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From Banking and Finance Law Daily, July 10, 2014

Payday lender fined for forcing borrowers into cycle of debt

By John M. Pachkowski, J.D.

The Consumer Financial Protection Bureau has filed an enforcement action against ACE Cash Express, Inc., one of the largest payday lenders in the United States, for pushing payday borrowers into a cycle of debt. The bureau’s enforcement action was the result of an examination of ACE conducted in coordination with the Texas Office of Consumer Credit Commissioner.

In its consent order, the CFPB found that ACE used illegal debt collection tactics—including harassment and false threats of lawsuits or criminal prosecution—to pressure overdue borrowers into taking out additional loans they could not afford.

Illegal debt collection. The CFPB found that ACE used unfair, deceptive, and abusive practices to collect consumer debts, both when collecting its own debt and when using third-party debt collectors to collect its debts. The bureau found that ACE collectors engaged in a number of aggressive and unlawful collections practices that included:

  • threatening to sue or criminally prosecute;

  • threatening to charge extra fees and report consumers to credit reporting agencies; and

  • harassing consumers with collection calls.

Payday cycle of debt. The bureau also found that ACE used its illegal debt collection tactics to create a false sense of urgency to lure overdue borrowers into a payday cycle of debt which the CFPB concluded to be an abusive practice.

The payday lender would encourage overdue borrowers to temporarily pay off their loans and then quickly re-borrow from ACE; even after consumers explained to ACE that they could not afford to repay the loan, the lender would continue to pressure them into taking on more debt. Borrowers would pay new fees each time they took out another payday loan from ACE. A portion of ACE’s 2011 training manual illustrated this cycle of debt.

Terms of enforcement order. The CFPB’s consent order requires ACE to:

  • provide $5 million in refunds to the overdue borrowers harmed by the illegal debt collection tactics during the period covered by the order—the refund covers borrowers’ payments to ACE, including fees and finance charges;

  • ensure that it will not engage in unfair and deceptive collections practices;

  • cease from engaging in those practices that created the payday cycle of debt; and

  • pay a $5 million fine to the CFPB’s Civil Penalty Fund.

Commenting on the enforcement action, CFPB Director Richard Cordray said, “This culture of coercion drained millions of dollars from cash-strapped consumers who had few options to fight back. The CFPB was created to stand up for consumers and today we are taking action to put an end to this illegal, predatory behavior.” In a press call Cordray added, “today’s enforcement action is an important step in fulfilling our duty to ensure that consumers in the marketplace for payday loans are treated fairly and with respect.”

In a press release, ACE Cash Express Chief Executive Officer Jay B. Shipowitz stated, “We settled this matter in order to focus on serving our customers and providing the products and services they count on.” The company also added in the release that a review of a statistically significant, random sample of ACE collection calls by Deloitte Financial Advisory Services, LLP, found “more than 96 percent of ACE’s calls during the review period met relevant collections standards.” The company added that an analysis of company data from March 2011 through February 2012 found that 99.5 percent of customers with a loan in collections for more than 90 days did not take out a new loan with ACE within two days of paying off their existing loan, and 99.1 percent of customers did not take out a new loan within 14 days of paying off their existing loan.

Companies: ACE Cash Express, Inc.; Deloitte Financial Advisory Services, LLP

MainStory: TopStory CFPB ConsumerCredit DebtCollection DoddFrankAct EnforcementActions Loans UDAAP

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