As part of this week’s flurry of enforcement-related announcements, the CFPB announced the settlement of a lawsuit filed jointly with the Attorneys General of North Carolina and Virginia  against Freedom Stores, Inc. (Freedom), a retailer selling merchandise online and in retail stores located near military bases that offered financing through retail installment contracts (RIC), for alleged unlawful debt collection practices.  The complaint, which was filed in a Virginia federal district court, also named as defendants: Freedom Acceptance Corporation (FAC), a company that purchased RICs from Freedom, Military Credit Services LLC (MCS), a company catering to military customers that extended revolving credit for purchases from retailers in MCS’s retailer network, the individual who served as Freedom’s president, and another individual who served as president of FAC and MCS.

Under the consent order agreed to by the parties and submitted for court approval, the defendants are required to provide over $2.5 million in consumer redress (in the form of refunds and balance reductions) and pay a $100,000 civil penalty to the CFPB.  The consent order also enjoins the defendants from committing future similar violations, establishes procedures the defendants must follow to avoid future violations, and provides for compliance monitoring by the CFPB.

The complaint alleges that FAC and MCS engaged in conduct that violated the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices.  The UDAAP counts are asserted by the CFPB and the state AGs under Section 1042 of Dodd-Frank.  FAC and MCS were alleged to have committed UDAAP violations by engaging in the following conduct:

  • FAC and MCS were alleged to have filed debt collection lawsuits in Norfolk, Virginia against consumers who signed credit agreements “far away” from Norfolk and resided “far away” from Norfolk when the lawsuits were commenced.  The complaint alleges that the companies’ practice of filing of lawsuits “in a distant forum” was both an “unfair” and an “abusive” practice.  These UDAAPs claims are particularly noteworthy in two respects.First, the FDCPA requires “debt collectors” to bring non-mortgage collection actions only in the judicial district  in which the contract was signed or in which the consumer resides when the action is commenced.  The CFPB’s UDAAP claim appears to be an attempt to extend this FDCPA requirement to creditors collecting their own debts and could signal that such a requirement will be part of a proposed debt collection rule that the CFPB  is expected to issue.Second, the CFPB has so far been very sparing in its use of the “abusive” prong of its UDAAP authority, using it in only three enforcement actions (Ace Cash Express, American Debt Solutions and CashCall).  Thus, the CFPB’s decision to deem the defendants’ alleged conduct “abusive” represents a significant development.
  • When consumers elected to make payments through military allotments, FAC and MCS also allowed consumers to authorize withdrawals from a bank account as a back-up payment method.  The complaint alleged that because the companies’ payment processor relied on reports that sometimes incorrectly predicted allotments would not go through or would be insufficient to make a full payment, many consumers had their payments taken from both their allotments and bank accounts in the same month, often without their knowledge and before the payment due date.  This practice was alleged to be “unfair.”
  • FAC and MCS were alleged to have contacted servicemembers’ commanding officers and requested they intervene in obtaining  repayment, doing so in reliance on a provision in the credit contracts that purported to provide permission for the companies to contact third parties, including their chain-of-command, if they fell behind in payments.  The complaint alleged that because many consumers were unaware of such provisions or if they were aware, had no opportunity to bargain for their removal, the companies engaged in an “unfair” practice by contacting third parties.  (The consent order requires a written consent for the companies to contact a consumer’s chain-of-command that must be on a page separate from all other contract terms, separately signed by the consumer, and clearly and conspicously disclose that the transaction is not conditioned on providing consent.)
  • In instances where a third party such as a family member had authorized a one-time payment on behalf of a consumer, FAC and MCS were alleged to have charged the third party’s bank account or credit card for additional payments.  The complaint alleged that the companies engaged in an “unfair” practice by taking unauthorized payments from such third parties.

The complaint sought to hold the individual defendants liable for all of FAC’s and MCS’s alleged UDAAP violations as “covered persons” under Dodd-Frank.  The complaint also included claims asserted only by the CFPB that the ACH authorization forms used by Freedom violated the Electronic Fund Transfer Act and the open-end credit agreements used by MCS violated the Truth in Lending Act.  In addition, the complaint, in claims asserted only by the North Carolina AG, alleged violations of the North Carolina Debt Collection Act by FAC and MCS, and violations of the North Carolina Unfair and Deceptive Practices Act by FAC, MCS and the individual defendants.

The defendants released the following statement regarding the settlement:

“The CFPB has had a special focus on companies that operate in the military community since its 2011 founding, which led to the inquiry regarding Freedom Stores.  We support the Bureau’s efforts to root out bad actors in this space, but by the CFPB’s own admission, the complaint against Freedom Stores, is not a finding or ruling that the defendants have actually violated the law.”

“Regardless, Freedom Stores has voluntarily agreed to forgive more than two million dollars in loans and provide more options regarding where default litigation will be conducted.  In addition, we are redoubling our efforts to educate customers on money management fundamentals through our online MoneySKILL course.  More than 1000 customers have already completed the course, receiving a $100 Freedom Store gift card.  In 2015, we have set the goal of 5000.  We have also put new safeguards in place to ensure customers are charged for loan payments only as expected and will be creating a blue ribbon internal advisory board of former military personnel and other experts who will help guide our policies.  We are proud to make these changes to ensure we are providing the highest level of service to our customers.”

“Freedom Stores is a family-owned business that has proudly served the needs of those who serve in uniform for more than 31 years.  Approximately half of our employees are spouses of military personnel or retired from the military, so we are especially sensitive to their needs. We intend to continue to set the standard for excellence in all we do.  We are honored to meet the needs of those who serve.”