It will be rough seas ahead for Navy Federal Credit Union (“Navy Federal”) whose Consent Order with the Consumer Financial Protection Board (“CFPB”) included a $28.5 million dollar fine relating to their debt collection practices.
The Consent Order resolved the CFPB’s pursuit of Navy Federal under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) prohibiting “unfair, deceptive, or abusive” acts or practices.
In addition to the massive fine, Navy Federal also agreed to substantial corrective measures and reporting requirements to CFPB over the next 5 years.
What Scuttled Navy Federal?
Basically, the CFPB found that Navy Federal lacked appropriate collection compliance controls, failed to provide employee training regarding debt collection communications (letters and phone calls) and that such collection practices involved material representations that were likely to mislead reasonable consumers. In particular, Navy Federal was found to have engaged in the following:
– Letters threatening legal action – Following a debtor default, Navy Federal sent letters to approximately 193,000 consumers that legal action had been recommended, leaving the impression that Navy Federal intended to sue the consumer if they did not remit payment. However, Navy Federal seldom followed through, filing fewer than 5,000 such lawsuits, and did not engage in any account-specific review prior to sending the letters. CFPB found that threatening to take legal action when there was no real intent to follow through was deceptive.
– Letters threatening to contact service members’ Commanding Officers – For those members who were in the military, Navy Federal sent collection letters threatening to notify Commanding Officers of the debtor’s default when in fact there was no evidence that Navy Federal ever actually contacted Commanding Officers, and the members never expressly consented to such action.
– Letters containing misrepresentation about credit ratings – Navy Federal also sent collection letters containing misrepresentations regarding credit consequences resulting from debtors’ default. Letters informed the debtor “you will find it difficult, if not impossible, to obtain additional credit because of your present unsatisfactory credit rating with Navy Federal” or that the consumer could “repair” his or her “credit” or “credit reputation” by calling Navy Federal. Navy Federal did not review or analyze the debtor’s particular credit situation before sending the letter. These practices were found to be deceptive and misleading because Navy Federal did not offer credit repair services, did not issue credit ratings and had no basis to assert the debtor’s decision to settle or repay a debt would result in repairing or improving the consumer’s credit history or that the debtor’s default would make it difficult or impossible for the debtor to obtain additional credit from other creditors.
– Deceptive debt collection communications over the telephone – Navy Federal’s collection personnel would verbally threaten legal action or wage garnishment as a consequence of delinquency, but again did not follow through and take such action even when the consumer failed to comply with the demands. Navy Federal’s quality control procedures did not address threats of litigation, wage garnishment or threats to disclose to Commanding Officers.
– Unfair electronic account access restrictions – Following a default, Navy Federal had a practice of freezing consumers electronic account access and disabling certain electronic services. A delinquency or over-draft of one account would result in a termination of a consumer’s ability to access electronically all of the consumer’s accounts. Specifically, Navy Federal would disable the consumer’s debit or ATM card and access to online-platforms to check account balances, transfer funds or make online payments. Literally, within days of the default, Navy Federal would restrict access to hundreds of thousands of consumers without any prior adequate notice of the impending electronic freeze. Further, Navy Federal did not make any exceptions for accounts containing protected federal benefits such as social security income, which CFPB found to be injurious to the consumers. Additionally, Navy Federal was found not to have adequately disclosed to the consumers the policies and practices regarding electronic access and service restrictions when they opened their credit account.
LESSONS FOR SMOOTH SAILING
(1) Each credit union that performs its own internal collection activities should have in place appropriate policies, procedures, oversight, training and carefully crafted form letters.
(2) All communications with the debtor, whether by letter or verbally, cannot contain any representation that would be deemed misleading. Do not include statements threatening repossession, garnishment or other legal action, unless you intend to follow through with the stated course of action,
(3) Do not communicate with anyone except the debtor. Do not contact employers, relatives, or other third-parties to effectuate collection.
(4) Make sure all communications, whether written or oral, accurately state the credit consequences resulting from debtor’s default. Avoid references to “credit repair”.
(5) Do not freeze or terminate access to accounts without first giving advance written notice and make sure all consumer account disclosures incorporate clearly and conspicuously that the credit union has the right to terminate electronic account access and close accounts in the event of default on the part of the debtor. Additionally, be exceedingly careful if the debtors account contains or receives protected federal benefits, such as social security income.
With these lessons in mind, taking a few moments to review your collection procedures may go a long way to keeping the wind at your backs and sailing full speed ahead.