Navy FCU Consent Order w/CFPB: What It Means to Your CU Posted by AVCU on 12:48 PM

adapted from guidance provided by Cornerstone CU League

There was a lot of press coverage this week about the CFPB fining Navy FCU $28.5 million for improper debt collection practices. The regulator's action is based on provisions in the Consumer Financial Protection Act related to practices considered "unfair, deceptive, and abusive acts and practices," commonly known as UDAAP.

Much of the CFPB’s action focuses on deceptive collection efforts. As a result, credit unions are advised to review loan agreements, collection policies and procedures, and all collection letters to ensure they avoid the practices for which Navy FCU was fined.

The CFPB's objections to Navy FCU’s collection process included:

• Violating UDAAP by sending collection letters threatening to take legal action including possible wage garnishment. Since the CU failed to follow through on most of those threats, it was deemed to be a misleading threat in violation of UDAAP. In short, credit unions should not threaten legal action during collection efforts.
• Objecting to Navy FCU’s threat to contact service members’ commanding officers. This was determined to be a false threat since the CU failed to take such action in virtually all cases. Any attempt to contact commanding officers would also have been problematic since consent was not obtained from the borrower. The contract clause referencing consent was buried in the fine print and not bargained for by the borrower. So, CUs should consider revising loan contracts and practices and avoid contacting military officials about delinquencies. CUs wishing to continue this process are strongly urged to obtain a legal opinion and legal review of their documents before proceeding.
• CFPB took 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 this was misleading by the CU holding itself out as a credit repair agency and/or a credit repair service. CUs should not make such statements; collection letters should also be revised accordingly.
• CFPB objected to Navy FCUs practice of restricting electronic account access, a common practice among many financial institutions.  The CFPB 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 account agreements cite that certain account features may be restricted in the case of account abuse or delinquency.
  
  The CFPB consent order provided 2 potential points that may be acceptable methods of freezing access to an account in response to a delinquency.  The following 2 items may indicate that a freeze may be still be permissible if proper conspicuous notice were given at account opening and once again prior to a freeze:
• Navy FCU didn't provide “adequate notice” to borrowers of an impending freeze
• the possibility of a freeze in response to delinquency was not “explicitly disclosed” in account opening documentation. 

CUs erring on the side of caution may choose to avoid any account access freezes absent a legal opinion.

CUs should review account opening disclosures, collection policies and procedures, and collection scripts and letters to ensure they don't utilize prohibited collection methods. Regarding the freezing of accounts, CUs should at least notify members prior to a delinquency-related freeze and review account opening disclosures to ensure members are educated as to collection procedures when an account is overdrawn or delinquent.