RSSPayday Lender Ace Cash Express has been ordered by the Consumer Financial Protection Bureau to pay $10 million in restitution and penalties for deceptive debt-collection practices. According to the CFBP, Ace systematically used exaggerated threats to “create a sense of urgency” when contacting delinquent borrowers. This tactic was used to pressure borrowers into refinancing their loans with higher interest rates, thus creating what the CFPB called “debt traps.”
Payday loans are unsecured, short term loans carrying a substantial annual percentage rate often in excess of 300 percent. A typical $200 payday loan will cost consumers roughly $25 (depending upon the interest rate and fees), plus return of principal. However, according to the Center for Responsible Lending, a consumer advocacy group, 90 percent of the payday lending business is generated by borrowers with five or more loans per year, and more than 60 percent of business is generated by borrowers with 12 or more loans per year. Such data supports the idea of a cycle of debt.
This cycle is what drew the attention of CFPB. Consumers who were unable repay their payday loans were, according to the CFPB, threatened with collection actions, wage garnishment and even jail time. Consumers were then offered a new refinancing option with an even larger interest rate. Even without refinance, a payday loan that is “flipped” eight times, that is, paid off on time but then taken out again immediately, will double in cost as the interest is applied.
The CFBO indicated that this cycle of debt was the goal of Ace’s policies. Their investigation uncovered an official ACE training document that explicitly described how the business model intends to create a debt cycle that becomes increasingly difficult to break. The document also urges Ace associates to aggressively market refinancing. “We believe that ACE’s aggressive tactics were part of a culture of coercion aimed at pressuring payday borrowers,” said CFPB Director Richard Cordray. A recent CFPB study found that more than 80 percent of payday loans are rolled over or followed by another loan within 14 days.
With more than 1,500 offices in 36 states, Ace is one of the nation’s largest payday lenders in the nation. Ace agreed to the settlement while denying any wrongdoing. The CFBP’s own investigation found that 96 percent of Ace’s customer calls were compliant with the law. Ace claims that an internal review found that nearly 100 percent of customers with a loan in collections for more than 90 days did not take out a new loan within two weeks of paying off their existing debt. Ace also defended its high interest rates, citing the high risk for payday lenders. According to the Center for Responsible Lending, payday loans have a 6 percent default rate nationally.
