With payday lenders already in the sights of the Consumer Financial Protection Bureau, the CFPB is now going after a sort of payday-lender-in-reverse that fleeced U.S. military servicemembers of millions of dollars — in most cases directly from their paychecks.
The CFPB said on Monday (April 20) that under a consent order, Fort Knox National Company and its subsidiary, Military Assistance Company (MAC), will pay about $3.1 million to servicemembers who were charged hidden fees after MAC accepting money to pay the servicemembers’ bills.
Under the so-called “allotment” system, servicemembers can set up payroll deductions to be sent to third-party processors who use the money to pay creditors for a fee, typically $3 to $5. Until 2014, MAC was one of the largest allotment processors. But the CFPB alleged in the consent order that between 2010 and 2014, Fort Knox and MAC routinely used an undisclosed set of fees to drain any residual balance that might be left in a servicemember’s account after the bills were paid.
For example, MAC charged $5 to send a letter to the servicemember about his or her residual balance, and another $5 fee to send a similar letter to the servicemember’s current or past creditor. MAC also charged a recurring fee of between $12 and $20 if the account sat idle with a positive balance for more than six months (a time during which MAC was also getting interest on the money in a bank account).
After those fees were charged, if the balance fell below the amount needed for the next round of fees, MAC allegedly charged a fee equal to the remaining money in a servicemember’s account. Then the allotment process would replenish the servicemember’s payment account, letting MAC repeat the process — with no disclosure of the fees or warning when they were applied, the CFPB charged.
“Servicemembers paid millions of dollars in fees, probably without even knowing it,” CFPB Director Richard Cordray said in a prepared statement. “Today we are taking action and others should take note.”
While the CFPB can go after specific allotment-system abusers, the Defense Department is acting too: In November the DoD announced its own reforms to the allotment system to create greater protections for servicemembers.