The Consumer Financial Protection Bureau said it has ordered U.S. Bank and one of its nonbank partner companies to return nearly $6.5 million to military service members for engaging in deceptive auto loan sales and marketing practices.
On Thursday, the agency said it charged the bank and Dealers’ Financial Services for failing to properly disclose all the fees charged to participants in the companies’ Military Installment Loans and Educational Services auto loan program and for misrepresenting the true cost and coverage of add-on products financed along with the auto loans.
The MILES program requires 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 CFPB said.
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, according to the CFPB.
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, the CFPB said. Over the life of a typical 60-month MILES loan, a borrower would pay approximately $180 in these fees, according to the bureau.
The CFPB said U.S. Bank also failed to properly disclose schedule of payments. Since the bank required service members to pay by military allotments, which they knew would be deducted from their paychecks twice a month, U.S. Bank should have informed them 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, according to the CFPB. The lag between when the payment was deducted and when it was credited cost service members additional interest, which was an extra $75 over the life of a typical MILES loan, the agency said.
In addition, DFS’s deceptive practices included understating the costs of the vehicle service contract. The CFPB said 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.
The CFPB said DFS also understated the costs of the vehicle service contract. The company 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.
Service members were also misled about product benefits, according to the CFPB. The MILES marketing materials deceptively suggested that the vehicle service contract would protect service members from all expensive car repairs, when many basic parts were not covered.
Under the CFPB orders issued Thursday, U.S. Bank and DFS agreed to:
- Stop deceptive practices. Both 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 service members. 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 service member victims for violating the Truth in Lending Act and federal laws that prohibit deceptive marketing and lending practices. Service members who had outstanding MILES loans between January 1, 2010 and June 27, 2013 may receive restitution under Thursday’s orders.
- Provide refunds or credits without any further action by consumers. Service members 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 service members are not required to use allotments in order to participate.
- Improve disclosures. The companies will take steps to improve their disclosures to service members 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 CFPB to demonstrate their compliance with the orders.
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