The Consumer Financial Protection Bureau (CFPB) has 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 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 cost and coverage of add-on products financed along with the auto loans.
"The CFPB has a special mission to protect servicemembers," said CFPB 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 created the MILES program to finance subprime auto loans to active-duty military. 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.
Under the CFPB orders, U.S. Bank and DFS have agreed to:
- Stop deceptive practices: U.S. Bank and DFS are required to end deceptive marketing and lending practices and will be prohibited from making misleading claims or omissions when marketing add-on products through MILES or similar programs in the future.
- Pay restitution to servicemembers: U.S. Bank has agreed to pay at least $3.2 million and DFS has agreed to pay $3.3 million to over 50,000 servicemember victims for violating the Truth in Lending Act and federal laws that prohibit deceptive marketing and lending practices.
- Provide refunds or credits without any further action by consumers: Servicemembers are not required to take any action to receive their reimbursement. U.S. Bank and DFS will provide the reimbursements to the victims as an account credit or as a check in the mail.
- Stop requiring the use of allotments: U.S. Bank and DFS have also agreed to modify the MILES program so that servicemembers are not required to use allotments in order to participate.
- Improve disclosures: The companies will take steps to improve their disclosures to servicemembers regarding the cost and other material terms of add-on products.
- Required reporting: Under the orders, both companies will be required to submit a redress plan that the CFPB must approve. They must also provide reports to the Bureau to demonstrate their compliance with the orders.