Consumer groups cheer move to rein in banking "blacklist"

For years, lower-income consumers often found it impossible to get basic banking services such as a checking account because banks use a consumer reporting agency's information to deny such services. That information comes from ChexSystems, which many banks use to flag consumers deemed to pose a credit or fraud risk.

On Wednesday, New York's attorney general announced a deal with Citigroup (C) to change how the bank uses data from ChexSystems. The result will make checking accounts more accessible in an attempt to reduce the growing ranks of the "unbanked." Citi's new policy goes into effect March 15 and applies nationwide.

It's the second such deal made in New York -- the first was with Capital One (COF) -- and it won praise from consumer advocacy groups, which have long complained that lower-income consumers were forced to pay onerous fees for checking cashing and such services because they couldn't open checking accounts.

"Actions by the New York Attorney General, other regulators and the [Consumer Financial Protection Bureau] have been crucial in reining in abusive use of so-called blacklist credit bureaus such as ChexSystems by banks," said Ed Mierzwinski, consumer program director for U.S. PIRG. "Unlike the big three credit bureaus, ChexSystems reports only negative information."

A simple circumstance like closing a bank account followed by a belatedly cashed check can lead to a report on ChexSystems that can prevent someone from getting another checking account, Mierzwinski said. Big banks, he added, can do better by consumers than simply relying on that database and allowing it to prevent a consumer from having the federal protections provided to bank account holders.

John Breyault, vice president of the National Consumers League, said making it easier for underserved communities to get access to bank accounts is a positive step. He cautions consumers about bank fees and recommends that they be leery of high-fee overdraft protection plans.

"For most consumers, as long s you pay relatively close attention to your balance, you can go without overdraft protection," Breyault said. "Bouncing a check is something no one wants to do."

New York Attorney General Eric T. Schneiderman said he'll continue to work with other banks to get them to retool their use of the ChexSystems database.

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    Mitch Lipka is an award-winning consumer columnist. He was in charge of consumer news for AOL's personal finance site and was a senior editor at Consumer Reports. He was also a reporter for The Philadelphia Inquirer and the South Florida Sun-Sentinel, among other publications.