WASHINGTON, D.C. and MINNEAPOLIS — The first significant
penalty from the Consumer Financial Protection Bureau in connection with
vehicle financing came Thursday — a development associated with approximately
$6.5 million in revenue for two companies.

The CFPB ordered U.S. Bank and one of its nonbank partner
companies, Dealers' Financial Services, to end what it called deceptive
marketing and lending practices targeting active-duty military.

The bureau said the two companies must return about $6.5
million to service members for failing to properly disclose all the fees
charged to participants in the companies' Military Installment Loans and
Educational Services (MILES) auto loans program, and for misrepresenting the
true cost and coverage of add-on products financed along with the auto loans.

"The bureau has a special mission to protect service
members," CPFB director Richard Cordray said. "The MILES program failed to
properly disclose costs associated with repaying auto loans through the
military allotments system and the expensive auto add-on products sold to
active-duty military. We will continue our work to ensure that service members
are treated fairly."

In a statement sent to SubPrime Auto Finance News, U.S. Bancorp senior vice president and
director of corporate public relations Tom Joyce explained that the company
partnered with Dealers' Financial Services more than a decade ago to create the
MILES program.

Joyce insisted MILES was intended to help junior military
personnel with little to no credit history to obtain affordable rate auto loans
and to receive valuable financial education prior to purchasing their first
vehicle.

"These loans were offered at competitive rates compared to
typical car loans for individuals without established credit histories," Joyce
said. "This has been a popular program with young military service people, who
faced the prospect of paying much higher interest rates at other lenders."

The CFPB stated the MILES program required service members
to repay their vehicle loans using the military allotment system, which deducts
payments directly from a military member's paycheck before that salary is
deposited in his or her bank account. The bureau contends the allotment system
was created decades ago to help deployed service members 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.

In response, Joyce said, "The CFPB has determined that
several aspects of the MILES program do not meet their standards. While we are
not being fined by the agency, we are reimbursing a $3 monthly fee that certain
customers paid to a third-party processor for servicing their automatic
payments.

"In addition, because the CFPB felt some of the disclosures
on the timing of when customer payments were being applied to their loans were
insufficient, we are also crediting a portion of the interest payments to those
borrowers," he continued.
 

"We take seriously the CFPB's concerns regarding these
disclosures and certain marketing materials used in conjunction with the MILES
program," Joyce went to say. "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."

Joyce also touched on what the future of the MILES program
is now that the CFPB issued its decision.

"The MILES program was designed to provide access to
affordable auto loans, as well as provide financial education for our military
service members," Joyce said. "While we intend to exit the MILES loan program,
we have also chosen to build on our original objective of financial education,
and we will continue to offer and further expand the educational component of
the program, broadening the content and extending access to all military
servicemembers."

More Explanation of Wrongdoing

In announcing the penalty, the CFPB elaborated about how
regulators arrived at their decision against U.S. Bank, headquartered in
Minneapolis, and DFS, headquartered in Lexington, Ky.

The bureau arrived at his decision based on the assertion
that DFS is responsible for managing the consumer-facing aspects of the MILES
program, including:

—Marketing the program

—Recruiting and maintaining the 700 participants in the
MILES dealer network

—Managing the MILES website

—Processing the loan applications before they are passed on
to U.S. Bank.

Again, the CFPB returned to the use of the military
allotment system by U.S. Bank and DFS to collect payments.

"Today, the military allotment system may be vulnerable to
misuse. When servicemembers pay by allotment, the lenders often require
servicemembers to use third-party processors that charge one or more fees," the
bureau said.

"If lenders require payments by allotment, military
consumers could be left with no choice but to pay this additional processing
fee in order to qualify and pay for the loan," the agency continued. "This can
cost servicemembers more in fees than alternatives like online banking, which
are often free."

U.S. Bank Violations

CFPB examinations found that U.S. Bank, which is responsible
for financing the MILES loans, violated the Truth in Lending Act and the Dodd
Frank Wall Street Reform and Consumer Protection Act's prohibition on deceptive
acts or practices.

The agency said it arrived at those conclusions because the
bank failed to properly inform servicemembers about fees associated with the
loan.

"Service members were charged a monthly processing fee for
their automatic payroll allotments. However, this fee was not properly
disclosed as part of the finance charge, annual percentage rate, and total
payments for the loans," federal officials said.

"Over the life of a typical 60-month MILES loan, a borrower
would pay approximately $180 in these fees," they continued.

The bureau also determined U.S. Bank failed to properly
disclose schedule of payments.

"Since U.S. Bank required service members to pay by military
allotments, which they knew would be deducted from service members' paychecks
twice a month, U.S. Bank should have informed service members that they had to
make payments twice per month," regulators said.

"However, the bank told service members that payments were
due only once a month and only credited their accounts once a month," they
continued. "The lag between when the payment was deducted and when it was
credited cost service members additional interest – an extra $75 over the life
of a typical MILES loan."

Because the bureau believes U.S. Bank helped to create the
MILES program with DFS, the agency said the company also responsible for the
illegal marketing of a vehicle service contract, which is the bulk of DFS'
violations.

Dealers' Financial Services Violations

CFPB examinations determined that DFS misrepresented the
costs and coverage of add-on products sold in conjunction with MILES loans.

"Specifically, DFS deceptively marketed two optional add-on
products that were sold to, and typically financed by, service members – a
vehicle service contract and an additional GAP insurance policy – which is a
special kind of insurance that only applies to a vehicle  that has been stolen or declared a total loss
and where the payment from the primary insurer does not cover the balance due
on the vehicle loan," regulators said.

As a result, the CFPB indicated DFS's deceptive practices
included:

—Understating the costs of the vehicle service contract: DFS
claimed in marketing materials that the vehicle service contract would add just
"a few dollars" to the customer's monthly payment when it actually added an
average of $43 per month.

—Understating the costs of the insurance:  Similarly, DFS told some customers that the
insurance policy would cost only a few cents a day, when the true cost averaged
42 cents a day, or more than $100 a year.

—Misleading consumers about product benefits: The MILES
marketing materials also deceptively suggested that the vehicle service
contract would protect servicemembers from all expensive car repairs, when many
basic parts were not covered.

Remedies Directed at U.S. Bank and DFS

Under the CFPB orders issued Thursday, the companies have
agreed to:

—Stop what have been determined to be deceptive practices:
U.S. Bank and DFS are required to end deceptive marketing and lending practices
and will be prohibited from making misleading claims or omissions when
marketing add-on products through MILES or similar programs in the future.

—Pay restitution to servicemembers: U.S. Bank has agreed to
pay at least $3.2 million and DFS has agreed to pay $3.3 million to more than
50,000 service member victims for violating the Truth in Lending Act and
federal laws that prohibit deceptive marketing and lending practices.
Servicemembers who had outstanding MILES loans between January 1, 2010 and
Thursday may receive restitution under the orders.

—Provide refunds or credits without any further action by
consumers: Service members are not required to take any action to receive their
reimbursement. U.S. Bank and DFS will provide the reimbursements to the victims
as an account credit or as a check in the mail.

—Stop requiring the use of allotments: U.S. Bank and DFS
have also agreed to modify the MILES program so that servicemembers are not
required to use allotments in order to participate.

—Improve disclosures: The companies will take steps to
improve their disclosures to service members regarding the cost and other
material terms of add-on products.

—Required reporting: 
Under the orders, both companies will be required to submit a redress
plan that the CFPB must approve. They must also provide reports to the Bureau
to demonstrate their compliance with the orders.

Earlier this week, the bureau released a bulletin discussing
its expectations regarding "responsible conduct" by those subject to CFPB
enforcement actions.

"By proactively altering problematic aspects of the MILES
program  and readily working with the
bureau to provide refunds to service members harmed by this conduct, both
companies in this action engaged in the sort of conduct the CFPB expects from
companies found to have violated consumer financial laws," regulators said.

"This was one of several factors the bureau considered when
choosing not to impose a civil money penalty in this matter," they added.

Joyce added one other response to the CFPB assertions.

"At U.S. Bank, ownership, accountability and service to all
of our customers, especially our military service members, is at the heart of
what we do," Joyce said. "We have a very strong track record of support for
military service members, for which we have been recognized with numerous
awards and commendations.

"In fact, two days ago, we were especially honored to have
received the Department of Defense's highest honor for support of employees who
serve in the National Guard and Reserve," he continued. "We have approximately
2,300 employees and countless bank customers who serve, or have served, in the
military.     

"Our commitment to supporting our military service members
will never waver," Joyce went on to say.

The CFPB mentioned the Department of Defense and the Judge
Advocate General (JAG) Corps of each of the service branches assisted the
bureau on this matter.

The CFPB and the Department of Defense have been also
working closely on issues related to the military discretionary allotment
system. The Department of Defense has convened an interagency work group to
improve the allotment system in which the CFPB will participate.

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