Today's Trends in Credit Regulation

Royal Flush - Five Lessons Learned from the ACE Cash Express Consent Order
By H. Blake Sims

"So if you don't mind me sayin' I can see you're out of aces
For a taste of your whiskey I'll give you some advice"
The Gambler, Kenny Rogers

Now I don't know much about gambling, and I don't think my firm would accept payment in whiskey, so my thoughts on this ACE matter are on the house.

The key to remember is that in a compliance 'card game' with the Consumer Financial Protection Bureau, don't assume Ace High is a winning hand. On July 8, the CFPB entered a consent order against ACE Cash Express, Inc. ACE is a publicly traded financial services company offering small dollar credit, check cashing, and other financial services. The CFPB examined ACE in early 2012. The CFPB ultimately ordered ACE to pay $5 million in restitution to consumers and $5 million in civil penalties to the CFPB. So, the question is: Was this payday lender "dealing from the bottom of the deck," or does the house (CFPB) always win? It appears to be more often the latter than the former. Regardless, there are lessons you can learn from this consent order.

Lesson #1 - Collections and Urgency - a Worse Pair than a Couple of Twos

The CFPB press release on ACE refers to the problem of creating a "false sense of urgency." But, CFPB Director Richard Cordray's prepared remarks and the consent order simply address creating a "sense of urgency," as if that alone constitutes a deceptive and abusive act.

Federal collection laws have always prohibited deceiving debtors and communicating false information. But, the CFPB seems to be moving beyond prohibiting a "false sense of urgency" to prohibiting any sense of urgency in collections. Obviously, collectors should never provide false information. But, the collection of money owed is an urgent matter - at least for the creditor. The lesson here is to review collections policies and procedures and remove any language or procedures that the CFPB may deem "create a sense of urgency" in the collection process.

Lesson #2 - The Secret to Survivin' is Knowin' What to Throw Away and Knowin' What to Keep

ACE claims to make millions of collection calls each year, which it voluntarily records for customer service and compliance monitoring purposes. According to an independent audit report, more than 96% of ACE's calls during the review period met relevant collection standards. While voluntarily recording all collection calls and saving them for independent auditing seems to be a great compliance practice, it seems to have backfired on the company. ACE received no credit from the CFPB for saving these recordings and largely complying with federal law. Instead, the CFPB used the existence of old recordings, which many organizations may have otherwise properly disposed of long ago, simply to find alleged compliance violations. The lesson: Companies should evaluate their call recording and record retention policies and discuss the pros and cons of such policies with counsel.

Lesson #3 - When it Comes to "Reasonable Measures," "Every Hand's a Winner and Every Hand's a Loser"

The consent order states that ACE must "take reasonable measures to ensure that its service providers, affiliates, and other agents cease and desist from any violations of the law." By all accounts, ACE did monitor internal and external collection activity. The CFPB even noted that ACE's vendor contracts addressed collection activities. ACE recorded and monitored calls, and more than 96% of ACE's calls met relevant collection standards. In most contexts, 96% is a mark of success. It certainly seems to indicate that ACE may have been taking "reasonable measures." The consent order, the press release, and Director Cordray's prepared remarks fail to quantify the number of collection calls the CFPB reviewed and the number of alleged violations. So, whatever you're doing to reasonably assure collection compliance, you should "double down." The CFPB seems to be taking the position that if it finds any compliance violations, your "reasonable measures" were not reasonable enough. You may see your "reasonable measure" as a winner, but the CFPB may see a loser.

Lesson #4 - Restitution - "There'll be Time Enough for Countin' When the Dealin's Done"

ACE was ordered to pay $5 million to "Restitution Eligible Consumers," a term broadly defined as all individuals subject to collections, who made a payment during the relevant period. Each Restitution Eligible Consumer is entitled to the amount paid to ACE plus 1.3%, a seemingly random calculation with no explanation provided in the consent order. The problem is that anyone who paid in the collections process could get a payment, even if that person was never subjected to the alleged misbehavior. Simply submitting a claim form is enough, and recorded calls demonstrating compliance with that particular consumer won't matter. Individuals who were never subjected to alleged bad acts will receive funds, depleting the funds available to those with legitimate claims. While the consent order is technically a settlement, my understanding is that the CFPB offers the settlement as a "take it or leave it" deal, with pressure to agree right away. So, the lesson here is that the restitution and penalties aren't quantifiable and aren't tied to actual consumer harm. If compliance issues affect even a small percentage of consumers, the CFPB may hit you with an incongruent penalty that doesn't consider the number of consumers harmed.

Lesson #5 - "And the Best that You Can Hope For Is to Die in Your Sleep"

A bit over the top, perhaps. But, it reflects the histrionic tone of CFPB press releases about consent actions and enforcement activities. They read a little like the embellished tales in Old West dime novels. And, the CFPB went "all in" with the ACE press release and Director Cordray's prepared remarks. Both were replete with name-calling that would have ignited a gunfight across any saloon card table. The CFPB accused ACE of being a "bully" and maintaining a "culture of coercion." The CFPB alleged "predatory behavior" and taking actions to "lure" borrowers into "traps." The CFPB made these statements as if they were facts, without noting the limited percentage of consumers affected, ACE's significant compliance efforts, and the corrective actions already taken by ACE .

The Gambler in Kenny Rogers's song made a living "out of reading people's faces" and knowing what the cards were. That's a good practice to emulate when a CFPB field examiner comes calling. Does a poker face imply no significant compliance issues? Our experienc says be wary. The tone at the end of an examination may belie the eventual press release. Companies should anticipate similar treatment from the CFPB and consider the narrative during negotiations.

All financial services companies should heed these lessons. You may think your company is holding a solid compliance hand, but the CFPB expects a Royal Flush. If you lose the hand with the CFPB, you may face random penalties and an ugly press release.

Should you find yourself in that unenviable seat across the table from the CFPB, I hope you "found an ace" or two here to help you. If not, you might need that shot of whiskey.

H. Blake Sims is a partner in the Tennessee office of Hudson Cook, LLP. Blake can be reached at 423-490-7563 or by email at

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