CFPB Fines Navy Federal Credit Union $28.5M Over Debt Collection Practices

The Consumer Financial Bureau has fined the Navy Federal Credit Union for engaging in improper debt collection practices. Find out what this ruling means for those affected and what might have lead to these transgressions.

The Consumer Financial Protection Bureau (CFPB) has ordered the Navy Federal Credit Union (NFCU) to pay $28.5M for making false threats about debt collection and restricting account access to its members. The credit union’s actions allegedly affected active-duty military, retired service members, and their families. The vast majority of the penalty – $23M – will go towards paying back the victims. The CFPB claims the debt collection practices the NFCU engaged in were in direct violation of Dodd-Frank Wall Street Reform and Consumer Protection Act. This is the first time the CFPB has fined a credit union since being formed in 2011.

The credit union froze approximately 700,000 member accounts after they became delinquent, even if the two were not tied to one another. For example, if a customer became delinquent on a credit card payment, they would also lose access to their debit and online checking functionality. The CFPB alleges that the credit union also issues false threats, such as contacting the member’s commanding officers, filing a lawsuit, or directly changing the customer’s credit score. The Bureau found that the NFCU only pursued legal action against 5,000 of the members it sent legal threats to, despite sending threatening letters to 193,000. Consumers who received a threat letter about contacting their commanding officer must receive at least $1,000 in compensation.

In addition to the $23 refund for customers, the NFCU will pay a $5.5M civil penalty to the CFPB. As per the bureau’s order, the credit union will need to handle and document its efforts to payback those affected. It is required to deposit the refunds directly into the bank accounts of victims.

Earlier this year, the CFPB commented that it would be looking into both third-party and first-party debt collection practices. The bureau’s Director Richard Cordray said, “it is not surprising that for many years the debt collection industry has drawn more complaints than any other.” At the time, credit union trade groups said the CFPB’s new rules and focus would have little impact on credit unions themselves.

The NFCU is the nation’s largest credit union, with 5,976,265 members and over $73B in assets. Its loan portfolio has grown significantly over the last 3 years, and so has its delinquencies. The percentage of delinquent consumer loans has grown by 46% between 2012 and 2015, according to the union’s annual financial report. In that same time period, total consumer loans with FICO scores below 610, which is considered poor, grew from $2B to $3.6B – an 81% growth. Consumer loans for higher-quality FICO customers grew at a much slow rate of 51%.

% of Total Loans that are Delinquent 2012% of Total Loans that are Delinquent 2013% of Total Loans that are Delinquent 2014% of Total Loans that are Delinquent 2015Delinquency Growth 2012 - 2015

Consumer loans

1.64%1.99%2.18%2.39%45.27%

Credit card loans

2.04%1.88%2.22%2.39%17.29%

Given these financials, it appears NFCU aggressively grew their loan business by sacrificing the quality of loans. When their customers became increasingly delinquent over the last few years, they engaged in harsher collection practices to get back some of those loans.

Service members have also recently been awarded relief after the Justice Department found that Wells Fargo illegally repossessed some of their vehicles. The bank was fined $4.1 for illegally collecting 413 cars, and then auctioning them off to cover delinquent bills. Additionally, the Office of the Comptroller of the Currency fined Wells Fargo another $20M for breaking provisions included in Servicemembers Civil Relief Act – including not capping interest rates at 6%.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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