U.S. Bank and its marketing partner have agreed to pay back $6.5 million to more than 50,000 servicemembers who were hit with hidden fees on auto loans, a government consumer watchdog agency said Thursday.
The Minnesota-based U.S. Bank and its partner, Dealers Financial Services of Lexington, Ky., avoided a potentially bigger payout from a civil lawsuit by agreeing to cooperate with the investigation by the Consumer Financial Protection Bureau and the Defense Department.
Under the arrangement, U.S. Bank will pay $3.2 million and DFS will pay $3.3 million to more than 50,000 servicemembers who had outstanding loans from January 2010 until now, the consumer protection bureau said.
The average payment to each servicemember will be about $100, a spokesman for the CFPB said, and servicemembers will not be required to take any action to receive their reimbursement. U.S. Bank and DFS will provide the reimbursements as an account credit or as a check in the mail, the bureau said.
The two firms agreed to end deceptive marketing and lending practices targeting military personnel in which they failed to disclose all of the fees charged in the companies' Military Installment Loans and Educational Services, or MILES, auto loans program, according to the bureau.
The companies also misrepresented the true cost and coverage of add-on products that they financed with the auto loans.
"The Bureau has a special mission to protect servicemembers," said bureau Director Richard Cordray. "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."
The MILES program required servicemembers to repay their auto loans using the military allotment system, which deducts payments directly from a military member's paycheck before that salary is deposited in a bank account.
The CFPB said that U.S. Bank did not disclose a monthly processing fee or make clear that participants needed to make payments twice a month. DFS understated the cost of optional add-on products marketed to borrowers, the CFPB said.
In response to the hidden fee scam, Defense Secretary Chuck Hagel said that he had ordered a review of the operations of the military's allotment system.
"The settlement that CFPB announced today is the culmination of over a year of collaboration between Defense Department leaders, the Judge Advocate General Corps of the military services and the CFPB," Hagel said in a statement.
"However, I remain concerned about the potential misuse of the allotment system by lenders," Hagel said. "That is why in concert with today's enforcement action, I have directed the department's comptroller to form an interagency team to assess what changes might be needed in the allotment system going forward."
As part of the agreement, U.S. Bank apologized for its deceptive practices.
"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," U.S. Bank said in a statement.
In announcing the repayment agreement, Cordray was joined by Holly Petraeus, the assistant director for Servicemember Affairs at the consumer protection bureau.
Petraeus, the wife of retired Army Gen. David Petraeus, briefly stopped coming to her Washington office last year during the height of the scandal over her husband's affair with his biographer, Paula Broadwell. That scandal forced him to quit as CIA director.
Holly Petraeus, an adviser on the military to First Lady Michelle Obama and Jill Biden, the wife of Vice President Joe Biden, has since returned to continue her long-time advocacy for military families.