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Defense officials are more than three months late on a report on the military allotment system, which will recommend steps to protect troops from unscrupulous businesses and lenders that use allotments to take advantage of them.
Defense Secretary Chuck Hagel ordered the review June 27 following a major enforcement action by the Consumer Financial Protection Bureau against two companies, alleging that they required troops to pay by allotments without properly disclosing all the fees charged by third-party processors.
A report on the review, headed by the Defense Department comptroller, was due within 180 days — by the end of last December.
“Due to the complex nature of the allotment study in which multiple internal and external stakeholders were engaged, the review has taken longer than anticipated,” said DoD spokesman Navy Cmdr. Bill Urban. “The report is being finalized at this time and is expected to be submitted to [Hagel] for review soon.”
A number of federal agencies, including the CFPB and other federal regulators, have been involved in the review.
Mike Barron, deputy director for government relations for the Military Officers Association of America, said that while there is some concern about the delay, “I understand they’ve got a lot of things on their plate, to be quite fair.”
From his experience as an Army commander, Barron said he knows it’s easy for soldiers to take out allotments. “We do have concerns about troops being taken advantage of through the allotment system,” he said. When the troops are buying items, “a lot of times they are buying from people who are familiar with the allotment system,” he said.
“We support a review of how companies use allotments, because at the end of the day, allotments should be used in the best interest of the service member,” said Bill Himpler of the American Financial Services Association, which represents about 350 companies offering installment loans and vehicle financing.
About 10 percent of those companies do business with service members. They make available the option of paying by allotment, but don’t require it, Himpler said.
In the enforcement action last June, CFPB alleged that the Military Installment Loans and Educational Services auto loan program used the military allotment system to its advantage.
US Bank financed the majority of MILES loans, and CFPB alleged that, among other things, they charged troops a $3 monthly processing fee for their automatic allotments, which was not properly disclosed up front.
CFPB also alleged that the bank failed to properly disclose its payment schedule. The lag time between when payments were deducted and credited cost troops extra interest averaging $75 over the life of a typical MILES loan.
“The military allotment system may be vulnerable to misuse,” the CFPB said in last June’s announcement about its enforcement action.
“When service members pay by allotment, the lenders often require service members to use third-party processors that charge one or more fees, the CFPB 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. This can cost service members more in fees than alternatives like online banking, which are often free.”
In November, Deanna R. Nelson, an assistant New York attorney general, told the Senate Commerce, Science and Transportation Committee that “age-old traditions such as payment by allotment must be revisited to review their efficacy in our modern age. What once was efficacious may now be simply a tool of abuse.”
She described an investigation of a business called SmartBuy, whose employees allegedly were trained to sell only to soldiers, and to refuse any payment other than by allotment.
During an investigation, Nelson said one employee bragged to an undercover investigator that when it became apparent from a soldier’s pay statement that he couldn’t sign up for another allotment, the employee simply canceled one of the soldier’s other allotments so he could make the purchase.
A service member is limited to having no more than six discretionary allotments at one time, according to the Defense Finance and Accounting Service.