Agencies With Big Data On Consumers Are Big Targets For Lawsuits

Consumer Banking
Posted at 12:00 AM, Mar 28, 2013
and last updated 2013-03-28 00:00:00-04

Can’t get a checking account? A little-known company called ChexSystems probably has you in its database for writing bad checks and the like. Banks use ChexSystems to check up on potential customers.

Like Equifax, Experian and TransUnion, ChexSystems is a consumer reporting agency as defined by the Fair Credit Reporting Act.

Unlike its credit reporting counterparts, ChexSystems stores different consumer information centered on “bad banking” activities, such as owing money on an overdrawn bank account. And while credit bureaus house data on both good and bad credit habits, ChexSystems is a negative-only agency. Only those who have made banking mistakes such as bouncing a check will have a file.

“You don't want to be in ChexSystems database,” says John Ulzheimer, president of “There's never anything good that comes from it.”

According to CNN Money, ChexSystems now holds files on more than 300 million consumers and provides reports to 80 percent of the nation’s banks.

ChexSystems is good for the banking industry in that banks can identify potentially problematic consumers before they become customers. A depositor whose Wells Fargo account gets shut down for insufficient funds probably won’t be able to walk down the street and open an account with Chase.  Given the vested interest of financial institutions, the data ChexSystems collects is provided to them by banks.

Clearly, reporting agencies can make mistakes of their own by holding inaccurate consumer data or by not taking sufficient action to right wrong data.

Consumer protection laws such as the Fair Credit Reporting Act hold ChexSystems and other consumer reporting agencies to certain standards. Reporting agencies are required to investigate consumer disputes about the accuracy of their reports. And consumer disputes on the outcome of an investigation must be included on the consumer’s report.

Missteps by these agencies open them up to lawsuits for violating regulations.

In 2011, ChexSystems settled a class action lawsuit in which the plaintiff claimed that the agency unfairly "blackballed" her from getting a bank account, according to court documents. The plaintiffs claimed that the agency failed to include their statements of dispute on their reports.

According to CNN Money, ChexSystems denied the allegations but agreed to pay each class action member $82 per valid claim -- up to a total of $278,000 for approximately 3,400 potential claims. It also agreed to ensure that fewer statements of dispute are excluded from consumer reports.

“Consumer reporting agencies are constantly getting sued. Last year was a record year for Fair Credit Reporting Act lawsuits,” says Ulzheimer. “A lot of those lawsuits are shakedowns. But some are definitely legit.”

Whether a class-action suit or a one-off civil lawsuit, claims against consumer reporting agencies must specify alleged violations that the agency engaged in.

In addition to national consumer protection laws, states have their own versions as well. State equivalents of the Fair Credit Reporting Act are pretty similar to the federal law, but there are some slight differences. This means that ChexSystems and other agencies can also get sued in state courts.

Ulzheimer says he wouldn’t be surprised to see more cases of ChexSystems and other consumer reporting agencies being on the wrong side of consumer litigation. “Momentum is headed in direction of more versus less lawsuits,” he says. “This is a business. Lawyers are in business of consumer protection law.”

So what’s the average bank customer to do?

Like credit reports, consumers can get a free copy of their ChexSystems report once every 12 months. If you find an error, you can dispute it, and the process is free. Per the Fair Credit Reporting Act, ChexSystems must perform a reasonable investigation.

“If their information is inaccurate or they can’t verify it, they have to remove it,” says Ulzheimer.