A federal regulator has ordered Navy Federal Credit Union to pay $23 million to hundreds of thousands of its customers, accusing the credit union of allegedly making false threats about debt collection. 

"Navy Federal Credit Union misled its members about its debt collection practices and froze consumers out from their own accounts," said Richard Cordray, director of the Consumer Financial Protection Bureau, in a Tuesday statement announcing the bureau's action. "Financial institutions have a right to collect money that is due to them, but they must comply with federal laws as they do so." 

Hundreds of thousands of consumers were affected by the practices between January 2013 and July 2015, according to the CFPB statement. In addition to paying $23 million in compensation to consumers, the credit union must correct its collection practices and pay $5.5 million to the Consumer Financial Protection Bureau's civil penalty fund.

CFPB officials alleged that Navy Federal violated federal law by making "deceptive representations" to consumers about its intentions regarding legal action, wage garnishment and contacting their chain of command. Records show the credit union rarely took these actions and lacked the legal authority to follow through on some of the threats, CFPB said.

CFPB also alleged Navy Federal misrepresented the effect of delinquency on consumers’ credit ratings, and that the credit union violated the Consumer Financial Protection Act by unfairly restricting consumers’ electronic account access.

Navy Federal officials agreed to the settlement without admitting or denying the allegations, according to the consent order.

Navy Federal officials said in a statement that "where our collections practices have come up short in the Consumer Financial Protection Bureau's estimation, we have made all the necessary changes. We have cooperated with the CFPB throughout the process."

As a not-for-profit cooperative, officials said, "when we make loans, we are lending our members' money. We have a long history of helping members when they are making the effort to pay back their loans, and we will continue to do so. This is part of our duty to our membership as a whole." 

Chain-of-command concerns

Navy Federal's "message to the consumer of ‘pay or be sued’ was inaccurate about 97 percent of the time," according to the CFPB announcement, "even among consumers who did not make a payment in response to the letters."

According to the consent order, the credit union also allegedly:

  • Sent letters to 115 consumers threatening to contact their commanding officers about their delinquencies if the consumers didn’t make a prompt payment. CFPB again labeled this a false threat, citing a lack of evidence that the credit union ever contacted those commanders -- even those who failed to pay -- and lacked the authority to report such issues. Consumers who received such letters will receive at least $1,000.
  • Froze about 700,000 consumers out of their credit union accounts for being delinquent on a credit product -- an illegal practice, per the CFPB. The only access available was to make payments on delinquent or overdrawn accounts. CFPB ordered the credit union to end this practice and keep other accounts open despite any delinquencies.
  • Misrepresented the credit consequences of falling behind on a loan in about 68,000 letters to members. Many of these consumers were told they would find it "difficult, if not impossible" to get additional credit because they were behind on their payments, but the credit union didn’t review the consumers’ credit files before sending the letters, so they had no basis for that claim. NFCU representatives also suggested they could cut or raise a consumer's credit score -- a decision ultimately made by credit bureaus, not by a customer's financial institution.

"Navy Federal Credit Union is proud of its 83-year history of helping our members fulfill their financial goals – both for savers and for borrowers," NFCU officials said in their statement. Membership in the credit union is open to people who are or have served in the U.S. military, Defense Department civilian employees or contractors, U.S. government employees assigned to DoD installations, and their immediate family members. 

The credit union has more than $73 billion in assets.

Karen Jowers covers military families, quality of life and consumer issues for Military Times. She can be reached at kjowers@militarytimes.com .

Karen has covered military families, quality of life and consumer issues for Military Times for more than 30 years, and is co-author of a chapter on media coverage of military families in the book "A Battle Plan for Supporting Military Families." She previously worked for newspapers in Guam, Norfolk, Jacksonville, Fla., and Athens, Ga.

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