For years, we’ve warned of how companies position themselves just outside the gates of military bases to target servicemembers with costly loans and expensive contracts for items like cars, furniture, and electronics.
Despite existing federal protections, the CFPB and the Department of Defense (DoD) continue to closely monitor these companies for abuses, particularly those that seek out servicemembers due to their steady paychecks and the ability to structure repayments through the military allotment system.
Curbing abuses of the military allotment system
The military allotment system dates back to the Civil War as a tool to help military personnel make automatic recurring payments for housing or to family members directly from their paychecks, especially when they were deployed away from home. Today, however, consumers have many other options for automatic payments, like arranging Automated Clearing House (ACH) payments or online bill-pay services where the consumer’s bank sends money directly to a creditor. These services are usually free and provide more legal protections than using the allotment system.
Instead of a servicemember benefit, some lenders treat the allotment system as a means of prioritizing repayment of that lender’s loan over the servicemember’s payments of other expenses. Lenders ensure they get paid before servicemembers’ paychecks are even deposited into their bank accounts. When allotments are used for bill payment, servicemembers can’t choose the order in which to pay higher priority bills. Allotments have been front and center in many of the CFPB’s military consumer protection lawsuits where lenders either required repayment by allotment, hid junk fees in the pay-by-allotment process, or engaged in deceptive marketing and lending practices associated with allotments. In these actions and others impacting servicemembers, the CFPB has recovered more than $173 million for thousands of military consumers.
In addition to the CFPB and DoD, and other regulators have been working to stop companies from abusing allotments and to modify the system to prevent further abuses. In 2014, the CFPB and other financial regulators participated at the request of the Secretary of Defense in an interagency working group charged with . This working group found that over $1.38 billion in military paychecks was funneled through nearly one million allotments to three institutions that were suspected abusers of the allotment system during a single fiscal year. As a result, that prohibited new allotments to purchase, lease, or rent personal property like cars, furniture, and electronics. The following year, DoD also expanded the allotment prohibition in the Military Lending Act (MLA) to include a wider range of credit products, like installment loans, that cannot be repaid by allotment.
Evading protections and other troubling practices
Unfortunately, companies are still using the military allotment system to benefit themselves and not servicemembers. Through consumer complaints and the larger work of the CFPB’s Office of Servicemember Affairs, we continue to hear about significant concerns, including the following:
Some lenders still require borrowers to set up allotments
Lenders claim to offer servicemembers a bevy of repayment options, but we continue to hear otherwise from military consumers. One borrower complained that:
“On the day the loan was taken out, one of the representatives informed me that I had to sit at one of the computers they have set up in their office and set up automatic allotments to get the loan repaid before I would be allowed to leave the premises with the loan check. As I was active-duty military at the time, I logged into my DFAS (Defense Finance and Accounting Service) account right then and there and set up an automatic allotment for the amount of $150 monthly.”
In a recent CFPB consent order, a military installment lender claimed to offer multiple repayment options, but we found that employees told servicemembers they were required to repay by allotment—a violation of MLA—and records showed that 99 percent of active-duty servicemembers, who received loans from this company, repaid those loans via allotment.
Lenders funnel money through deposit accounts to skirt DoD’s protections
Some lenders may attempt to evade the DoD’s protections by partnering with allotment processing banks that create “savings accounts” for the servicemember. Allotments to a savings account are generally not prohibited by DoD rules. But, lenders can attempt to circumvent the DoD rules by creating allotment-funded savings accounts for servicemembers and then arranging for automatic payments from those accounts.
All servicemembers already have bank accounts since it’s required to get military pay. It’s concerning that servicemembers could be signing up for unnecessary and additional accounts with banks they have little or no choice in selecting, just to process allotments. Complaints indicate that servicemembers are often unaware that they just created a new savings account through which they repay the company. Servicemembers may also suffer financial harm due to the allotment accounts. For example, the bank may charge a monthly service or processing fee to send money from the savings account to the lender. In 2013, a single bank that was a suspected abuser of the allotment system reported $4.9 million in income from allotment processing fees alone.
Another example is if the servicemember overfunds the savings account by not immediately stopping the allotment once the loan has been repaid. In this situation, servicemembers may repay lenders more than they are owed, and they may have difficulty getting these extra funds returned. For example, one servicemember told us:
“[Company] took my first repayment by allotment on [date], and two additional payments after my loan was fully repaid by allotment...[One of the extra] payments was refunded on [date] in the full amount of $115.00. The March payment was refunded on [date] in a partial amount of $108.00, I was not made aware of the fact they owed me anything until [date], 7 days after the allotment was sent to them. I am unable to get the April payment refunded until after [date] as their systems won’t receive it until then despite my Leave and Earnings statement showing the future transfer. [Company] did not terminate the allotment on their end and never contacted me via phone, e-mail, or my [Company] dashboard once the loan was fully repaid to notify me that I needed to terminate the allotment through DFAS if they were unable to do so.”
In other cases, the excess payments pile up in the allotment savings accounts and are slowly diminished by dormancy and other junk fees. Servicemembers also recount difficulty getting information from the banks where these allotments are being deposited, stopping the payments, and getting their funds back.
Remaining vigilant to stop allotment abuses
While actions have been taken to stop abuses, it's clear that more work needs to be done to prevent companies from leveraging the military pay system to their advantage. We know that debts incurred by servicemembers and their families are a significant morale issue that impacts military readiness. Beyond the great personal cost to servicemembers and their families, servicemembers’ financial issues impact all Americans. It costs the government hundreds of millions of dollars each year to recruit and replace servicemembers when financial issues lead to their security clearances being revoked or to being separated from the military altogether.
The CFPB is committed to ensuring that servicemembers and their families have high levels of financial readiness, so troops can maintain their focus on the mission. If you’re a servicemember and believe that you have been treated unfairly by a company through the military allotment system, file a complaint online. Complaints have proven invaluable in our previous work on military allotments and we will continue to use them to hold companies accountable in our enforcement and compliance work as we move forward.