Yesterday, the CFPB and ACE Cash Express issued press releases announcing that ACE has entered into a consent order with the CFPB. The consent order addresses ACE’s collection practices and requires ACE to pay $5 million in restitution and another $5 million in civil monetary penalties.
In its consent order, the CFPB criticized ACE for: (1) instances of unfair and deceptive collection calls; (2) an instruction in ACE training manuals for collectors to “create a sense of urgency,” which resulted in actions of ACE collectors the CFPB viewed as “abusive” due to their creation of an “artificial sense of urgency”; (3) a graphic in ACE training materials used during a one-year period ending in September 2011, which the CFPB viewed as encouraging delinquent borrowers to take out new loans from ACE; (4) failure of its compliance monitoring, vendor management, and quality assurance to prevent, identify, or correct instances of misconduct by some third-party debt collectors; and (5) the retention of a third party collection company whose name suggested that attorneys were involved in its collection efforts.
Notably, the consent order does not specify the number or frequency of problematic collection calls made by ACE collectors nor does it compare ACE’s performance with other companies collecting seriously delinquent debt. Except as described above, it does not criticize ACE’s training materials, monitoring, incentives and procedures. The injunctive relief contained in the order is “plain vanilla” in nature.
For its part, ACE states in its press release that Deloitte Financial Advisory Services, an independent expert, raised issues with only 4% of ACE collection calls it randomly sampled. Responding to the CFPB claim that it improperly encouraged delinquent borrowers to obtain new loans from it, ACE claims that fully 99.1% of customers with a loan in collection did not take out a new loan within 14 days of paying off their existing loan.
Consistent with other consent orders, the CFPB does not explain how it determined that a $5 million fine is warranted here. And the $5 million restitution order is problematic for a number of reasons:
All claimants get restitution, even though Deloitte found that 96% of ACE’s calls were unobjectionable. Claimants do not even need to make a pro forma certification that they were subjected to unfair, deceptive or abusive debt collection calls, much less that such calls resulted in payments to ACE.
Claimants are entitled to recovery of a tad more than their total payments (including principal, interest and other charges), even though their debt was unquestionably valid.
ACE is required to make mailings to all potential claimants. Thus, the cost of complying with the consent order is likely to be high in comparison to the restitution provided.
In the end, the overbroad restitution is not what gives me most pause about the consent order. Rather, the CFPB has exercised its considerable powers here, as elsewhere, without providing context to its actions or explaining how it has determined the monetary sanctions. Was ACE hit for $10 million of relief because it failed to meet an impossible standard of perfection in its collection of delinquent debt? Because the CFPB felt that the incidence of ACE problems exceeded industry norms or an internal standard the CFPB has set?
Or was ACE penalized based on a mistaken view of its conduct? The consent order suggests that an unknown number of ACE collectors used improper collection practices on an unspecified number of occasions. Deloitte’s study, which according to one third party source was discounted by the CFPB for unidentified “significant flaws,” put the rate of calls with any defects, no matter how trivial, at approximately 4%.
Ironically, one type of violation described in the consent order was that certain collectors sometimes exaggerated the consequences of delinquent debt being referred to third-party debt collectors, despite strict contractual controls over third-party collectors also described in the consent order. Moreover, the entire CFPB investigation of ACE depended upon ACE’s recording and preservation of all collection calls, a “best practice,” not required by the law, that many companies do not follow.
Despite the relative paucity of problems observed by Deloitte, the good practices observed by ACE and the limited consent order criticism of formal ACE policies, procedures and practices, in commenting on the CFPB action Director Cordray charged that ACE engaged in “predatory” and “appalling” tactics, effectively ascribing occasional misconduct by some collectors to ACE corporate policy. And Director Cordray focused his remarks on ACE’s supposed practice of using its collections to “induc[e] payday borrowers into a cycle of debt” and on ACE’s alleged “culture of coercion aimed at pressuring payday borrowers into debt traps.” Director Cordray’s concern about sustained use of payday loans is well-known but the consent order is primarily about incidences of collector misconduct and not abusive practices leading to a cycle of debt.
CFPB rule-making is on tap for both the debt collection and payday loan industries. While enhanced clarity and transparency would be welcome, this CFPB action will be unsettling for payday lenders and all other financial companies involved in the collection of consumer debt.