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More than 50,000 service members with loans under the Military Installment Loans and Educational Services auto loans program will receive refunds totaling about $6.5 million as part of an enforcement action by the Consumer Financial Protection Bureau.
The refunds will be paid by U.S. Bank and the nonbank company Dealers’ Financial Services.
In a related issue, Defense Secretary Chuck Hagel has directed the Defense Department comptroller to set up a team to look at what changes may be needed in the military allotment system, in which deductions are set up straight from a service member’s paycheck. The MILES program required troops to set up allotments in order to receive an auto loan.
CFPB enforcers allege the two auto loan companies failed to disclose all the fees they charge and misrepresented the cost and coverage of add-on products that were financed along with the auto loans. Dealers near many military bases around the country participate in the MILES program, CFPB director Richard Cordray said.
“A CFPB examination of the program found that MILES used the military discretionary allotment system to its advantage — requiring that service members pay straight from their paycheck before the money hit their personal bank accounts — without properly disclosing all associated fees and the way the program worked,” Cordray said.
The size of the refunds service members will receive varies depending on the loan, but will average just under $100 per person, said Kent Markus, assistant director of enforcement for the CFPB.
Troops do not have to take any action to receive the payments.
CFPB has given U.S. Bank and Dealers’ Financial Services 30 days to prepare a plan for disbursing the refunds, with repayments to start shortly thereafter, Markus said. Service members who had outstanding MILES loans between Jan. 1, 2010, and June 27, 2013, may receive restitution.
U.S. Bank financed the majority of the MILES loans. According to CFPB, U.S. Bank allegedly violated the Truth in Lending Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act by:
■ Failing to inform troops about fees associated with the loans. Troops were charged a $3 monthly processing fee for their automatic allotments, which was not properly disclosed. Over the life of a 5-year MILES loan, a borrower would pay about $180 in fees.
■ Failing to properly disclose the schedule of payments. The lag between the time the payment was deducted and when it was credited cost troops extra interest — an extra $75 over the life of a typical MILES loan.
Dealers’ Financial Services managed the aspects related to dealing with the consumer, including marketing; recruited the more than 700 auto dealers in the program; and processed loan applications. CFPB alleges DFS misrepresented the costs and coverage of add-on products, among other deceptive practices:
■ Understating the costs of the vehicle service contract by claiming that it would add a few dollars a month to the payment, when it added an average of over $43 per month.
■ Understating the costs of GAP insurance by saying the policy would cost a few cents a day, when the cost averaged 42 cents a day, a total of more than $100 a year. GAP insurance pays off a car — the difference in what is owed and what it’s worth — if the car is stolen or totaled.
■ Misleading consumers about products, suggesting that the vehicle service contract would protect troops from more repairs than it actually covered.
In addition to paying restitution, U.S. Bank and DFS must end deceptive marketing and lending practices, stop requiring the use of allotments, improve disclosures and submit a plan to address these issues to CFPB.
CFPB chose not to pursue civil penalties in the case, officials said, partly because both companies have altered “problematic aspects” of their program, and have been readily working with CFPB.
DFS has neither admitted nor denied any facts or conclusions of the review, but the company agreed to change its practices in line with recommendations made by the CFPB, and to provide restitution to customers, according a statement from parent company DFC Global Corp.
“At U.S. Bank, we have high expectations for ourselves and our company’s product offerings, and we apologize for any confusion this program may have caused our customers,” spokeswoman Teri Charest said in the statement.
Two days before the CFPB announcement, U.S. Bank was named as one of 15 employer recipients of the 2013 Secretary of Defense Employer Support Freedom Award. Charest noted that among U.S. Bank’s awards and recognitions is being named on Military Times EDGE magazine’s Best for Vets 2012: Employers list.
CFPB director Richard Cordray said one of the ways CFPB learned about the companies’ practices was through a letter from a father in Massachusetts who wrote to express his concerns that his 21-year-old son, an infantry soldier with good credit, was paying more than 70 percent of his take-home pay for a five-year loan on a used $20,000 Dodge Ram under the MILES program, at an interest rate of 18 percent.
He had also been sold a number of add-on products, including a warranty, that added thousands of dollars. “Harry wanted to know how a program claiming to educate its customers — the word ‘educational’ is in its title — could saddle such a loan on a young soldier on his way to Iraq,” Cordray said.
In a statement, Hagel thanked CFPB for their help protecting troops and increasing their financial literacy and readiness.
“However, I remain concerned about the potential misuse of the allotment system by lenders,” he said.
The comptroller team to review the allotment system will include representatives from enforcement agencies and bank regulators and will report within 180 days “on steps the department can take to ensure our discretionary allotment system no longer creates an opportunity for unscrupulous businesses and lenders to take advantage of those who serve in the armed forces,” Hagel said.