For decades, payday lenders and debt collectors did their work while being largely ignored by federal financial regulators. And a new report from the Consumer Financial Protection Bureau, which recently gained oversight authority over the largest of these businesses, calls out many of the sketchy, sometimes illegal, practices some in these industries have been getting away with for far too long.
In its fourth Supervision Highlights report [PDF], the CFPB shines a light on its oversight of non-banking entities including payday lenders and debt collection agencies.
From November 2013 to February 2014, regulators were able to return more than $70 million to 775,000 consumers through supervision activities. While that is a big win for consumers.
The CFPB report found several inefficiencies related to the payday lending industry, including deceptive collection practices and the lack of oversight after contracting with third-party collectors.
Payday loans are often marketed as a way to bridge the gap between paydays, but they are more often a gateway to unsurmountable debt for consumers.
Regulators found that Regulators found that some payday lenders regularly deceived consumers in attempts to collect debt by making threats of legal action or tacking on additional fees to borrower’s accounts. At times, lenders also lied to consumers referencing non-existent promotions in attempts to entice borrowers to call back about their debt.
Most payday lending companies require borrowers to list references and contacts in order to receive funds, and the lenders reassure consumers that the contact info is only used for credit or character references. However, the CFPB found that these contacts were often called to ascertain a borrower’s location upon default. In some instances, lenders improperly disclosed personal debt information to these third-party individuals.
Other deceptive claims made during payday lending collection included:
- False threats to report to consumer reporting agencies (CRAs);
- False threats of legal action or referral to a non-existent in-house “legal department”;
- False claims that the lender will debit the borrower’s account at any time
Additionally, payday lenders fail to oversee services when contracting with third-party collection agencies – even though the practice is required by CFPB rules.
Debt collection agencies have long received a high number of consumer complaints, and rightfully so according to the Supervisory Highlight report.
CFPB examiners found that a number of debt collectors intentionally and illegally violate the Fair Debt Collection Practices Act (FDCPA) by misleading consumers about litigation. Among the many practices prohibited by the FDCPA, collections agencies are not allowed to threaten arrest, use obscene language, or pretend they represent law enforcement.
Debt collectors were also found to make an alarming number of illegal calls to consumers. In once case a debt collector made approximately 17,000 calls to consumers outside the times allowed by the FDCPA. That company also violated the law by calling more than 1,000 consumers as many as 20 times in two days.
While debt collectors are required to investigate any consumer disputes regarding information the collector has passed to the credit reporting agencies, that often isn’t occurring. Examiners found evidence that debt collectors were deleting disputed accounts rather than investigating the issues.
Companies found to be in noncompliance with CFPB rules during the examinations were altered of the issue and given remedial measures. If a company does not fix the situation the CFPB plans to take enforcement actions.
“For the first time at the federal level, nonbank financial institutions are subject to supervisory oversight that holds them accountable for how they treat consumers,” CFPB Director Richard Cordray says in a news release.
CFPB Supervision Report Highlights Risky Practices In Nonbank Markets [Consumer Financial Protection Bureau]