The Consumer Financial Protection Bureau (CFPB) has taken decisive action against U.S. Bank and Dealers’ Financial Services (DFS) for engaging in deceptive marketing and lending practices specifically targeting active-duty military personnel through the Military Installment Loans and Educational Services (MILES) program. This program, which offered Miles Program Car Loans, promised to provide financing for servicemembers but instead allegedly trapped them in a web of undisclosed fees and misrepresented costs. The CFPB has ordered the two companies to refund approximately $6.5 million to affected servicemembers.
“Protecting servicemembers is a top priority for the CFPB,” stated CFPB Director Richard Cordray. “The MILES program exploited the military allotment system and obscured the true costs of miles program car loans with hidden fees and misleading add-on products. This action underscores our commitment to ensuring fair treatment for those who serve our country.”
Understanding the MILES Program and Military Car Loans
The MILES program was designed as a collaborative effort between U.S. Bank and DFS to provide car loans to active-duty military personnel, often those with subprime credit. U.S. Bank served as the primary lender, financing the majority of the loans, while DFS managed the consumer-facing operations. DFS was responsible for marketing the miles program car loans, managing a network of 700 auto dealerships, overseeing the MILES website, and processing loan applications before passing them to U.S. Bank for final approval.
A key feature of the MILES program was its mandatory use of the military allotment system for loan repayment. This system, initially created to assist deployed servicemembers in sending money home and paying creditors before widespread electronic banking, deducts loan payments directly from a servicemember’s paycheck. While seemingly convenient, this system can be exploited by lenders who require the use of third-party processors, often adding extra fees to the loan. For miles program car loans, this mandatory allotment system became a point of financial vulnerability for servicemembers.
Deceptive Practices Uncovered: U.S. Bank and DFS Violations
CFPB investigations revealed that both U.S. Bank and DFS engaged in practices that violated the Truth in Lending Act and the Dodd Frank Wall Street Reform and Consumer Protection Act’s prohibition against deceptive acts.
U.S. Bank’s Misleading Loan Disclosures
As the financing institution behind the miles program car loans, U.S. Bank was found to have:
- Undisclosed Fees: U.S. Bank failed to properly disclose a mandatory monthly processing fee associated with the military payroll allotment system. This fee was not included in the finance charge, annual percentage rate (APR), or total payment calculations provided to servicemembers. For a typical 60-month miles program car loan, these undisclosed fees could accumulate to approximately $180, significantly increasing the overall cost of borrowing.
- Misrepresented Payment Schedule: Servicemembers were required to make loan payments through military allotments, deducted twice a month from their paychecks. Despite this bi-monthly deduction, U.S. Bank informed borrowers that payments were due only once a month and only credited accounts monthly. This delay between payment deduction and credit resulted in servicemembers being charged additional interest, costing them an estimated extra $75 over the life of a typical miles program car loan.
Alt: U.S. Bank branch exterior, representing the financial institution involved in deceptive miles program car loans.
DFS’s Deceptive Marketing of Add-on Products
Dealers’ Financial Services (DFS), responsible for the marketing and sales aspects of the miles program car loans, was found to have misrepresented the costs and benefits of optional add-on products, specifically a vehicle service contract and GAP insurance. These deceptive practices included:
- Understated Vehicle Service Contract Costs: DFS marketing materials claimed the vehicle service contract would add only “a few dollars” to the monthly payment. In reality, it added an average of $43 per month, significantly increasing the total cost of the miles program car loan when financed.
- Understated Insurance Costs: Similarly, DFS misrepresented the cost of GAP insurance, telling some customers it would cost “a few cents a day.” The actual cost averaged 42 cents per day, exceeding $100 annually, further inflating the expenses associated with the miles program car loan.
- Misleading Product Benefit Claims: MILES marketing materials deceptively suggested the vehicle service contract would protect servicemembers from all expensive car repairs. However, many essential vehicle parts were not covered under the contract, leading servicemembers to believe they had more comprehensive protection than they actually did when taking out miles program car loans.
Alt: Exterior of a car dealership, symbolizing the point of sale for deceptive miles program car loans and add-on products.
CFPB Remedies: Restitution and Program Changes for Miles Program Car Loans
In response to these violations, the CFPB issued orders requiring U.S. Bank and DFS to take corrective actions, including:
- Ceasing Deceptive Practices: Both U.S. Bank and DFS are mandated to end all deceptive marketing and lending practices related to miles program car loans and similar programs. They are prohibited from making misleading statements or omissions when marketing add-on products in the future.
- Providing Restitution to Servicemembers: U.S. Bank is obligated to pay at least $3.2 million, and DFS is required to pay $3.3 million in restitution to over 50,000 servicemember victims. This compensation is for violations of the Truth in Lending Act and federal laws prohibiting deceptive marketing and lending practices associated with miles program car loans. Servicemembers with outstanding MILES loans between January 1, 2010, and the present may be eligible for restitution.
- Automatic Refunds and Credits: Servicemembers do not need to take any action to receive their reimbursement. U.S. Bank and DFS will automatically provide refunds or account credits to affected individuals.
- Eliminating Mandatory Allotments: U.S. Bank and DFS must modify the MILES program to remove the requirement that servicemembers use military allotments for loan repayment. This change offers servicemembers more payment flexibility and avoids potentially costly mandatory fees associated with the allotment system for miles program car loans.
- Improving Disclosures: The companies are required to enhance their disclosures to servicemembers regarding the costs and terms of add-on products, ensuring transparency and informed decision-making when considering miles program car loans.
- Mandatory Reporting and Compliance: Both companies must submit a redress plan to the CFPB for approval and provide regular reports demonstrating their compliance with the CFPB orders.
Implications for Servicemembers Seeking Car Loans
This CFPB action serves as a critical reminder for servicemembers to exercise caution and vigilance when seeking car loans, especially those marketed specifically to the military. The case highlights the potential risks associated with:
- Mandatory Military Allotments: Be wary of lenders requiring loan payments through military allotments, as this may involve undisclosed fees and reduced payment flexibility. Explore alternative payment methods whenever possible.
- Add-on Products: Carefully scrutinize and question the costs and benefits of any add-on products offered with car loans, such as vehicle service contracts or GAP insurance. Ensure you fully understand the coverage and whether these products genuinely meet your needs at a reasonable cost.
- Loan Disclosure Transparency: Demand complete transparency regarding all loan fees, interest rates, and payment schedules. Ensure all costs are clearly disclosed and included in the APR and total payment calculations.
Alt: The seal of the Consumer Financial Protection Bureau (CFPB), representing the agency’s action against deceptive miles program car loans.
The CFPB’s enforcement action against the MILES program underscores its commitment to protecting servicemembers from predatory lending practices. By taking action against U.S. Bank and DFS, the CFPB is sending a clear message that deceptive marketing and hidden fees in miles program car loans will not be tolerated, and servicemembers deserve fair and transparent financial services. Servicemembers are encouraged to be informed consumers and to report any suspected deceptive practices to the CFPB and other relevant authorities.
