United States: CFPB Update: CFPB Orders $3.1 Million In Refunds To Military Servicemembers In Fifth Case Involving Military Allotments

Last Updated: April 22 2015
Article by Nicholas F.B. Smyth

Most Read Contributor in United States, October 2017

On Monday, the Consumer Financial Protection Bureau (CFPB) announced the latest in a series of five enforcement actions involving military allotments: a $3.1 million consent order against a payment processor, Military Assistance Company (MAC) and its parent, Fort Knox National Company. The CFPB alleged that MAC had failed to disclose to servicemembers the amount of its fees and the fact that it had charged fees. MAC managed a payment processing system that took payments from servicemembers' paychecks (allotments) and sent them to creditors such as car lenders or furniture sellers. Once the loan was paid off, excess funds would sometimes continue accumulating in a servicemember's third-party payment processing account, often without the servicemember's knowledge. MAC charged its allegedly undisclosed fees against these excess funds.

What are allotments, and why does CFPB care about them?

As the CFPB explained, "The military allotment system allows servicemembers to deduct payments directly from their earnings. The allotment system was created to help deployed servicemembers send money home to their families and pay their creditors at a time when automatic bank payments and electronic transfers were not yet common bank services." MAC was one of the largest third-party allotment processors before the Department of Defense (DOD) changed the rules on January 1, 2015, to prohibit the use of allotments to repay loans for personal property (cars, furniture, jewelry, etc). DOD changed the allotment system in response to recommendations from a working group made up of several DOD offices, CFPB (including me, when I was there), and other federal bank regulators.

The CFPB has been concerned about potential harms resulting from abuse of the allotment system for a number of years. In June 2013, Holly Petraeus, the Director of the Bureau's Office of Servicemember Affairs, outlined the concerns in a blog post. Among other things, she cited the cost of allotments and the lack of transparency and choice.

CFPB focused on all issues that affect servicemembers

The other reason the CFPB cares about allotments is that the CFPB, led by Mrs. Petraeus' office, is focused like a laser on anything that might harm servicemembers. For example, the CFPB takes complaints about and examines for violations of the Servicemembers Civil Relief Act (SCRA) and Military Lending Act (MLA).

The MLA is a complex law that the CFPB has authority to enforce, and the DOD is currently working on a final rule that will significantly expand its scope. Last week I spoke on an ABA panel in San Francisco entitled "Lending to the Military," and the revisions to the MLA were a topic of great concern – particularly for credit card lenders. DOD has proposed expanding the MLA to cover credit card loans, which would require systems changes at nearly every bank in the country. This is because the MLA (like the SCRA) has an interest rate cap with a complicated definition of interest that differs from the Truth-in-Lending Act's APR definition. Lenders must review their systems and train their staff to avoid violations of these laws.

Although the CFPB does not enforce the SCRA, its exam manual directs examiners to keep an eye out for potential violations of that law, and the Bureau can refer such matters to the Department of Justice (DOJ). In many ways, the SCRA is significantly more complicated to comply with than the MLA, and DOJ has been zealously enforcing it.

CFPB and banks' interests are aligned in moving payments to online banking

Instead of allotments, Mrs. Petraeus' blog post encourages servicemembers to consider automatic ACH payments or online bill-payment as a means of repayment, since they are "usually free and easy to set up." This is a good example of an area where the CFPB is interested in driving more consumers to use bank or credit union services instead of nonbanks. (I  previously wrote about another area where CFPB policy changes may have a similar effect: small dollar lending.)

The charges in the MAC order

The MAC consent order alleged violations of the Consumer Financial Protection Act's prohibition on unfair, deceptive, or abusive acts or practices (UDAAP). 12 U.S.C. §§ 5531, 5536(a)(1)(B). In fact, the order found that MAC's conduct violated all three standards, and there were two separate counts of abusive acts and practices. The Bureau found the conduct abusive because it took "unreasonable advantage of [] (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; [or] (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service." 12 U.S.C. § 5531(d)(2).

Previous cases show a steady focus on allotments

The MAC order follows on four previous CFPB consent orders involving lenders that targeted military servicemembers and either required or strongly encouraged repayment by military allotment:

  • A December 2014 consent order against Freedom Stores ordering $2.5 million in redress. Among other things, the CFPB alleged that Freedom had "double-dipped" in servicemembers' funds by setting up most servicemembers on allotment payments, and then requiring borrowers to authorize a bank withdrawal as a backup method. The CFPB said that, "many consumers had their payments taken from both their paychecks and their bank accounts in the same month, often without their knowledge and before the payment due date."
  • A July 2014 consent order against Colfax Capital and Culver Capital (also known as "Rome Finance"), ordering $92 million debt forgiveness for servicemembers. CFPB alleged that, among other things, Rome had hidden the high interest from servicemembers by artificially inflating the disclosed price of the goods (typically TVs and computers) that it sold to them. The lenders in Rome typically required servicemembers to repay by allotment.
  • Two June 2013 consent orders against a bank and its nonbank marketing partner, ordering refunds of $6.5 million to servicemembers. The CFPB alleged that the bank and nonbank's subprime auto loan program required servicemembers to repay their loans by allotment.

CFPB targeting payment processors to prevent harm by smaller entities

The MAC settlement is also interesting because it follows on the heels of CFPB's lawsuit earlier this month against "phantom" debt collectors and the four payment processors that processed credit and debit card payments on their behalf: Global Payments, Pathfinder, Frontline, and Electronic Merchant Systems. The CFPB is focused on the payment processor space because the Bureau has limited resources, and it recognizes that targeting larger players such as payment processors can be more effective than investigating only the merchants and debt collectors, which are often much smaller entities. I suspect that the Bureau thinks that if it can force payment processors to improve their compliance and risk management systems, then the lawsuit will have a wider impact, instead of stopping just one alleged phantom debt scheme.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.