WASHINGTON A nearly $2.8 million fine against a Texas-based company accused of furnishing faulty credit profiles put lenders on notice that blaming a software vendor for serious technical errors simply won't cut it.
The Consumer Financial Protection Bureau's action against First Investors Financial Services Group accuses the subprime auto lender of a failure to correct errors in its computer system, resulting in borrowers being harmed when their credit profiles sent to reporting agencies were distorted. The errors attributed to software purchased by a vendor included inaccurate credit score data and defaults rates, among others.
"Today's action makes clear that a furnisher like First Investors is ultimately responsible for information they furnish" to the credit reporting agencies, said Sarah J. Auchterlonie, an enforcement attorney at the CFPB, in a conference call with reporters. "Companies cannot pass the buck to the vendor when there are problems in the system We will be taking a close look at how vendor relationships affect other furnishers and consumers."
The CFPB acknowledged that First Investors reported the errors to its software vendor in April 2011, but said the company failed to take further steps necessary to fix the problem internally. Because of this, First Investors was charged $2.75 million in fines for knowingly allowing the problem to continue. The agency said potentially "tens of thousands" of consumers were harmed as a result.
CFPB Director Richard Cordray said companies that provide credit profile information to the credit reporting agencies should not take lightly their responsibility to safeguard customer data.
"Today's action sends a signal to all companies that supply information to the credit reporting agencies that they must have sound practices in place that protect consumers," Cordray said on the conference call. "Data furnishers have the legal duty to identify consumers accurately, correctly recount the consumers' payment histories, and keep their own information and record-keeping in order."
Officials on the call essentially held up the First Investors case as a warning about the need for financial institutions to monitor vendor relationships. Other recent CFPB actions have stressed the importance of scrutinizing third-party affiliations as well. Notably, Capital One Financial and Discover Financial Services were both penalized by the agency in 2012 for credit card add-on products largely provided through vendor channels. American Express and ACE Cash Express, a payday lender, have also faced allegations of vendor-related problems that led to consumer harm.
Companies that report consumers' credit data "should make sure that any products or vendors they use to perform these duties are doing so accurately and legally," Cordray said during the call. "Some are doing this better than others, and some are not doing what they promise or what federal law requires We will continue to monitor this market carefully, and we will not hesitate to take further enforcement actions as they are needed."
The CFPB cited First Investors for providing wrong data on how much customers were paying toward their loans, while also misreporting delinquency dates and total amounts of delinquencies.
"In many cases, First Investors understated the amounts its customers were paying. When consumers made multiple payments within a single month, for example, First Investors only reported one of the payments," the agency's press release said. "This does not give consumers full credit for keeping up with their loan obligations. First Investors also overstated the dollar amount by which many of its customers were past due on their accounts."
The company also mischaracterized whether a vehicle was repossessed or "voluntarily surrendered" by the consumer, the agency said.
"In one case, it reported that a consumer was delinquent 11 times when in fact that consumer had only been delinquent twice," Cordray said.
In a statement issued by First Investors, the company said it had already begun reporting issues to the CFPB and had nearly corrected all of the problems cited in the order.
"To resolve the matter and to avoid the expense and business disruption associated with defending any lawsuit, First Investors elected to settle the CFPB's claims rather than dispute them in court. First Investors has not admitted any wrong doing," the company said in a written statement. "When issues were identified, First Investors worked with its service provider to correct them. All of the issues described in the Consent Order were reported by First Investors to the CFPB and were either corrected or in the process of being corrected when reported."
The company also said that the issues identified in the consent order affected between 1% and 12% of its accounts.
"The CFPB's consent order acknowledges that First Investors timely responded to any consumer dispute and corrected the furnished information when necessary," the company said. "First Investors takes its federal and state law compliance obligations very seriously."