The Consumer Financial Protection Bureau announced on Wednesday that Texas-based First Investors Financial Services Group entered into a consent order because the regulator said the subprime finance company distorted consumer credit records for years.

CFPB officials said First Investors failed to fix known flaws in a computer system that was providing inaccurate information to credit reporting agencies. The bureau contends the actions potentially harmed tens of thousands of the finance company’s customers.

On Tuesday, the CFPB ordered First Investors Financial Services Group to pay a $2.75 million fine, fix its errors and change its business practices.

“First Investors showed careless disregard for its customers’ financial lives by knowingly distorting their credit profiles for years,” CFPB director Richard Cordray said. “Companies cannot pass the buck by blaming a computer system or vendor for their mistakes.

“Today’s action sends a signal that the CFPB will hold companies accountable for sending inaccurate information to credit reporting agencies,” Cordray continued.

Back in September of 2012, First Investors Financial Services entered into a definitive merger agreement as the company came off of record-setting performances during its previous two fiscal years. First Investors merged with FIFS Holdings Corp., a company controlled by Aquiline Capital Partners, which is a New York-based private equity firm investing in the financial services sector.

Under the merger agreement, officials said FIFS Holdings acquired all of the outstanding shares of First Investors common stock in an all-cash transaction valuing the subprime lender at $100 million. They said stockholders of First Investors received $13.87 for each share of First Investors common stock they hold.

Signing the consent order with the CFPB was Bennie Duck, executive vice president and chief financial officer of First Investors Financial Services Group.

According to regulators, the CFPB investigation found that First Investors furnished inaccurate information about its customers to credit reporting agencies for at least three years. Because the company services its own loans, it supplies information on its accounts to the credit reporting agencies and is considered a furnisher under the Fair Credit Reporting Act (FCRA).

When First Investors discovered the problem in April 2011, the CFPB determined it notified the vendor but did nothing more. Bureau officials said the company did not replace the system or take any steps to correct the inaccurate information it had supplied. It continued for years to use a system that it knew was flawed.

“Tens of thousands of consumers were likely subject to these systemic reporting problems,” bureau officials said.

Specifically, the CFPB found that First Investors was providing distorted information to the credit reporting agencies regarding how its customers were performing on their accounts. The incorrect information First Investors reported included:

• Wrong payments and overdue amounts: First Investors provided inaccurate information about how much consumers were paying toward their debts. 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. 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.

• Distorted dates: First Investors inaccurately reported many of its customers’ “date of first delinquency,” which is the date on which a consumer first became late in paying back the loan. In most cases, First Investors was reporting the date to be more recent than it actually was. The date an account first becomes delinquent matters because it determines how long a delinquency can appear on a consumer’s credit report. Inaccurate reporting of the age of a consumer’s delinquency can cause it to appear on the consumer’s credit report longer than is allowed by the FCRA.

• Inflated delinquencies: First Investors substantially inflated the number of delinquencies for some customers when it reported customers’ last 24 months of consecutive payment activity. In one case, First Investors reported that a consumer was delinquent 11 times, when in fact the consumer had only been delinquent twice.

• Mischaracterization of vehicle surrender: When loans reach a certain stage of delinquency, First Investors has the option to repossess the car. Before that happens, though, consumers have the option to voluntarily surrender their vehicle and avoid a “repossession” showing up on their credit report. First Investors told credit reporting agencies that some of its customers had their vehicles repossessed, when in fact those individuals had voluntarily surrendered their vehicles back to the lienholder.

Enforcement Action

The CFPB said First Investors violated the FCRA by inaccurately furnishing information and it violated the Dodd-Frank Wall Street Reform and Consumer Protection Act by misrepresenting to consumers that the company would only furnish accurate information. The CFPB’s order requires First Investors to take the following actions: 

• Correct errors on credit reports: First Investors must identify all consumer accounts affected by its reporting errors and fix any inaccuracies. The company must either provide the correct information, or, in cases where accurate information is not available, First Investors must delete references to the loan altogether.

• Help consumers obtain free copies of their credit reports: First Investors will identify and inform all affected consumers about this action. It will also help all affected consumers receive free copies of their credit reports so consumers can check the reports’ accuracy for themselves.

• Establish consumer safeguards: First Investors must change how it does business and establish safeguards to ensure that it reports only accurate information about its customers to credit reporting agencies. In addition, it must ensure it has the staffing, facilities, systems, and information necessary to timely and completely respond to consumer disputes. And, it must establish an audit program to identify any systemic inaccuracies.

• Pay a civil monetary penalty of $2.75 million: First Investors will pay a $2.75 million fine for the illegal actions.

Editor's Note: To clarify a previous headline associated with this story, the CFPB did not penalize New York-based First Investors, a financial services provider that helps clients reach their financial goals through a variety of products and services, including mutual funds, life insurance, annuities, retirement-related services and investment management.