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From Banking and Finance Law Daily, June 27, 2013

CFPB announces enforcement action against U.S. Bank for violation of MILES program

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau issued a press release on June 27, 2013, that it had ordered U.S. Bank and one of its nonbank partner companies, Dealers’ Financial Services (DFS), to end deceptive marketing and lending practices that target active-duty military. As a condition of the order, the two financial institutions must return about $6.5 million to servicemembers for failing to properly disclose all the fees charged to participants in the companies’ Military Installment Loans and Educational Services (MILES) auto loans program, and for misrepresenting the true costs and coverage of add-on products financed along with the auto loans.

CFPB Director Richard Cordray remarked on the order, “The CFPB has a special mission to protect servicemembers. The MILES program failed to properly disclose costs associated with repaying auto loans through the military allotments systems and the expensive auto add-on products sold to active-duty military. We will continue our work to ensure that servicemembers are treated fairly.”

MILES program. The MILES program required servicemembers to repay their auto loans using the military allotment system, which deducts payments directly from a military member’s paycheck before it is deposited into their bank account. The allotment system, as used today, is vulnerable to misuse. The lenders often require servicemembers to use third-party processors that charge one or more fees. Military consumers who are forced to use the allotment system could be charged one or more fees in order to qualify and pay for the loan. The fees that servicemembers are charged are more expensive than current alternatives, such as online banking, which is often free. Throughout the life of a MILES loan, a borrower could pay approximately $180 in fees.

Violations. The CFPB found that U.S. Bank had violated the Truth in Lending Act and Dodd-Frank’s prohibition on deceptive acts or practices by: failing to properly inform servicemembers about fees associated with the loans; and failing to properly disclose a schedule of payments.

The CFPB also found that the DFS has misrepresented the costs and coverage of add-on products sold in conjunction with MILES loans—a vehicle service contract and an additional insurance policy. According to the CFPB, DFS’s deceptive practices include: understating the costs of the vehicle service contract; understating the costs of the insurance; and misleading consumers about product benefits.

Remedies. Under the CFPB order, the companies have agreed to:

  1. stop deceptive practices;
  2. pay restitution to servicemembers;
  3. provide refunds or credits without any further action by consumers;
  4. stop requiring the use of allotments;
  5. improve disclosures; and
  6. submit a redress plan that must be approved by the CFPB.

Military allotments. In conjunction with the enforcement action, CFPB’s Office of Servicemembers Affairs Assistant Director, Holly Patraeus, issued a blog post on “What you should know about military allotments.” According to Patraeus, this enforcement action is important “because it shines a spotlight on potential problems with the use of allotments as a way to pay off consumer debt.”

While the allotment system has existed for decades, when it was first created, there was no such thing as an automatic bank payment or electronic transfer. Today, servicemembers can easily arrange for other automatic payment methods, most of which are free and easy to use. Patraeus makes a comparison of the allotment system and newer automatic payment systems using such factors as: cost, choice, flexibility, legal protections, and transparency.

Patraeus advises all military members that if they buy something and are told that they can only pay by allotment, to think about walking away from the transaction. “What’s convenient for the lender may not provide the best protection for you, and reputable lenders will gladly accept payment by other means.”

Companies: Dealers’ Financial Services; U.S. Bank

RegulatoryActivity: CFPB DoddFrankAct EnforcementActions TruthInLending

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