June 28 - The Consumer Financial Protection Bureau has ordered U.S. Bank and one of its nonbank partner companies, Dealers’ Financial Services, to end deceptive marketing and lending practices targeting active-duty military. The two companies 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 auto loans program, and for misrepresenting the true cost and coverage of add-on products financed along with the auto loans.
“The bureau has a special mission to protect servicemembers,” said CPFB Director Richard Cordray. “The MILES program failed to properly disclose costs associated with repaying auto loans through the military allotments system and the expensive auto add-on products sold to active-duty military. We will continue our work to ensure that servicemembers are treated fairly.”
U.S. Bank, headquartered in Minneapolis, Minn., and DFS, headquartered in Lexington, Ky., created the MILES program to finance subprime auto loans to active-duty military worldwide. While the program has expanded beyond U.S. Bank being its only lender, today U.S. Bank is still responsible for financing the substantial majority of the MILES program loans. DFS is responsible for managing the consumer-facing aspects of the MILES program. This includes: marketing the program; recruiting and maintaining the 700 participants in the MILES auto dealer network; managing the MILES website; and processing the loan applications before they are passed on to U.S. Bank.
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 that salary is deposited in his or her bank account. The allotment system was created decades ago to help deployed servicemembers send money home to their families and pay their creditors at a time when automatic bank payments and electronic transfers were not yet common bank services.
Today, the military allotment system may be vulnerable to misuse. When servicemembers pay by allotment, the lenders often require servicemembers to use third-party processors that charge one or more fees. If lenders require payments by allotment, military consumers could be left with no choice but to pay this additional processing fee in order to qualify and pay for the loan. This can cost servicemembers more in fees than alternatives like online banking, which are often free.
U.S. Bank Violations
CFPB examinations found that U.S. Bank, which is responsible for financing the MILES loans, violated the Truth in Lending Act and the Dodd Frank Wall Street Reform and Consumer Protection Act’s prohibition on deceptive acts or practices by:
U.S. Bank, which helped create the MILES program with DFS, is also responsible for the illegal marketing of a vehicle service contract discussed below.
Dealers’ Financial Services Violations
CFPB examinations found that DFS misrepresented the costs and coverage of add-on products sold in conjunction with MILES loans. Specifically, DFS deceptively marketed two optional add-on products that were sold to, and typically financed by, servicemembers – a vehicle service contract and an additional GAP insurance policy, which is a special kind of insurance that only applies to a car that has been stolen or declared a total loss and where the payment from the primary insurer does not cover the balance due on the car loan. DFS’s deceptive practices included:
Under the CFPB orders issued today, the companies have agreed to:
Earlier this week, the bureau released a bulletin discussing its expectations regarding “responsible conduct” by those subject to bureau enforcement actions. By proactively altering problematic aspects of the MILES program and readily working with the bureau to provide refunds to servicemembers harmed by this conduct, both companies in this action engaged in the sort of conduct the CFPB expects from companies found to have violated consumer financial laws. This was one of several factors the bureau considered when choosing not to impose a civil money penalty in this matter.
The Department of Defense and the Judge Advocate General Corps of each of the service branches assisted the CFPB in this matter. The CFPB and the Department of Defense have been also working closely on issues related to the military discretionary allotment system. The Department of Defense has convened an interagency work group to improve the allotment system in which the CFPB will participate.
To see a blog by Assistant Director for Servicemember Affairs Holly Petraeus on what servicemembers should know about military allotments, go to: www.consumerfinance.gov/blog/what-you-should-know-about-military-allotments/.
The U.S. Bank Consent Order is available at: http://files.consumerfinance.gov/f/201306_cfpb_enforcement-order_2012-0340-02.pdf.
The DFS Consent Order is available at: http://files.consumerfinance.gov/f/201306_cfpb_enforcement-order_2013-0589-02.pdf.