One of the most polarizing phrases in the debate over small-dollar lending is the “cycle of debt”.  Consumer advocacy groups argue that payday and installment loan products are designed to perpetually keep consumers in debt because the lenders have no reasonable expectation of pay-off.  The CFPB has picked up on this phrase and is actively looking to attack the cycle of debt using its authority to route-out unfair, deceptive or abusive acts or practices (UDAAP). A recent consent order highlights this.

ACE Cash Express of Irving, Texas is one of the more recent targets of the CFPB’s fight against the cycle of debt.  ACE was charged with committing UDAAP for its and its third-party debt collectors’ harassing collection practices.  Specifically, both threatened borrowers with suit, criminal prosecution and adverse reporting to credit reporting agencies, when it was ACE’s corporate policy to do none of these things.

One of the most damaging pieces of evidence against ACE came from its own training manual which included a diagram illustrating how its employees could keep its struggling customers in the cycle of debt.

The result for ACE was an order of restitution in the form of consumer refunds of $5.0 million, the agreement to end collection threats, harassment and pressuring tactics keeping customers in a cycle of debt, and a $5.0 million civil penalty.

There are three important “take-a-ways” from the ACE case:

  1. Loan products that keep customers in a cycle of debt are by their very nature, UDAAP
  2. Lenders are responsible not only for their own collection conduct, but that of their third-party collectors
  3. Lenders’ training manuals can and will be used by the CFPB as evidence of UDAAP