4:17 p.m. Updated To add comment from Dealers’ Financial Services
Active members of the military who took out a car loan under the “MILES” program may have refund checks coming their way.
As part of its effort to make sure members of the military get fair financial treatment, the Consumer Financial Protection Bureau has ordered U.S. Bank and an affiliated company to refund $6.5 million to thousands of borrowers for failing to fully disclose some costs and fees under the automobile lending program. “Miles” stands for Military Installment Loans and Educational Services.
U.S. Bank and its affiliate, Dealers’ Financial Services, will repay funds to about 50,000 borrowers who took out loans after Jan. 1, 2010. The average check will be around $100, and will vary depending on when the car was bought, its price, and whether add-on products were purchased. Richard Cordray, the bureau’s director, said in a prepared statement that the bureau didn’t assess civil penalties because the companies cooperated to resolve the issues.
U.S. Bank, part of U.S. Bancorp, initially created the program a decade ago to make sub-prime car loans to younger, active-duty service members buying their first cars. It partnered with Dealers Financial Services, based in Lexington, Ky., to recruit participating car dealerships and to market and administer the program. In a statement, U.S. Bank said the loans were “offered at competitive rates compared to typical car loans for individuals without established credit histories. “
The bureau found that U.S. Bank violated the Truth in Lending Act as well as federal laws that prohibit deceptive marketing and lending practices, because it failed to properly disclose fees associated with the loans, like a $3 monthly processing fee that would total $180 over the life of a typical 60-month loan.
It also found that DFS misrepresented the cost of add-on features, such as service agreements and “gap” insurance to cover costs not covered by the borrower’s regular car insurance policy.
The bank, the bureau said, required borrowers to pay under the military’s “allotment” system, but didn’t disclose the full cost of fees associated with doing so. The system allows soldiers to pay bills from their paycheck before it is deposited in their bank account, but typically requires a fee from a third-party processor.
One of the bureau’s tasks is to oversee financial services marketed to military members. Mr. Cordray said the bureau began looking into potential problems with the MILES program after receiving complaints from family members. For instance, a man from Massachusetts told how his 21-year-old son, who had good credit and was being deployed to Iraq in the infantry, financed a used Dodge Ram for $20,000 through the MILES program, at an 18 percent interest rate. In addition to the loan, he was sold add-on products, including a warranty, costing thousands of dollars. The payments and upkeep cost $700 a month, or more than 70 percent of his take-home pay .
U.S. Bank intends to exit the MILES program, bank spokesman Tom Joyce said in an e-mailed statement. He noted that the bank has been recognized by the Department of Defense for its support of employees who serve in the National Guard and the military reserves, and has about 2,300 employees who are serving or who have served in the military.
“We take seriously the CFPB’s concerns regarding these disclosures and certain marketing materials used in conjunction with the MILES program,” he 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.”
Jeff Weiss, chairman and chief executive of DFC Global Corp., the parent company of Dealers’ Financial Services, said in a statement that the company is in negotiations for potential new lending partners for the program.
“We cooperated completely in the CFPB examination of our DFS business,” he said. “DFS is already in the process of modifying its compliance management system and communication procedures with customers to take into account these issues.”
Holly Petraeus, the bureau’s assistant director for service member affairs, said in a statement that the finding highlights potential problems with the use of allotments as a way to pay off consumer debt. The allotment system, which predates the widespread use of electronic payments and online banking, was used to make paying bills easier for active-duty service members. Because the payments are deducted before the salary is deposited, however, it offers less flexibility in the event of a financial emergency, and can cost more in fees than most bill payment options because they typically involve third-party processors, she said.
The Defense Department has requested a review that may result in changes to the system, Secretary Chuck Hagel said in a statement.
Have you financed a car loan through the MILES program? Were its terms fairly disclosed?
Article source: http://bucks.blogs.nytimes.com/2013/07/02/military-auto-borrowers-to-get-refund-checks/?partner=rss&emc=rss