Navy Federal Credit Union Ordered to Pay Millions for Improper Debt Collection

Credit union allegedly used false threats and placed unfair restrictions on account access

Navy Federal Credit Union Ordered to Pay Millions for Improper Debt Collection
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October 18, 2016

The Consumer Financial Protection Bureau (CFPB) has ordered Navy Federal Credit Union to pay $28.5 million for making false threats to its members—including active-duty and retired military and their families—about debt collection.

Navy Federal also allegedly restricted access to accounts unfairly to members who had a delinquent loan. It is working to correct these debt collection practices and will pay approximately $23 million to redress victims in addition to a civil money penalty of $5.5 million.

"Navy Federal Credit Union misled its members about its debt collection practices and froze consumers out from their own accounts," said CFPB Director Richard Cordray. "Financial institutions have a right to collect money that is due to them, but they must comply with federal laws as they do so."

As a credit union, Navy Federal offers numerous financial products and services to consumers, such as deposit accounts and loans. Only those consumers who or have been servicemembers in the U.S. armed forces, civilian employees or contractors for the Department of Defense, government employees assigned to Department of Defense installations, and their immediate family members may join. With more than $73 billion in assets as of December 2015, Navy Federal is the largest credit union in the U.S.

Upon investigating, the CFPB found that the credit union deceived its customers to make them pay delinquent accounts. It falsely threatened to take severe actions when, in reality, it rarely took such actions or was not authorized to do so. It also cut off electronic account and bank card access to members if they did not pay overdue loans. These practices, which took place between January 2013 and July 2015, affected hundreds of thousands of consumers and violated the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The CFPB found that Navy Federal did the following specific actions:

  • Falsely threatened both legal action and wage garnishment. It sent letters to members that threatened to take legal action unless those members made a payment, but in reality, it rarely took such actions. The CFPB discovered that its message of "pay or be sued" was not accurate approximately 97 percent of the time, even among those members who did not respond to the letters by making a payment. In addition, representatives from the credit union called members with similar verbal threats to take legal action. Finally, Navy Federal threatened wage garnishment when it had neither the intention nor the authority to do so.
  • Pressured servicemembers to repay by falsely threatening to contact commanding officers. Dozens of servicemembers received letters from Navy Federal threatening to contact their commanding officers if they did not make a payment promptly. These threats were also made by phone by credit union representatives. Consumer credit problems can lead to disciplinary proceedings or the revocation of a security clearance for members of the military. Navy Federal neither intended, nor was authorized, to contact its members' chains of command regarding the debts it was trying to collect.
  • Misrepresented the consequences to credit of falling behind on paying a loan. Navy Federal issued approximately 68,000 letters to members in which it misrepresented the consequences to the members' credit of falling behind on one of its loans. Many of these letters claimed that the member would find it "difficult, if not impossible" to get more credit because they were behind on loan payments. However, Navy Federal had no basis for this claim because it did not examine consumer credit files before issuing the letters. Additionally, it misrepresented its own influence on consumers' credit ratings by implying that it could either raise or lower the rating or affect members' credit access. Navy Federal could supply information to credit reporting companies as a furnisher, but it could not determine credit scores.
  • Illegally froze members' account access. After consumers became delinquent on one of its credit products, Navy Federal froze electronic access and disabled electronic services for around 700,000 member accounts. This meant that delinquency on a loan could shut down members' debit cards, ATM, and online access to their checking accounts. All a member could do online in such cases was to make a payment on a delinquent or overdrawn account.

The Dodd-Frank Act gives the CFPB the authority to take action against any institutions or individuals engaging in unfair or deceptive acts or practices or violating federal consumer financial laws in any other way. Under the stipulations of its order, Navy Federal is required to do the following:

  • Pay its victims $23 million in redress. The credit union must compensate consumers whom it sent threatening letters roughly $23 million. Most of these members will be eligible for this compensation if they received on of the letters and made a payment in response within 60 days. Furthermore, all members who received a letter threatening to contact their chain of command will receive at least $1,000. Navy Federal will contact eligible consumers.
  • Correct its debt collection practices. Navy Federal has to develop a comprehensive plan to address the ways in which it communications with members regarding outstanding debt. Such a plan includes not making any misleading, false, or unsubstantiated threats to contact a member's commanding officer or to take legal action, as well as misrepresentations regarding the consequences to members' credit if they fall behind on a Navy Federal loan.
  • Ensure that consumers can access their accounts. The credit union cannot block members from accessing all of their accounts even if they are delinquent on or more of those accounts. It must put into effect proper procedures for restrictions on electronic accounts.
  • Pay a civil money penalty of $5.5 million. Navy Federal must pay a civil money penalty of $5.5 million to the CFPB's Civil Penalty Fund.