstances, but it won't delete or alter a factual listing unless instructed to do so by the closing bank. Otherwise, you could hunt for a non-ChexSystems bank, try your luck with an online bank or have friends or relatives cash your checks for you -- meager options indeed.

A wake-up call
"Credit reports originally began with somebody who would actually go and interview your employer and your neighbors and not only talk about your ability to borrow and repay, but also your character," Myvesta's Rohde says. "That was all kind of phased out. We took the whole character thing out of it. Now we're putting it right back in."

According to Rhode, some of the 15% to 20% of the population that routinely mangles checkbooks actually need the kind of wake-up call that ChexSystems delivers.

"As funny as it sounds, it actually is more of an advantage to you to have that happen, because you may never look at your credit report," he says. "Most people are unaware that a negative credit report or low credit score actually increases your cost and access to things like car insurance. The insurance companies use your credit report as an indicator of insurability."

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