Compliance Blog

On August 22, 2023, the Consumer Financial Protection Bureau (CFPB) announced the filing of a complaint against Heights Financial Holding Co. f/k/a Southern Management Corporation (Southern) for “illegal loan-churning practices” that amount to UDAAP violations. Specifically, the CFPB alleges that Southern’s business model relied on stressed borrowers to repeatedly refinance their loans and pay more and more fees to Southern.

Alleged Conduct

In the order, the CFPB alleges that Southern engaged in the following conduct:

·       Used a credit scoring model for refinanced loan that prioritized consumers that were likely to further refinance their loans in the future;

·       Targeted consumers whose expenses were greater than their incomes;

·       Rewarded employees who facilitate refinances and punish employees who failed to meet a refinance quota;

·       Worked to limit delinquent borrowers’ options so that refinancing would be the “best option”

·       Management would send emails to employees that employees should work to keep customers from paying off a loan, for example:

o   “When a customer has paid the loan down to just a few payments, they start focusing on paying us out. We can combat that by refinancing them now!’”

o   “’It is crucial we focus and get the team in a mindset that as much [tax and covid-stimulus] money is out there, your great customers will be trying to pay you and not refinance. This is where the relationship you have built with them comes in handy. FLIP THAT LOAN!’”

·       Refused partial payments from borrowers;

·       Southern employees made in-person visits to delinquent borrowers’ homes in order to “create a sense of urgency;” and

·       Advertised their refinancings as a “fresh start.”

CFPA Violations

The complaint alleges the following violations:

·       Southern’s actions were unfair to borrowers under the CFPA;

o   Southern’s borrowers suffered substantial harm through repeated costly refinancings due to Southern’s pushing; and

o   This harm was not outweighed by a benefit to consumers/competition.

·       Southern’s actions were abusive to borrowers under the CFPA;

o   Southern took unreasonable advantage of their borrowers lack of understanding of the risks and costs of refinancing.

Credit unions may want to note that many of Southern’s loans would be considered  high-cost installment loans. While credit unions do not offer such loans, federal credit unions can offer short-term Payday Alternative Loans (PALs) that comply with the requirements of section 701.21(c)(7)(iii) and (iv). As explained further in this NAFCU blog, FCUs and some state chartered credit unions have restrictions on refinancing these types of loans. However, there are still a couple things credit unions can take away from this suit.

The first is a front row seat to an UDAAP action by the CFPB. The CFPB has been flexing its UDAAP muscles over the past few years. From overdraft fees to non-lending discrimination, it is clear that no credit union (or other financial institution) is safe. Having compliance professionals review this complaint as well as other actions taken by the CFPB or NCUA will allow them to gain insight into an agency’s viewpoint and tweak processes if necessary.

The second is a call to action. It is clear based on the number of borrowers affected by Southern’s actions that small dollar short term loans are a real need for Americans. Unlike many other lenders, credit unions care about their members, and the rates permitted for PALs loans offered by credit unions are much lower than the rates typically charged by non-depository payday lenders. As such, credit unions may want to review whether they have the capability to offer these types of loans and whether there is a need within their membership/community for them.

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