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Navy Federal Credit Union made false threats about debt collection to its members, including active-duty and retired military members, according to the Consumer Financial Protection Bureau, a federal regulatory agency.

CFPB officials announced Tuesday that Navy Federal would change its practices and pay $23 million in compensation to its members as well as $5.5 million in civil penalties.

Navy Federal is based in Vienna, Va. but has more than 5,000 employees at its Heritage Oaks campus in Pensacola. Open to servicemembers, Department of Defense employees, contractors, and their family members, the credit union is the largest in the country, with more than $73 billion in assets as of December 2015.

Navy Federal employees at the credit union's Heritage Oaks campus in Pensacola. (Navy Federal Credit Union/Special to The Pulse)

Navy Federal employees at the credit union’s Heritage Oaks campus in Pensacola. (Navy Federal Credit Union/Special to The Pulse)

Credit union “misled its members”

In a statement, CFPB officials said that investigators found Navy Federal deceived consumers to get them to pay delinquent accounts. In letters and phone calls to members, Navy Federal threatened to take legal action, though it rarely did so, and even threatened to garnish some members’ wages, an action which regulators found the credit union had no authority to take. Navy Federal also illegally froze some members’ access to their accounts, disabling ATM and electronic account access for about 700,000 accounts when members became delinquent on a Navy Federal credit card or loan.

“Navy Federal Credit Union misled its members about its debt collection practices and froze consumers out from their own accounts,” said CFPB Director Richard Cordray. “Financial institutions have a right to collect money that is due to them, but they must comply with federal laws as they do so.”

Some servicemembers even received letters and calls from Navy Federal threatening to contact their commanding officers if the servicemembers didn’t make payments. For members of the military, consumer credit problems can result in disciplinary proceedings or lead to revocation of a security clearance. Navy Federal wasn’t authorized and never actually intended to contact servicemembers’ chains of command about the debts, officials said.

Navy Federal also sent around 68,000 letters to members misrepresenting the credit consequences of falling behind loans, implying that the credit union could make it harder for members to obtain access to additional credit.

Between January 2013 and July 2015, hundreds of thousands of consumers were affected by these practices, which officials said violated the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Navy Federal to pay millions, reform practices

Under the terms of a consent order filed Tuesday by CFPB regulators, Navy Federal will pay roughly $23 million in compensation to consumers who received threatening letters. Servicemembers who received letters threatening to contact their commanding officers will receive at least $1,000 in compensation. The credit union will contact consumers who are eligible for compensation, officials said.

Navy Federal must also ensure members’ access to all accounts even when delinquent on one or more accounts, and must create a comprehensive plan to address how it communicates with its members about overdue debt. The credit union will also be required to pay a penalty of $5.5 million to the CFPB’s Civil Penalty Fund.

Navy Federal agreed to the settlement without admitting or denying the allegations, according to the consent order. In a statement, Navy Federal said it had cooperated with the CFPB throughout its investigation.

“Where our collections practices have come up short in the CFPB’s estimation, we have made all the necessary changes,” the credit union said. “As a not-for-profit cooperative, when we make loans, we are lending our members’ money. We have a long history of helping members when they are making the effort to pay back their loans, and we will continue to do so. Navy Federal Credit Union has been nationally recognized for its exceptional service to members. We remain steadfastly focused on upholding our standards of service excellence and the trust of our membership.”

Former Ohio Attorney General Richard Cordray, right, was nominated as the CFPB's director by President Barack Obama in 2011. (Official White House Photo/Special to The Pulse)

Former Ohio Attorney General Richard Cordray, right, was nominated as the CFPB’s director by President Barack Obama in 2011. (Official White House Photo/Special to The Pulse)

CFPB structure unconstitutional, federal appeals court says

The CFPB’s announcement about Navy Federal came on the same says as a federal appeals court said that the agency’s leadership structure is unconstitutional and gives too much power to its director. Specifically, the court found that provisions in the Dodd-Frank which limit the president’s power to remove the CFPB director

“The [CFPB] Director enjoys significantly more unilateral power than any single member of any other independent agency,” the appeals court said in a ruling. “Indeed, other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.”

The court’s ruling comes as welcome news to the agency’s Republican critics, which have often accused the CFPB of overreaching its authority. “This is a good day for democracy, economic freedom, due process and the Constitution,” said Rep. Jeb Hensarling, chairman of the House Financial Services Committee, in a statement. “The second highest court in the land has vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional.”

In a statement of their own, CFPB officials said they “respectfully disagree” with the court’s decision. “Today’s decision will not dampen our efforts or affect our focus on the mission of the agency,” said CFPB spokesperson Moira Vahey.

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