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WASHINGTON (Reuters) - U.S. Bancorp's (USB.N) U.S. Bank and a nonbank partner will refund about $6.5 million to U.S. military personnel over auto lending practices regulators said were deceptive, the Consumer Financial Protection Bureau said on Thursday.
U.S. Bank and its partner, Dealers' Financial Services of Lexington, Kentucky, failed to properly disclose all of the fees associated with auto loans made through a program targeted at military personnel, the bureau said.
The bureau said it would not require either company to pay a civil penalty, in part because they cooperated with the investigation.
Officials said the announcement highlights problems with the military's so-called allotment system, which allows members to have loan payments deducted directly from their paychecks.
Military personnel sometimes wind up paying extra processing fees as a result of this system, and lenders who receive automatic payments may issue loans that are not necessarily affordable, bureau officials said.
"Today's action reflects our determination to act to protect service members against harmful practices in the consumer financial marketplace," said bureau Director Richard Cordray.
Defense Secretary Chuck Hagel said on Thursday that his department would form a working group with representatives from enforcement agencies and bank regulators to consider changes to the military's allotment system.
The consumer bureau, which was created by the 2010 Dodd-Frank law, has sought to crack down on what it sees as deceptive marketing of consumer products. The bureau keeps a special eye on products aimed at military personnel.
Cordray said problems with this particular program came to light when a Massachusetts resident contacted the bureau. The man said his son, a service member, wound up spending most of his paycheck on loan payments and upkeep after receiving a loan through the program.
The bureau examined the Military Installment Loans and Educational Services program, known as MILES. Dealers' Financial Services marketed the program to servicemembers, recruited car dealers, and processed loan applications. U.S. Bank financed the majority of the program's loans, the bureau said.
However, the bank did not disclose a monthly processing fee or clarify that participants needed to make payments twice a month. Dealers' Financial Services understated the cost of optional add-on products marketed to borrowers, the bureau said.
The companies neither admitted nor denied the bureau's findings. They agreed to stop deceptive marketing and lending practices and to improve disclosures, the bureau said.
U.S. Bank will pay $3.2 million and Dealers' Financial Services will pay $3.3 million to more than 50,000 members of the armed services who had outstanding loans between January 2010 and now, the CFPB said.
The average payment will be just less than $100, said Kent Markus, who heads the consumer bureau's enforcement division.
"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.
The bank said it intended to exit the MILES program. Dealers' Financial Services, a subsidiary of financial services company DFC Global Corp DLLR.O, said it was negotiating with potential new lending partners.
"DFS is already in the process of modifying its compliance management system and communication procedures with customers to take into account these issues," said Jeff Weiss, chief executive of DFC Global Corp.
Reporting by Emily Stephenson; Editing by Gerald E. McCormick and David Gregorio