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What Navy FCU’s Consent Order with the CFPB Means to Your CU
Friday, October 14, 2016 6:45 AM

The Consumer Financial Protection Bureau has ordered Navy Federal Credit Union to pay $28.5 million, a combined victim’s compensation and fine, in response to improper debt collection actions. Navy FCU has also agreed to reform several collection policies and procedures. The justification for these enforcement actions stems from provisions in the Consumer Financial Protection Act, which allows the CFPB to pursue persons for infractions against consumers that are considered "unfair, deceptive, and abusive acts and practices," commonly known as UDAAP. 

UDAAP is not a clearly defined set of consumer abuses. As a result, we are left with few concrete answers beyond what CFPB identifies in enforcement actions and occasionally through regulation.  

Much of CFPB’s order focuses on deceptive collection efforts. As a result, credit unions now need to review their loan agreements, collection policies and procedures, and all collection letters to ensure that such practices are avoided.  

In the order, CFPB attacked several aspects of Navy FCU’s collection process. First, CFPB accused Navy FCU of violating UDAAP by sending collection letters threatening to take legal action including possible wage garnishment. Because the credit union failed to actually follow through on most of those threats, the CFPB deemed the letters to be a misleading threat in violation of UDAAP. In short, credit unions should not threaten legal action during collection efforts.

Next, CFPB objected to Navy FCU’s threat to contact servicemembers’ commanding officers. Once again, CFPB determined this to be a false threat as the credit union failed to take such action in virtually all cases. Any attempt to contact the commanding officers would have been problematic, too, said the CFPB, because proper consent was not obtained from the servicemember/borrower. The contract clause referencing consent was buried in the fine print and not bargained for by the borrower. In summary, credit unions should consider revising loan contracts and practices and avoid contacting military officials about delinquencies. Credit unions wishing to continue this process are strongly urged to obtain a legal opinion and legal review of their documents before proceeding.

Third, the CFPB raised issue with Navy FCU’s collection letters threatening that the borrower may not be able to obtain future credit and that contacting the credit union could help the borrower repair credit history. CFPB felt that the credit union misled borrowers by holding itself out as a credit repair agency and/or a credit repair service. Credit unions must train staff not to make such statements; collection letters should also be revised accordingly.

Finally, CFPB objected to Navy FCUs practice of restricting electronic account access. This item is particularly concerning as it is a practice commonplace to many financial institutions, including credit unions. 

Unfortunately, we do not have an easy answer for how credit unions should proceed with regard to electronic account restrictions. CFPB’s discussion in the order fails to identify a specific definition of unacceptable conduct regarding any particular account restriction. Electronic access to an account can take many forms, such as debit/credit card access, ATM, automated phone transfers, and online banking. Most, if not all, account agreements that credit unions use also provide that certain account features may be restricted in the case of account abuse or delinquency.

So, how do we know to what extent we can exercise these contractual rights without them being considered a UDAAP issue?

The consent order provided two potential qualifiers that may indicate an acceptable method of freezing access to an account in response to a delinquency. First, Navy FCU did not provide “adequate notice” to its members of an impending freeze; second, that the possibility of a freeze in response to delinquency was not “explicitly disclosed” in account opening documentation. These two items indicate that a freeze may be still be permissible if proper conspicuous notice is given at account opening and once again prior to a freeze. 

We cannot determine for sure if it is CFPB’s position that all freezes in response to delinquency are considered a UDAAP violation (we think CFPB would be stretching it here, but that wouldn’t necessarily surprise anyone). Therefore, credit unions erring on the side of caution may choose to avoid any such freezes absent a legal opinion.

For now, credit unions should review account opening disclosures, collection policies and procedures, and collection scripts and letters to ensure that they do not utilize prohibited collection methods. Regarding the freezing of accounts, until we are provided with additional guidance, at minimum credit unions should take care to notify members prior to a delinquency-related freeze and review account opening disclosures to ensure that members are educated as to collection procedures when an account is overdrawn or delinquent.