When customers fell behind on repaying their short-term, small-dollar loans, Ace Cash Express threatened jail time or pressured them into taking out new loans with exorbitant fees to cover the debt.
Ace was so intent on squeezing money out of customers that its training manual included a graphic of a step-by-step loan process that could trap delinquent borrowers in a cycle of debt, the Consumer Financial Protection Bureau said Thursday.
Those sorts of abusive debt-collection practices are at the heart of the $10 million settlement the government watchdog reached with Ace, one of the nation’s largest payday lenders. The Irving, Tex.-based company agreed to the deal but denies wrongdoing.
Ace must pay $5 million to refund delinquent customers who were subject to illegal collection practices from March 7, 2011 to Sept. 12, 2012. Ace must also pay a $5 million civil penalty and end its abusive tactics, according to the order.
Eligible borrowers will be contacted by a settlement administrator with instructions for submitting a claim for a refund of their payments to Ace, including fees and finance charges. CFPB officials said they could not determine an exact number of customers harmed by Ace’s behavior, but estimated the figure to be in the tens of thousands.
“Ace was relentlessly overzealous in its pursuit of overdue consumers,” CFPB Director Richard Cordray said in a conference call with reporters. “Ace collectors were repeatedly calling consumers’ employers and relatives and improperly sharing the details of the debt.”
Troubles at Ace became apparent when the bureau conducted one of its first examinations of the payday lender. Examiners discovered that the company’s in-house and third-party debt collectors threatened to report delinquent borrowers to credit bureaus or to add fees to their debt, in violation of the law.
They also uncovered a graphic in Ace’s training manual that illustrated that the company offers delinquent customers the option of refinancing or extending their loans. Then, when the borrower “does not make a payment and the account enters collections,” the cycle starts all over again, with the same customer applying for another payday loan.
A recent CFPB study found that more than 80 percent of payday loans are rolled over or followed by another loan within 14 days, based on a study of 12 million loans in 30 states. These borrowers are more likely to stay in debt for 11 months or longer, accruing more fees.
Ace, which has 1,500 retail storefronts in 36 states and the District, said it cooperated with the bureau’s probe but disputes the findings.
“We settled this matter in order to focus on serving our customers and providing the products and services they count on,” said Ace chief executive Jay B. Shipowitz.
After the CFPB raised concerns, the company hired Deloitte Financial Advisory Services to review a sample of its collection calls. The consultant found that more than 96 percent of Ace’s calls during the review period were in accordance with the law.
CFPB Deputy Enforcement Director Lucy Morris said the Deloitte study had “significant flaws” but still showed “substantial violations.”
Ace insists that it has policies in place to prevent struggling borrowers from taking out new loans. The company analyzed its data from March 2011 through February 2012 and found that nearly 100 percent of customers with a loan in collections for more than 90 days did not take out a new loan within two weeks of paying off their existing debt.
Still, the company said it has instituted a new compliance monitoring program, has cut ties with its old third-party collection agency and now requires all employees to take quarterly compliance training.
The growing prevalence of payday lending, especially after the financial crisis, has alarmed lawmakers and advocacy groups. Payday loans carry high interest rates and balloon payments that can trap Americans in a cycle of debt, critics say. Industry groups argue that payday lending serves a need that is not being met by traditional banks.