Forgive and forget

It's something approximately 93 percent of American households take for granted - access to retail financial services such as checking and savings accounts as well as borrowing from their local bank.

For the 7.7 percent of households listed in a 2014 survey conducted by the Federal Deposit Insurance Corp. as "unbanked," it is common to rely on alternative financial services such as nonbank check cashing, prepaid debit cards and payday lending, which can have onerous terms and high fees.

And when those households do try to open a bank account, negative financial history reports from ChexSystems, a consumer reporting agency, often raise a red flag with financial institutions, forcing the households to remain among the ranks of the unbanked. While the banks use such reports to weed out customers who may pose a financial risk, a red flag raised by a consumer reporting agency can often take years to go away, forcing the potential customer away from mainstream financial institutions.

The use of consumer reports to evaluate account applications has come under scrutiny from state regulators and consumer advocates, but in the past year, three major banks - Capital One, CitiBank, and most recently, Santander - reached agreements with the office of New York state Attorney General Eric Schneiderman to change how the banks use reports from ChexSystems to screen customers.

The attorney general's Feb. 20 agreement with Santander comes as part of an ongoing investigation by the attorney general's Civil Rights and Consumer Frauds bureaus into the use of consumer-reporting agencies such as ChexSystems by major American banks.

Although Santander will continue screening customers for past fraud, Schneiderman's office said the bank will largely eliminate its so-called account-abuse screening so that applicants are not rejected for isolated or minor banking errors, such as paid debts or a small overcharge. The changes to Santander's policies are expected to take effect Sept. 30 and will be implemented at its 703 branches, most of which are in the Northeast.

"No one should be denied a bank account because of a bounced check from years ago," Schneiderman said in a press release announcing Santander's agreement. "Denials like these force low-income Americans - and New Yorkers in particular - to resort to high-cost alternatives to banks, simply because of a small financial misstep in the past."

While Schneiderman's agreements with the three large banks help consumers, the situation could create a difficult predicament for the banks, which have to tread a fine line between knowing their customers and being consumer-friendly.

"Banks are being told to practice 'KYC' - know your customer - but they're also being told to relax," said Robert J. Chersi, the executive director of the Center for Global Governance, Reporting and Regulation at Pace University's Lubin School of Business in New York City. "There's lots of criticism of ChexSystems, but it's a tool that allows banks to know their clients."

Chersi told the Business Journal that banks have an understandable need to weed out clients who might be engaged in activities such as fraud or money laundering to prevent regulatory sanctions and fines.

"It's an interesting predicament," Chersi said. "Consumer protection is a big topic, and this is all in the spirit of consumer protection and protecting people from being taken advantage of" by alternative financial services.

Capital One, CitiBank and Santander have a combined 613 branches in the state of New York and 50 branches in Connecticut, according to usbanklocations.com, an online directory of bank branches nationwide.

Linda Sherry, who works in the Washington, D.C., office of Consumer Action, a nonprofit consumer financial advocacy group, told the Business Journal that ChexSystems is where banks report problems with accounts, such as when a customer bounces a check or overdraws and never makes good on the check or pays the fees. These problems are kept in a database similar to a credit report, which consumers have a right to see.

"Some people have had positive experiences of having an overdraft charge, paying off and having the report removed," Sherry said.

Often, however, less sophisticated consumers can get hit with fees and charges that end up on a ChexSystems report.

"In most cases, we encourage people to maintain a relationship with a bank," Sherry said. "Some accounts, though, can be expensive - they have 'gotchas,' fees where if a customer overdraws more than once, they get charged a fee on each one. People who don't know about these fees are set up for failure."