Making good on its word to track concerns such as questionable interest rates and discrimination, the Consumer Financial Protection Bureau recently sent a stern message that it is monitoring auto lenders’ activities.
The CFPB 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 June 27, 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.
The bureau’s 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.
“The bureau has a special mission to protect service members,” said CPFB Director Richard Cordray, in a statement. “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 service members are treated fairly.”
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 insurance policy. 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, U.S. Bank and DFS agreed to stop deceptive practices, pay restitution to service members, provide refunds or credit without any further action by consumers, stop requiring the use of allotments, improve disclosures and issue compliance reporting.
In an email to Credit Union Times, Teri Charest with U.S. Bank corporate public relations, said “While we are not being fined by the agency, we are reimbursing a $3 monthly fee that certain customers paid to a third-party processor for servicing their automatic payments.”
The bank also said “because the CFPB felt some of the disclosures on the timing of when customer payments were being applied to their loans were insufficient, we are also crediting a portion of the interest payments to those borrowers.”
“We take seriously the CFPB’s concerns regarding these disclosures and certain marketing materials used in conjunction with the MILES program,” Charest wrote. “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.”
U.S. Bank said it intends to exit the MILES loan program, choosing to build an “original objective of financial education, and we will continue to offer and further expand the educational component of the program, broadening the content and extending access to all military service members.”
The lack of due diligence was clearly where U.S. Bank failed, said Eddie Nevarez, vice president of business development for the National Auto Loan Network, in Newport Beach, Calif., which counts credit unions among its clients.
“Although I fully agree with the findings and the order of the CFPB, I do not believe it was the intent of U.S. Bank to deceive or mislead their customers,” Nevarez said. “I believe this is more a case of a lack of compliance and risk monitoring.”
While the bank said it plans to leave the MILES program, Nevarez said by monitoring and insuring compliance of the program, the fallout could have been avoided.
“We have seen this more times than we should in recent years; it is not until the deceptive and misleading practices are discovered and out in the open that banks and credit unions take action,” Nevarez said.