More than 50,000 active-duty service members who participated in
a big bank's specialty auto loan program are due a refund, says the
federal consumer watchdog agency.
On June 27, the Consumer Financial Protection Bureau ordered
U.S. Bank and a partner company to return $6.5 million to
participating service members for engaging in what the agency
called "deceptive marketing and lending practices" in the
companies' Military Installment Loans and Educational Services
(MILES) auto loan programs.
"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,"
said CFPB Director Richard Cordray in a
MILES was created to finance subprime auto loans to active
military members. The program has expanded beyond U.S. Bank to
other lenders, but most of the loans are still financed by the
bank. The CFPB reported that the MILES loan program violated the
Truth in Lending Act
. U.S. Bank will pay $3.2 million and its partner, Dealers'
Financial Services (DFS) will pay $3.3 million for the
U.S. Bank failed to inform the service members about a monthly
charge for processing their automatic payments. The average life of
a MILES loan is 60 months, and the fees associated with the
processing the loan payments would total approximately $180.
Additionally, CFPB found that U.S. Bank did not disclose that
payments were due twice a month. U.S. Bank required loan recipients
to pay by military allotments, which should have been deducted
twice a month from service members' paychecks. However, U.S. Bank
told the service members that payments were due only once a month
and only credited their accounts once a month. This resulted in
additional interest charges, which added up to about $75 over the
life of the average MILES loan.
DFS was responsible for marketing the program and processing the
loan applications before passing them on to U.S. Bank.
Misrepresenting expensive auto add-ons got the DFS in trouble. Two
optional add-on products were sold -- a vehicle service contract
and an additional Guaranteed Auto Protection (GAP) insurance
policy. The service contract added an average of $43 a month
to a bill, but DFS claimed the contracts added just "a few dollars"
to a monthly payment. (The site has since been updated removing
this language.) The GAP insurance added more than $100 a year to a
loan, but according to the CFPB, DFS told some customers the cost
would be pennies a day. In reality, the cost of the GAP insurance
was closer to 50 cents a day.
The CFPB has ordered the companies to stop all deceptive
practices immediately, pay restitutions to the service members,
stop requiring the use of allotments, improve their disclosure
practices and submit a redress plan for the CFPB to approve. The
CFPB has also mandated the reimbursement funds be paid without
requiring action from the consumers.
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