U.S. Bank and one of its nonbank partners, Dealers Financial Services, will refund about $6.5 million to 50,000 customers as the result of deceptive practices associated with its auto loan program. The refunds were ordered by the Consumer Financial Protection Bureau, a federal agency that enforces consumer financial laws and investigates consumer complaints.
All 50,000 affected customers were military service members who were participating in the Military Installment Loans and Educational Services, or MILES, auto loans program, which was created to finance subprime auto loans to active-duty military members. Created decades ago, before automatic payments and electronic transfers were common, the MILES program required service members to repay their car loans via the military allotment system, which deducted the funds from paychecks before the salary was deposited in the service members' bank accounts. This method required using third-party processors that charge fees, which can result in higher costs than alternatives such as online banking, which is often free.
The CFPB found that U.S. Bank failed to properly inform service members about the fees and to properly disclose the payment schedule. There was also a lag time between when the payments were deducted and when they were credited, resulting in additional interest charges.
In addition, the CFPB also found that DFS misrepresented the costs and coverage of vehicle service contracts and guaranteed auto protection, or GAP, insurance add-on products, which were sold with the car loans. The deceptive practices included claiming in marketing materials that the vehicle service contracts added "just a few dollars" to the monthly payment, when the added cost was $43 on average, and claiming GAP insurance would add "just a few cents a day," when the extra cost was 42 cents on average. Additionally, the marketing materials also suggested that the vehicle service contract would protect them from all expensive car repairs, when in fact many basic parts were not covered.
Service members who had outstanding MILES car loans from Jan. 1, 2010, going forward qualify for reimbursements. They will receive checks in the mail or account credits and do not need to take any action to be reimbursed. U.S. Bank and DFS have agreed to modify the program, so service members are not required to use the military allotment system to participate.
Were you one of the participants in the program?
Tara Baukus Mello writes the cars blog as well as the weekly Driving for Dollars column, providing both practical financial advice for consumers as well as insight into the latest developments in the automotive world. Follow her on Facebook here or on Twitter @SheDrives.