Lender to pay $ 10 million to settle consumer office claims

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Consumer advocates have long warned that payday lenders are deliberately trying to lure borrowers into a costly and debilitating cycle of debt. Now the nation’s consumer financial watchdog says it has the proof.

The Consumer Financial Protection Bureau has accused a major payday lender, Ace Cash Express, of using various illegal tactics to pressure customers with delinquent loans to borrow more to pay them back.

The allegations against Ace marked the first time officials in the bureau had accused a payday lender of intentionally pushing people into a cycle of debt.

Ace, with 1,500 stores in California and 35 other states, agreed to pay $ 10 million to settle the case, without admitting or denying the wrongdoing.

The Irving, Texas-based company released a statement noting that it had cooperated with the office’s investigation for two years and that almost all of its employees’ calls to customers complied with the collection rules.

The bureau’s investigation revealed a graphic from an Ace training manual showing the circular lending process – how clients were contacted to take out new loans after failing to repay old ones.

“Ace has used false threats, intimidation and harassing calls to intimidate payday borrowers in a cycle of debt,” Bureau Director Richard Cordray said. “This culture of coercion drained millions of dollars from cash-strapped consumers who had few options to fight back.”

The office, created by the Financial Reform Act of 2010, has tried to crack down on payday loan abuse and is questioning whether new federal rules are needed.

Payday loans, long a staple of working-class and low-income neighborhoods, became more popular during the Great Recession and its aftermath, as cash-strapped consumers sought a quick fix to hold them until their next check. payroll.

According to the Community Financial Services Assn, about 20,600 payday establishments across the country provide $ 38.5 billion in such loans each year. of America, an industry trade group.

Short-term loans, typically $ 350, are cash advances on a paycheck. Loans are generally two weeks long with a fixed fee of 15% or an interest rate that doesn’t seem too serious.

But the costs can multiply quickly if the loan is not repaid and the borrower has to take out another loan to pay off the first one.

The Ace case provides glaring evidence of the industry’s business model and could lead to stricter regulations from the consumer office, said Nick Bourke, director of the Small Dollar Loans Project at Pew Charitable Trusts.

“A payday loan is marketed as a short-term temporary solution,” Bourke said. “But the reality is, most people need half a year to pay off the loan.”

Customers can end up spending more on fees than the original loan amount, he said.

“The payday loan business model would collapse if customers only used it for two or three weeks at a time,” Bourke said.

The graphic in the Ace training manual provided “an explicit picture of the debt trap,” said Mike Calhoun, president of the Center for Responsible Lending.

“It’s true. It’s abusive and it’s time to stop,” Calhoun said.

In March, the Office of Consumer Affairs said its analysis of the industry found that 4 in 5 people who took out a payday loan either turned it into a new loan or took out another within two weeks.

The allegations against Ace came after an investigation sparked by a routine review of the company’s operations as part of the office’s oversight.

The bureau said its investigation found that Ace’s internal and third-party debt collectors used illegal tactics, such as harassing phone calls and fake threats to report borrowers to credit reporting companies, to try to force them to take out new loans to repay. the elders.

“Ace was relentlessly overzealous in his pursuit of late clients,” Cordray said.

In a statement, Ace said it hired an outside expert who found that 96% of the company’s calls to customers “met relevant collection standards.” The company also questioned the idea that it was drawing customers into a cycle of debt.

The company said an analysis of its data from March 2011 to February 2012 found that 99.5% of customers with loans outstanding for more than 90 days had not taken out new loans with Ace within two days. following the repayment of their existing loans. And 99.1% of clients have not taken out a new loan within 14 days of paying off existing loans, he said.

Nonetheless, Ace said, he has taken steps since 2011 to prevent abuse, including increasing his monitoring of collection calls and ending the use of an unnamed third-party collection agency that concerns the office.

As part of the settlement, Ace will hire a company to contact eligible customers and issue refunds, the office said.

Consumer advocates hope the bureau will write federal rules requiring payday lenders to determine a client’s repayment capacity before issuing loans.

“There is definitely a time in everyone’s life when they may need a small dollar loan,” said Pamela Banks, Senior Policy Advisor for Consumers Union. “But we advise consumers to think long and hard about whether they need the loan.”

If they need the money, they should go to family, friends or even their church first – “nothing short of a payday lender,” she said.

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