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MILES to Go

After reading the CFPB’s consent order against U.S. Bank and its nonbanking partner, the magazine’s legal insider concludes the bureau is one heck of a negotiator.

August 2013, F&I and Showroom - Feature

by Michael Benoit

On June 27, the Consumer Financial Protection Bureau (CFPB) announced consent orders against U.S. Bank and Dealers’ Financial Services relating to their alleged mistreatment of servicemembers using their Military Installment Loans and Educational Services (MILES) program. The bureau had alleged the parties had failed to properly disclose fees and misrepresented the cost of add-on products.

According to the U.S. Bank consent order, the CFPB found it in violation of Regulation Z (Truth in Lending) because it failed to accurately disclose the finance charge, annual percentage rate, payment schedule, and total payments for MILES loans where U.S. Bank served as the creditor. The bureau also charged U.S. Bank with violating the Consumer Financial Protection Act (CFPA)’s prohibition on deceptive acts or practices.

Specifically, the CFPB said the bank did not disclose the monthly fee associated with processing allotment payments as a finance charge (which caused other disclosure violations). The bureau also charged the bank with failing to properly disclose the payment schedule as requiring two payments per month (due to how the military’s allotment system deducts payments from wages).

These claims seem to be the result of the bank requiring the use of allotments by servicemembers. To the extent a payment method is required, any fee associated with the payment method is a finance charge. OK, but I’d like to point out that if you require that payments be made to a lockbox, it seems the cost of the stamp would also be a finance charge. At 46 cents per month for 60 months, that adds up to an additional $27.60.

In any event, we’ve always advised our clients not to require ACH payments or allotments because it opens you up to these kinds of claims. My military finance clients also tell me a fee should not be passed on to the servicemember to use the allotment system. So, to the extent one was charged for the mandatory use of the allotment system, the bank should have disclosed that fee as a finance charge and factored it into the APR calculation. But since a servicemember can cancel an allotment at anytime, was it really mandatory.

As far as the payment schedule, the bank was correct in that it disclosed that payments were due once a month. The Truth in Lending Act permits creditors to assume that payments will be made when due for purposes of disclosure. Apparently, the CFPB felt that because the allotment was mandatory and payments were deducted twice a month, TILA disclosures should have reflected that fact. However, several military lender clients have told me that while payments are deducted twice per month, the military sends the payments to creditors only once a month. If this is true, it seems disingenuous to make the bank credit payments it hasn’t received and cannot even be sure were deducted.

The violations alleged against DFS focused primarily on marketing. Specially, the CFPB felt the firm’s marketing of the program’s vehicle service contract was in violation of the CFPA because DFS failed to properly disclose the cost of the protection and what it covered. The firm marketed the VSC as costing “a few dollars a month” when the actual cost was $43 per month. The bureau also found that DFS “told some customers” that insurance would cost only a “few cents per day” when the true cost was 42 cents per day.

Now, the CFPB was well within its rights on the VSC claims, but it’s a little harder to prove customers were verbally given information that misled them about actual costs. The takeaway here is that the CFPB doesn’t need proof; it just needs to negotiate well.

It appears the payoff for the bank and DFS here is that their monetary obligations were limited to restitution. Still, restitution in the amounts of $3.2 million and $3.3 million, respectively, isn’t chump change.

All that said, dealers can be subject to the same kinds of claims through the Federal Trade Commission, whose authority to protect against unfair and deceptive practices is very similar. Check your marketing materials to be sure they accurately reflect the nature and benefits of the ancillary products you sell. And train your F&I folks on the difference between “being salesy” and being deceptive, as statements that mislead are actionable.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at michael.benoit@bobit.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.

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