Warning to lenders targeting the military

By Debbie Gregory.

Defense officials at the Pentagon have reviewed lender-related abuse of the system that soldiers, sailors and Marines use to pay their bills. U.S. Bank and  Dealers’ Financial Services have failed to disclose fees on costly auto loans signed by service members.

Taking advantage of our young service members is despicable. Complaints about the MILES auto loan program and allotment system prompted a yearlong investigation.

The MILES program required service members 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 service members 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.

U.S. Bank and Dealers’ Financial Services were using the system to their advantage by failing to disclose fees and understating costs to service members. The companies must now stop requiring service members to use the allotment system to pay their auto loans.

Today, the military allotment system may be vulnerable to misuse. When service members pay by allotment, the lenders often require service members 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 service members more in fees than alternatives like online banking, which are often free.

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 for engaging in deceptive marketing and lending practices.

The Consumer Financial Protection Bureau (CFPB) ordered U.S. Bank and one of its nonbank partner companies, Dealers’ Financial Services (DFS), to end deceptive marketing and lending practices targeting active-duty military. The two companies must return about $6.5 million to service members 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 cost and coverage of add-on products financed along with the auto loans.

Defense Secretary Chuck Hagel said he is still concerned about the potential for future abuse of the allotment system, which allows service members to automatically send a portion of their pay to any bank or person they choose. He has asked the DOD’s comptroller to create a team and determine whether changes may be needed.