Texas-based ACE Cash Express will pay a total of $10 million to settle an enforcement action brought by the Consumer Financial Protection Bureau (CFPB), predicated upon a finding by the CFPB that ACE had engaged in unfair, deceptive, and abusive practices in connection with its collection of payday loans in violation of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank).

One of the nation’s largest payday lenders, ACE operated a “culture of coercion,” CFPB director Richard Cordray said in a statement, which “drained millions of dollars from cash-strapped consumers who had few options to fight back.” Online or at one of approximately 1,500 retail storefronts located in 36 states and the District of Columbia, the company offers payday loans, check-cashing services, title loans, installment loans, and other financial products and services.

The agency alleged that the payday lender “pushed borrowers into a cycle of debt” using illegal debt collection tactics such as harassment by making an excessive number of calls and in some cases, calling employers or relatives of borrowers and sharing details about the debt. Despite the fact that ACE did not actually sue consumers, collectors used legal jargon and threatened lawsuits as well as extra fees, according to the CFPB.

Collection agents – both third-party and ACE employees – pressured borrowers into taking out additional loans by creating a “false sense of urgency,” the CFPB said, encouraging borrowers to pay off an existing loan and then quickly take out a new loan, incurring more fees.

ACE even used a graphic in its 2011 training manual to illustrate the cycle of debt, the agency said. First, ACE approves a loan; if the consumer exhausts the cash and cannot repay, ACE offers the option to refinance or extend the loan; when the consumer fails to make a payment and the loan enters collections, the cycle renews with the borrower applying for another payday loan.

ACE’s actions constituted unfair, deceptive, and abusive practices, the CFPB said.

In addition to the $10 million – $5 million of which will go to borrowers as refunds with the other $5 million a penalty to be paid to the agency – ACE agreed to change its practices. Collectors will no longer (i) pressure delinquent borrowers to pay off a loan and then quickly take out a new one; (ii) disclose debts to unauthorized third parties; (iii) directly contact consumers who are represented by an attorney; or (iv) falsely threaten to sue a consumer, report him to the credit bureau, or charge collection fees.

The enforcement action came as a result of an examination of ACE conducted by the CFPB in coordination with the Texas Office of Consumer Credit Commissioner.

ACE also issued its own press release about the settlement, which shed additional light on the case.

The company said it retained an outside independent financial expert in response to the CFPB investigation. After reviewing a statistically significant, random sample of ACE collection calls, the expert found that more than 96 percent of the calls during the period met relevant collection standards. A study of company data from March 2011 through February 2012 revealed that 99.5 percent of customers with a loan in collections for more than 90 days did not take out a new loan with ACE within two days of paying off their existing loan, the company added, and 99.1 percent of customers did not take out a new loan within 14 days of paying off their existing loan.

“We settled this matter in order to focus on serving our customers and providing the products and services they count on,” ACE’s CEO Jay B. Shipowitz said in the release.

To read the consent order in In the Matter of ACE Cash Express, click here.

To read ACE’s press release, click here.

Why it matters: On a call to discuss the consent order, Director Cordray said the agency remains “concerned that short-term payday loans can turn into long-term debt traps that leave consumers worse off,” citing the CFPB’s study on payday loans released earlier this year. The action against ACE reiterates the CFPB’s focus on – and limited patience for – payday lenders. In addition, the CFPB used its UDAAP authority under Dodd-Frank to effectively subject ACE, a first-party debt collector, to the requirements of the Fair Debt Collection Practices Act, even though the FDCPA excludes parties collecting on their own debts from the definition of “debt collectors.”