The Pentagon last week announced a review that focuses on the allotment system being used by service members for their payments, as U.S. Bank and its partner agreed to pay thousands of service members $6.5 million for alleged deceptive practices in their auto loan program.
According to Secretary of Defense Chuck Hagel, a team of bank regulators and enforcement agencies will conduct the review and make sure that the system will never again allow dishonest lenders and businesses to take advantage of service members.
The allotment system allows those who serve in the Armed Forces to automatically transfer part of their income to a bank of their choice. It enables banks and their partners to deduct payments, such as auto loan payments, from the government before service members get their paychecks.
The system, which may involve third-party processors, was invented when electronic transfers and automatic payments were not yet possible. It was a helpful way for service members then to make regular payments even when deployed.
Recently, the Consumer Financial Protection Bureau (CFPB) scrutinized the Military Installment Loans and Educational Services (MILES) program of U.S. Bank and Dealers’ Financial Services.
“We learned that the MILES program was failing to properly disclose costs associated with both the military allotments system, which it required servicemembers to use in order to participate in the program, and the expensive add-on products being sold,” Cordray told USAToday.
The undisclosed costs included the total loan cost, finance charges, payment schedules, warranties and annual percentage rates.
In addition, the ads of the loan program suggested that the vehicle service contract covers expensive repairs where in fact it didn’t cover many basic repairs.
The sixth largest bank in the U.S. and its non-bank partner agreed to refund the money they owe to more than 50,000 service members. CFPB Director Richard Cordray said that they did not fine the lenders because they cooperated with the agency.
Meanwhile, U.S. Bank spokesman Thomas Joyce told USAToday that they are returning part of the interest payments and a $3 monthly fee to certain borrowers who paid a third-party company to process automatic payments. He also said that the use of the loan program is discontinued.