Accepting payments via discretionary military allowances has long been suspicious in the eyes of the Consumer Financial Protection Bureau. Military allowances are automatic deductions from military pay. Awards can be non-discretionary, such as court-ordered child support payments. Or the military can set up discretionary allowances to make payments, for example, to creditors.
In 2013, the CFPB sued a lender for alleged abuse of the discretionary allocation system in connection with payment for motor vehicles purchased by military personnel. Among other things, the CFPB alleged that military members were required to set up discretionary military allowances to repay their loans and that the lender failed to properly disclose the costs associated with repaying loans through the military allowance system. In addition, when announcing the action, the CFPB highlighted its perception that the military award system, which “was created…to help deployed service members…pay their creditors at some point where automatic bank payments and wire transfers were not yet common services” is “vulnerable to misuse”. In light of this perception and in response to the CFPB’s enforcement action, the Department of Defense subsequently revised its policy regarding discretionary military awards, effective January 1, 2015, to prohibit the use of military awards to buy, rent or lease personal property.
Fast forward nearly a decade later, the CFPB is still closely scrutinizing the use of discretionary military allowances as a means of reimbursement, warning that it particularly monitors companies “who seek military personnel because of their regular salaries and ability. to structure reimbursements through the military posting system.In its June 2, 2022 blog post, the CFPB stated that consumers today have expanded options for making automatic payments that generally provide military members with more legal protections than the use of the attribution system, thus suggesting that the use of military attributions to repay creditors is still unnecessary and unfavorable to service members.Furthermore, the CFPB believes that lenders who use the attribution system to repayment” prioritize repayment of the loan from that lender over payments from other spending by the member”, suggesting that discretionary allocations, by their nature, are unfair to the member, as they result in the member having a lack of control over their finances.
The CFPB also specifically cited lenders who appear to offer various methods of repayment, but whose actual practices result in the member being obligated, or believing they are obligated, to repay via military allowance. The blog further cautions lenders against attempting to circumvent DOD restrictions on award payments by requiring service members to create award-funded savings accounts, or by creating such accounts for the member. of the service, then deducting the automatic payments from these accounts.
Therefore, if you are offering military allowance to consumers as a means of reimbursement, you may want to think twice about whether the increased regulatory scrutiny and UDAAP risk is really worth it. If so, then at least it’s time to take a close look (or, better yet, have an experienced compliance lawyer review) your policies and procedures relating to these payments.
Make sure your disclosures about available reimbursement methods are clear and never require consumers to reimburse through a military allowance. This is especially crucial for covered borrowers protected by the Federal Military Loans Act, which prohibits requiring covered borrowers to establish an allowance to repay a consumer credit transaction. MLA violations may result in transaction cancellation. Make sure your customer service representatives are trained to describe all available payment options and don’t encourage consumers to pay-as-you-go or mislead consumers that it’s the only way to refund the transaction. Do not charge fees for attribution payments. Monitor customer complaints to detect issues early and correct identified issues immediately. And always remember that when doing business with military members and their dependents, the risk of scrutiny, UDAAP allegations, and adverse regulatory action is high.