Illinois Credit Union League

Illinois Credit Union League

Office of General Counsel

L&T Bulletin

Office of General Counsel:

October 20, 2016

As many of you know, on October 11, 2016, the Consumer Financial Protection Bureau (“CFPB”) announced a consent order with Navy Federal Credit Union that addressed allegations that Navy Federal had engaged in a number of deceptive and unfair practices related to collections of debts owed by Navy Federal members. The practices involving alleged misrepresentations made to members affected approximately 200,000 members in a two-year period. The account freeze policy affected almost 700,000 members. The consent order requires Navy Federal to pay $23 million in consumer redress, which will be paid to Navy Federal members that were subjected to the practices at issue. Navy Federal is also ordered to pay $5.5 million to the CFPB as a civil penalty.

This bulletin addresses the implications of the consent order and how it relates to Illinois law and impacts our member credit unions.

The CFPB consent order is a settlement of charges brought by the CFPB against Navy Federal. The order does not impose any obligations on any credit union except Navy Federal. However, the consent order does indicate the enforcement goals and priorities of the CFPB. Therefore, we will examine the practices challenged in the consent order in detail so that you may compare them to your own credit union’s practices. We will also address how Illinois law supports a credit union policy to deny services to members who cause a loss to the credit union.

The CFPB Charges Against Navy Federal

The primary allegations made by the CFPB against Navy Federal are that Navy Federal engaged in the following deceptive (misleading) practices:

• Navy Federal’s debt collection letter templates misrepresented that legal action had “been recommended” and that Navy Federal would “have no alternative but to recommend [the account] for legal action.” In reality, Navy Federal seldom recommended or took legal action against its members. Letters with these kinds of misrepresentations were sent to approximately 193,000 consumers in a two-year period. Navy Federal filed fewer than 5,000 debt collection lawsuits during the same time period.

Also, the CFPB claimed that Navy Federal’s compliance controls and employee training regarding debt collection were inadequate. For example, Navy Federal’s process for evaluating accounts for potential legal action was not sufficiently connected to or coordinated with the process for determining when to send letters to consumers threatening legal action. There was no account-specific review prior to sending a letter threatening legal action; instead all charged-off accounts were marked as “recommended for litigation.”

• Navy Federal’s debt collection letters also threatened to contact members’ military commanding officers about the members’ outstanding debts. The letter stated that failure to pay the debt, “will leave us no alternative but to forward the Certificate of Compliance covering your loan to your commanding officer to request assistance in communicating with you.” This letter was sent to approximately 115 members, but there was no evidence that Navy Federal contacted any of the commanding officers of those members. Also, the CFPB alleged that Navy Federal did not have the members’ consent to contact their commanding officers because the account agreement clause giving Navy Federal the right to disclose servicemembers’ debts to their military commands was buried in fine print, non-negotiable, and not bargained for by consumers.

• Navy Federal also stated in its debt collection letters that, “You will find it difficult, if not impossible, to obtain additional credit because of your present unsatisfactory credit rating with [Navy Federal].” The letters also sometimes stated that a consumer could “repair” his or her “credit” or “credit reputation” by calling Navy Federal. In reality, Navy Federal did not review or analyze members’ particular credit situations before sending the letters.

• The CFPB alleged that Navy Federal’s employees stated in phone calls that Navy Federal would pursue legal action to collect the debts, would garnish wages, and would contact the member’s commanding officer. Navy Federal did not cover these statements in its training materials and internal policies and procedures. Navy Federal’s quality control procedures did not address these statements and there was no evidence that any employees were disciplined, reprimanded, or subject to additional training for making such statements.

The CFPB challenged the freezing of delinquent members’ accounts as an unfair practice. A practice is unfair if: (a) the practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (b) such substantial injury is not outweighed by countervailing benefits to consumers or competition.

• Navy Federal had a practice of freezing members’ electronic account access and disabling certain electronic services after members became delinquent on a Navy Federal credit account. The freeze was made on all of a delinquent member’s accounts. The freeze included disabling the member’s debit or ATM card and all functions at ATMs. The freeze prevented the member from accessing online or mobile web platforms, adding a travel alert, and having Social Security Administration verification requests processed. The timing of the freeze depended on the risk level assigned to the account. 36,000 members had accounts frozen after being delinquent for 1-5 days; about 480,000 members had their accounts frozen after being delinquent for 6-16 days, and about 180,000 members had their accounts frozen after being delinquent for 17 or more days. The CFPB also charged that Navy Federal did not provide adequate notice to members of an impending account freeze. In most cases, members could not regain their services until after they settled their debt or made arrangements with Navy Federal. Navy Federal did not make any exception for accounts containing Social Security or veterans benefits.

The CFPB alleged that the injury to consumers included:

(a)Interfering with consumers’ ability to make purchases or withdrawals using their debit or ATM cards;

(b)Interfering with consumers’ ability to make deposits through ATMs;

(c)Preventing consumers from managing their accounts online or through ATMs; and

(d)Preventing consumers from initiating electronic transfers or payments from or between their Navy Federal accounts.

The CFPB claimed that these injuries were not reasonably avoidable because Navy Federal’s policies and practices regarding electronic access and service restrictions were not adequately disclosed to consumers when they opened their deposit or credit accounts, or before they became delinquent on a credit account.

The order states that Navy Federal must: (1) stop making any misrepresentations about the practices outlined above; (2) remove from member-facing disclosures and agreements any reference to contacting employers, including military employers, about member debts; and (3) no longer impose electronic account restrictions when a member is delinquent or overdrawn on an account.

League Interpretation and Guidance

While the Navy Federal consent order does not have the force of law of a regulation or court opinion, it does provide us with insight into the kinds of collection practices the CFPB disfavors. As for the deceptive practices alleged against Navy Federal, the lesson is that credit unions need to be very careful about what they communicate to members and ensure that the representations match what the credit union’s actual practices are.

For example, Navy Federal used very strong language in its letters stating that Navy Federal had “no alternative” but to recommend legal action or contact the member’s commanding officer. But in reality legal action was recommended and sought just a small fraction of the time and commanding officers were not contacted at all. Navy Federal also used strong language that, “You will find it difficult, if not impossible, to obtain additional credit because of your present unsatisfactory credit rating with Navy Federal.” This was an overstatement, because in reality Navy Federal may have not been willing to extend further credit to the member, but Navy Federal could not make a blanket statement about the unavailability of credit from any source.

All communications with members about their delinquent loans should be reviewed to ensure that the statements match the actual intent and practice of the credit union. Also, credit unions should ensure that there are policies and procedures in place to inform employees of the kinds of statements that they can and cannot make, in addition to quality control procedures to ensure that the policies are in fact being followed by credit union employees.

Despite the consent order in Navy Federal, credit unions can continue to use an account freeze policy, but credit unions should carefully review their policies and procedures. Our Illinois Credit Union Act provides support for the denial of services to a member who has caused a loss to the credit union. Specifically, Section 15(6) of the ICUA(205 ILCS §305/15(6)) states:

A member who has caused a loss to the credit union or has violated board policy applicable to members may be denied any or all credit union services in accordance with board policy, however, members who are denied services shall be allowed to maintain a share account and to vote on all issues put to a vote of the membership.

Based on this provision of the ICUA, credit unions have adopted policies where a member can be denied credit union services if the member has caused a loss to the credit union by not timely repaying a loan or other debt owed to the credit union. However, there are several steps that a credit union should take to minimize the risk of the CFPB alleging that an account freeze policy is an unfair practice.

The CFPB stated in its consent order that the consumer injury as a result of Navy Federal’s account freeze policy was not reasonably avoidable because Navy Federal’s policies and practices regarding electronic access and service restrictions were not adequately disclosed to consumers when they opened their deposit or credit accounts, or before they became delinquent on a credit account. If the credit union has an account freeze policy, it should disclose it in account and loan agreements, when a member is delinquent on a loan but before the account freeze is initiated, and by any other means in order to put the member on notice of the policy. The member-facing disclosures should be as clear as possible about how the account freeze will operate (e.g., how many days past due on a loan payment, whether it applies to all accounts) and what the member can do to prevent the account freeze or lift it once it is imposed. Credit unions can also argue that any consumer harm caused by an account freeze policy is outweighed by countervailing benefits, namely the prevention of the entire membership of the credit union bearing the loss sustained from delinquent loan payments and loan losses.

We will continue to monitor this issue closely and issue further guidance on any developments.

For additional assistance regarding topics covered in this Bulletin, or for assistance with other questions regarding credit union laws and regulations, call League Legal and Technical Staff at:

630/983-4264

Or

Toll Free at 1-800-942-7124

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The Bulletin is provided or sold with the understanding that the Illinois Credit Union League is not engaged in rendering legal or professional advice. The credit union user intends information provided as a foundation for further investigation and study with its retained attorneys and other professional advisors.