CFPB and State AGs Settle with Retailer Over Debt Collection Practices Against Servicemembers

The Consumer Financial Protection Bureau (CFPB) and the Attorneys General of North Carolina and Virginia announced legal action against a retailer that caters to members of the U.S. military, and an affiliated lender and debt collection agency, for using illegal collection tactics against their customers.

The CFPB alleges that Freedom Stores, Inc., Freedom Acceptance Corporation, and Military Credit Services LLC used illegal tactics to collect debts, including filing illegal lawsuits, debiting consumers’ accounts without authorization, and contacting servicemembers’ commanding officers.

Freedom Stores (also known as Freedom Furniture and Electronics) is a Virginia-based furniture and electronics retailer that caters to U.S. military members with stores located near military bases nationwide. Freedom Stores offers credit to consumers purchasing its merchandise and transfers the contracts to an affiliated company, Freedom Acceptance Corporation. John Melley and Leonard Melley, Jr. also own Military Credit Services, which provides financing for purchases made at over 300 independent consumer-goods retailers, primarily catering to servicemembers.

The CFPB’s investigation found that Freedom Stores, Inc., Freedom Acceptance, and Military Credit Services and the owners, John Melley and Leonard Melley, Jr., engaged in illegal debt collection practices in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These illegal practices include:

• Illegally filing thousands of lawsuits in Virginia for out-of-state contracts: From July 2011 to December 2013, Freedom Acceptance Corporation and Military Credit Services filed over 3,500 lawsuits in Norfolk, Virginia against consumers who had not signed their financing contracts in Virginia and did not live there when the suits were filed. Almost all of those lawsuits resulted in a default judgment.

• Double-dipping into servicemembers’ funds: Most of Freedom Acceptance’s and Military Credit Services’ customers sent their payments via military allotment, which is discussed more in-depth in a CFPB blog post. But the companies also required consumers to authorize withdrawals from a bank account as a back-up payment method.

• Contacting commanding officers to pressure servicemembers into repayment: A clause buried in the fine print of the purchase contracts required servicemembers to allow Freedom Acceptance and Military Credit Services to contact their commanding officers about their debt. The companies would contact the officers in writing and by phone to disclose the debts, humiliating the servicemembers and putting their careers at risk.

• Illegally debiting bank or credit card accounts of consumers’ family and friends: Collectors for these companies withdrew funds from checking accounts and credit cards of consumers’ parents, significant others or other individuals without prior authorization.

The CFPB and the states filed a consent order in federal court to require the three companies and their owners and chief officers, John Melley and Leonard Melley, Jr. to provide over $2.5 million in consumer redress and to pay a $100,000 civil penalty.