Three affiliated companies accused of illegal debt collection practices against military and other consumers will credit or refund more than $2.5 million to those consumers, following action by the Consumer Financial Protection Bureau and the attorneys general of North Carolina and Virginia.
Freedom Stores, Inc., also known as Freedom Furniture and Electronics, is a national retailer that sells furniture and other items online and at 14 locations near military installations.
"Freedom Stores and its affiliated companies were filing thousands of lawsuits in Virginia against consumers not from there, taking money from some consumers' bank accounts without permission, and using the military chain of command to pressure and humiliate servicemembers," said CFPB Director Richard Cordray, in a statement announcing the action filed in federal court in Norfolk.
"Today's action sends a clear message that the Consumer Bureau will continue to aggressively defend the rights of servicemembers and all consumers," Cordray said.
In addition to the $2.5 million in credits to consumers, the companies must pay a $100,000 fine to the CFPB's Civil Penalty Fund.
Freedom Stores offers credit to customers buying the merchandise, and transfers the contracts to an affiliated company, Freedom Acceptance Corp. The owners and chief officers, John Melley and Leonard Melley, Jr., also own Military Credit Services, which provides financing for purchases at more than 300 independent retailers. They've been in business for 32 years.
Freedom Stores and its affiliated finance companies Freedom Acceptance Corp. and Military Credit Services are accused of illegally filing more than 3,500 lawsuits in Norfolk, Va., against consumers who had not signed their financing contracts in Virginia and didn't live in that state.
Those customers will receive the more than $2.5 million, most of which will be credits to their accounts, forgiving part of their unpaid loans. More than $373,000 in partial refunds will go to customers who paid their loan balances after a judgment was entered against them.
Within 60 days after the order is signed by the judge, the companies will adjust the balances owed by consumers and send notices informing them of the credit they will receive. For consumers who will get refunds, within 21 days of the order, the companies must send the $373,000 to CFPB, and the information required to locate affected consumers.
John Melley said the companies used Virginia for the location of the lawsuits because the legal fees in that state are about one-fourth of what they are in other states where stores are located.
"We didn't want to saddle our customers with more legal fees," he said, adding the practice is not illegal. They've found that less than 1 percent of customers who have lawsuits for unpaid debts filed against them — and live in the Norfolk area — come to court, he said.
"If customers disputed the bill, they would have come to us anyway" to resolve the bill, he said.
The customers getting credits and refunds will incur tax liability. "When you forgive debt, the government treats that as income," Melley said, noting that the companies are required to send forms to the IRS.
"We cooperated fully with the Consumer Financial Protection Bureau. When we settled, we didn't realize they were going to come out with such inflammatory language," Melley said. "We resolve all our complaints. This was not customer complaint-driven. We have an A rating with the [Better Business Bureau] because we work hard to resolve complaints."
The BBB report giving the company an A- shows 14 complaints in the last three years, all of which were closed. Twelve of the 14 were related to billing or collection issues.
Melley said the companies have about 25,000 customers a year, about 80 percent of them from the military community.
The companies are also accused of double-dipping into service members' funds. For customers who choose to use allotments to pay bills, the companies also get information about a bank account as a backup.
But because a payment processor's reports on allotments were sometimes incorrect, they would take money from service members' paychecks and bank accounts in the same month, sometimes triggering overdraft fees, according to the CFPB.
Out of about 800,000 payments made each year, Melley said this has happened about 20 to 30 times a year, adding that each time, the situation was rectified.
"We would send refund checks and absorb any bounced check fees," he said. "We took care of any financial consequences. Our customers would have had late charges if we didn't have this practice."
The companies also allegedly contacted commanding officers in efforts to pressure troops into making payments, according to the CFPB. The court agreement will allow the companies to continue to have the troops sign a privacy waiver allowing company officials to talk to troops' supervisors, but it must be on a separate sheet of paper, rather than above the service member's signature where it's currently located.
Melley denied that the company contacts commanders to pressure troops into making payments. "No way. We don't use the customer's command for debt collection at all," he said.
"CFPB made that assumption because we have a privacy waiver that allows us to talk to the command. Sometimes the service member goes to a supervisor [to talk about financial issues] and the supervisor will call us. We can't talk about it unless the service member gives us permission.
"Sixty percent of our business is repeat customers. We wouldn't have that if we did those things," he said.
The companies also would sometimes illegally debit bank or credit card accounts of customers' family and friends, CFPB alleges. "That happened 13 times during the four-year period since the beginning of 2010 that CFPB looked at," Melley said.
He said a parent might call and make a payment by credit card, and that information was mistakenly stored, then mistakenly debited again later. When the parent or other third party "called to let us know ... we sent them a refund check," Melley said.
"When you do as many payments as we do, you make some mistakes. As long as they are not intentional, and you make good on it, that's what's important."
"The Bureau and the states' complaint is not a finding or ruling that the defendants have actually violated the law," the CFPB noted in a press release. In addition, the agreement states that the defendants neither admit nor deny the allegations.
The request for the order for the consent agreement, signed by attorneys for the CFPB, N.C. and Virginia state attorneys general, and for the defendants, was filed in U.S. District Court for the Eastern District of Virginia, in Norfolk, Dec. 18. The proposed order will have the full force of the law when signed by the presiding judge.