Illegal Debt Collection Against Active Military Members

Last week, federal regulators reached a settlement with owners of lending and retail companies that were targeting active duty servicemembers and utilizing illegal debt collection practices under the SCRA.

Two companies, Freedom Furniture and Electronics and Military Credit Services, settled with the Consumer Finance Protection Bureau last week regarding their illegal debt collection practices, according to ProPublica. They employed similar tactics to USA Discounters, a retail and credit company that was the feature of an earlier expose by the news source and has since changed its name to USA Living.

The latter company owns stores outside each of the largest military bases in the U.S., ProPublica reported. It guaranteed credit on marked-up appliances, electronics and other products and often tacked unnecessary or excessive fees onto loans. When servicemembers fell behind on their payments, the USA Discounters used a clause in their contracts to sue them in Virginia, regardless of whether their purchases had been made in the state or not.

According to the Consumer Finance Protection Bureau, Freedom Stores, Inc., Freedom Acceptance Corporation and Military Credit Services LLC are accused of using illegal tactics to collect debts. These tactics included filing illegal lawsuits, debiting consumers’ accounts without authorization and contacting servicemembers’ commanding officers. Among possible violations, the Servicemembers Civil Relief Act mandates that active duty servicemembers cannot be sued for such matters without an affidavit as to military service and after observing the mandatory 90-day stay of proceedings, where applicable.

“Our nation’s servicemembers deserve better than to be targeted with illegal collections tactics when they are struggling to pay their bills,” said CFPB Director Cordray. “Freedom Stores and its affiliated companies were filing thousands of lawsuits in Virginia against consumers not from there, taking money from some consumers’ bank accounts without permission, and using the military chain of command to pressure and humiliate servicemembers. Today’s action sends a clear message that the Consumer Bureau will continue to aggressively defend the rights of servicemembers and all consumers.”

Alleged illegal debt collection practices

The investigation carried out by the CFPB alleged that the aforementioned companies and their owners, John Melley and Leonard Melley Jr., engaged in the following illegal practices:

  • Illegally filing lawsuits in Virginia – The companies filed more than 3,500 lawsuits in Norfolk, Virginia, against consumers who did not live in Virginia or sign a financing contract in Virginia. Nearly all of those suits resulted in a default judgment and the subsequent garnishing of the consumers’ wages or placement of liens on the consumers’ bank accounts. Some were unaware that they had been sued at all until they noticed the money leaving their bank accounts.
  • Collecting twice – The majority of the customers of these companies sent payment via military allotment. However, the companies required consumers to authorize payments from a bank account as a backup method of payment. Reporting errors caused the company to take payments from both sources in the same month sometimes, often without the knowledge of the servicemember, resulting in overdraft fees.
  • Contacting commanding officers – The companies put a clause in their contracts that authorized them to contact the commanding officer of a customer who was behind on his or her debts. According to the CFPB, this humiliated servicemembers and put their careers at risk. Credit problems can result in the loss of security clearance or disciplinary proceedings for active duty servicemembers.
  • Withdrawing funds from friends and family members – Often when a servicemember was unable to pay his or her monthly balance, a parent, significant other, friend or other individual would authorize a one time payment on his or her behalf. The companies would keep that payment information on file and later take funds from those accounts without authorization or notification.

Results of the investigation

In the settlement, the companies agreed to repay $2.5 million to customers and to pay a penalty of $100,000, according to ProPublica. They are also barred from using Virginia courts to sue out-of-state customers.

A spokesperson explained to the news source that the settlement did not include an admission of guilt. In an emailed statement, she wrote that the firms “intend to continue to set the standard for excellence in all we do. We are Honored to meet the needs of those who serve.”

There is a rising trend among judicial figures, regulators and legislators to seriously enforce protections for active duty servicemembers and veterans, including those under the Servicemembers Civil Relief Act. Companies and individuals who work with servicemembers must be extremely careful to determine which of their customers have active duty status and to respect the special rights given to them. The penalties for noncompliance with the SCRA and similar laws can be severe.

For further information on the nuances of the military affidavit in the collection process, we offer this informative video.

Attorney Roy Kaufmann serves as the Director of the Servicemembers Civil Relief Act Centralized Verification Service, located in Washington, D.C. As a recognized authority on the Servicemembers Civil Relief Act, Mr. Kaufmann has published hundreds of articles and hosted many webinars. His teachings help law firms and businesses to remain compliant with the SCRA rules and regulations so as to avoid costly fines.