WASHINGTON, June 27, 2013 – About 50,000 service members will get refunds averaging $100 — though some will be far higher — after an enforcement action involving auto loans that Consumer Financial Protection Bureau officials announced today.
The bureau is ordering U.S. Bank and one of its nonbank partners, Dealers Financial Services, to return about $6.5 million to service members across the country, CFPB Director Richard Cordray told reporters during a conference call today.
“We’ve determined that the companies developed a joint program that engaged in deceptive marketing and lending practices while providing subprime auto loans to tens of thousands of active-duty military members,” he said.
Cordray explained that U.S. Bank and DFS created the Military Installment Loans and Educational Services program, better known as MILES, to sell subprime auto loans to active-duty service members at communities across the country located near military bases.
The consumer bureau found that MILES used the military discretionary allotment system to its advantage. Service members were required to pay by allotment, which he noted is “straight from their paycheck before the money hit their personal bank accounts,” without disclosing all associated fees and the way the program worked.
Specifically, he said, MILES failed to accurately disclose the finance charge, annual percentage rate, payment schedule and total payments for the loans.
“The examination also found that the MILES program deceived service members by understating the cost and scope of certain add-on products, such as a service contract, marketed and sold in connection with the loans,” he said.
Today’s action requires return of at least $3.2 million in undisclosed fees and costs, he said, and $3.3 million for the cost of the add-on products.
CFPB won’t impose civil penalties, he said, in part “because of the manner in which U.S. Bank and DFS cooperated with the bureau to resolve these matters.”
“Today’s action reflects our determination to act to protect service members against harmful practices in the consumer financial marketplace. … Everyone at the bureau will continue to stand side by side with our military and veterans,” Cordray said.
The director said he is pleased that Defense Secretary Chuck Hagel has ordered an interagency effort to determine whether the allotment system should be changed to further protect service members.
Holly Petraeus, CFPB’s assistant director for service member affairs, joined Cordray on the call and echoed his sentiments about allotments.
The system has been around since long before electronic fund transfers existed, she noted, and has been extremely useful for troops who need to make regular payments to their creditors, especially when deployed or on the move.
But allotments have drawbacks, she added. They may include costs for third-party processors, “as we saw in this case,” she said, and they reduce budget flexibility, because an allotment comes out before a service member receives his or her pay.
Allotments also offer less protection and less transparency than electronic bank transfers, she said.
Noting Hagel’s interagency working group to study allotments, Petraeus said, “I hope all of us can work together to try to eliminate the risks to military consumers that have grown up around the use of the allotment system.”
The third CFPB official on today’s call was Kent Markus, the bureau’s assistant director for enforcement, who told reporters service members due refunds don’t need to take action. They will receive them either through an account credit or by check.
Markus noted the enforcement action also mandates that MILES drop the allotment requirement, and that the institutions involved make no further deceptive statements or omissions.