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 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.
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 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.
U.S. Bank, headquartered in Minneapolis, Minn., and DFS, headquartered in Lexington, Ky., reportedly 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 service members 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 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.
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 on deceptive acts or practices by:
Failing to properly inform service members about fees associated with the loan: Service members were charged a monthly processing fee for their automatic payroll allotments. However, this fee was not properly disclosed as part of the finance charge, annual percentage rate, and total payments for the loans. Over the life of a typical 60-month MILES loan, a borrower would pay approximately $180 in these fees.
Failing to properly disclose schedule of payments: Since U.S. Bank required service members to pay by military allotments, which they knew would be deducted from service members’ paychecks twice a month, U.S. Bank should have informed service members that they had to make payments twice per month. However, the bank told service members that payments were due only once a month and only credited their accounts once a month. The lag between when the payment was deducted and when it was credited cost service members additional interest—an extra $75 over the life of a typical MILES loan.
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, service members – 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:
Understating the costs of the vehicle service contract: DFS claimed in marketing materials that the vehicle service contract would add just “a few dollars” to the customer’s monthly payment when it actually added an average of $43 per month.
Understating the costs of the insurance: Similarly, DFS told some customers that the insurance policy would cost only a few cents a day, when the true cost averaged 42 cents a day, or more than $100 a year.
Misleading consumers about product benefits: The MILES marketing materials also deceptively suggested that the vehicle service contract would protect service members from all expensive car repairs, when many basic parts were not covered.
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