Deceptive auto lending marketing and practices have landed U.S. Bank and Dealers’ Financial Services LLC in nóng water with the Consumer Financial Protection Bureau. The two companies, which run a program called Military Installment Loans and Educational Services (MILES) that finances subprime auto loans to active-duty military worldwide, have been ordered by the CFPB to pay servicemembers $6.5 million for failing to properly disclose allotment fees and the timing of allotment payments. Minneapolis-based U.S. Bank (www.usbank.com) has agreed to pay at least $3.2 million and Lexington, Ky.-based DFS (www.usmiles.com) has agreed to pay $3.3 million to the more than 50,000 servicemembers who had outstanding MILES loans starting Jan. 1, 2010.
While other companies provide financing to MILES customers, U.S. Bank is the program’s primary lender. DFS manages the consumer-facing aspects of the MILES program, including marketing, recruiting dealers, managing the website, and processing the loan applications before they are passed on to U.S. Bank. “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 CPFB Director Richard Cordray in a statement.
Per the CFPB orders, the companies have agreed to stop deceptive practices, pay restitution to servicemembers, provide refunds or credits without any further action by consumers, stop requiring the use of allotments, improve disclosures, and submit a redress plan that the CFPB must approve.
Here are the specific violations, as outlined in the CFPB’s press release today:
U.S. Bank Violations
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 servicemembers about fees associated with the loan: Servicemembers 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 servicemembers to pay by military allotments, which they knew would be deducted from servicemembers’ paychecks twice a month, U.S. Bank should have informed servicemembers that they had to make payments twice per month. However, the bank told servicemembers 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 servicemembers additional interest—an extra $75 over the life of a typical MILES loan.
U.S. Bank, which helped create the MILES program with DFS, is also responsible for the illegal marketing of a vehicle service contract discussed below.
Dealers’ Financial Services Violations
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, servicemembers – 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 servicemembers from all expensive car repairs, when many basic parts were not covered.
Click here for the U.S. Bank Consent Order.
Click here for the DFS Consent Order.