Cloud Over Payday Industry Grows as CFPB Fines Texas Lender

WASHINGTON — The Consumer Financial Protection Bureau has yet to issue broad rules for payday lenders, but the bureau's $10 million settlement with ACE Cash Express Thursday sends another strong message about the practices it may target.

The settlement — the bureau's second action against a payday lender — alleges ACE Cash Express essentially used threats against delinquent borrowers to compel them to take out more loans. The payday lender, which is based in Irving, Texas, has agreed to pay $5 million in refunds to affected consumers, and a $5 million penalty for the violations, without admitting wrongdoing.

"We believe that ACE's aggressive tactics were part of a culture of coercion aimed at pressuring payday borrowers into debt traps," CFPB Director Richard Cordray said on a conference call with reporters. "Our investigation uncovered a graphic in ACE's training manual that lays out a step-by-step loan and collection process that can ensnare consumers in a cycle of debt. When borrowers could not pay back their loans, ACE would subject them to illegal debt collection threats and harassment."

The CFPB alleges some of ACE's debt collection tactics included threatening to sue consumers if they failed to make payments, as well as to charge extra fees or report consumers to credit reporting agencies if they remained delinquent on loans.

Cordray said ACE's training manual told debt collectors to "create a sense of urgency" when contacting a delinquent borrower.

"ACE used false threats, intimidation, and harassing calls to bully payday borrowers into a cycle of debt," Cordray said in a press release. "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 separate press release, ACE said the CFPB's allegations related "exclusively to some of Ace's collection practices prior to March 2012." (The CFPB began supervising payday lenders in January 2012.) 

The payday lender said it had hired Deloitte Financial Advisory Services to independently review a sample of calls used in the CFPB's investigation as well as a second random sampling in response to the CFPB's concerns.

"Deloitte's review indicated that more than 96% of ACE's calls during the review period met relevant collections standards," the company said in the release. "Over the last two years, ACE has cooperated fully with the CFPB, implementing recommended compliance changes and enhancements and responding to requests for documents and information."

But when asked about Deloitte's analysis, one CFPB official said it does not absolve the lender from culpability.

"First, I would just say that we found ACE caused significant consumer harm and as a result, ACE has agreed to provide tens of thousands of consumers $5 million in refunds so we don't view that as isolated or small. We view that as significant," said Lucy Morris, the CFPB's deputy enforcement director. "I can't get into the specifics of our investigation" but the "study which they [ACE Cash] paid for — and we found that it has significant flaws — even that study shows substantial violations."

The settlement, meanwhile, only amplified attention on how the bureau will craft rules across the payday loan industry. It was the second CFPB enforcement action against a payday lender after the bureau had ordered Cash America International to pay $19 million in November. The earlier action alleged that Cash America affiliates robo-signed court documents and overcharged servicemembers, among other findings.

The CFPB has issued research on cash-advance products and payday loans that primarily warn of the risk that consumers face from taking out multiple payday loans and falling into a cycle of fees and debt.

The topic is highly controversial, with industry and consumer groups on opposing sides of the debate over payday lending ahead of any formal regulation being released. Lenders argue there is a need for small-dollar, short-term credit but that overregulation and heavy-handed enforcement could erase the product from the industry. On the other side, consumer groups are worried about the debt traps that can ensnare consumers.

"We hope that today's news is followed by strong, effective regulation that protects all families from abusive payday loans," said Mike Calhoun, president of the Center for Responsible Lending, in a press release following the announcement of ACE Cash's settlement.

On the conference call, Cordray said the 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."

"At the bureau, we remain concerned that short-term payday loans can turn into long-term debt traps that leave consumers worse off," said Cordray. "Payday loans pose risks when they are not offered by responsible lenders. But this case shows that the real harm to consumers can be far greater than just the financial burdens."