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Allotments allow military servicemembers to automatically direct some of their paycheck to parties of their choosing, ideally for savings, insurance premiums, housing payments, and support of dependents. Until recently, allotments could also be used to make retail purchases, but such transactions weren’t covered by many of the legal protections that come with traditional payment methods like electronic checks and debit cards. Recently enacted rules now prohibit the use of allotments for buying personal property, and federal regulators are reminding retailers they have to follow the law.
The Consumer Financial Protection Bureau sent letters to several companies that sell retail goods to military servicembmers to ensure that their website, ads, and marketing materials don’t violate the new rules.
The new protections from the Department of Defense are intended to eliminate the aspect of the allotment system most prone to abuse by unscrupulous lenders that prey on servicemembers.
Consumerist reported on one such company last year, when the Consumer Financial Protection Bureau took action to stop USA Discounters from taking advantage of underpaid soldiers by charging exorbitant fees, suing them when they fell behind on payments and skirting the Servicemembers Civil Relief Act (SCRA), which gives active duty servicemembers the right to defend themselves but does not specify where lawsuits must be filed.
The retailer, which has locations near 11 military bases, advertised its always-approved credit offers to members of the military with bad credit or no credit history as a way to entice them to purchase items such as computers and televisions.
While the Bureau didn’t specify which retailers received the recent reminders, a sample letter [PDF] provided by the CFPB shows that some companies allegedly continue to make marketing claims that suggest they engages in unfair, deceptive, or abusive acts or practices.
“According to your website,[redacted] seems to be offering active-duty servicemembers the option to repay loans by military allotment even after January 1, 2015, when the Department of Defense prohibited servicemembers from allotting their pay to buy, lease, or rent personal property. We have not determined whether your conduct violates the CFPA, but we urge you to review your practices to ensure that you comply with all relevant laws,” the sample letter states.
The Bureau says in a statement that the letters are not a finding or a ruling that the recipients have violated the law.
However, it did reiterate that providing any misleading information given to servicemembers about payment options and allowing servicemembers to pay by allotment when prohibited by the Department of Defense also constitutes unfair, deceptive, or abusive acts or practices in consumer financial products or services under the Dodd-Frank Wall Street Reform and Consumer Protection Act, for which the Bureau can take action.
“Companies that are still advertising repayment via military allotment may be violating the law,” CFPB Director Richard Cordray said in a statement. “Companies should give consumers accurate and reliable information so they can make the best decisions for their own financial situations. We will continue our work protecting servicemembers and promoting a fair and transparent marketplace for all consumers.”
In the past, the CFPB has gone after operations that receive payments from servicemembers, largely through the military allotment system.
Last December, the Bureau ordered three companies – Freedom Stores, Inc., Freedom Acceptance Corporation, and Military Credit Services LLC – to provide over $2.5 million in consumer redress and to pay a $100,000 civil penalty for allegedly using illegal tactics to collect debts, including filing illegal lawsuits, debiting consumers’ accounts without authorization, and contacting servicemembers’ commanding officers.
Virginia-based furniture and electronics store, Freedom Stores (also known as Freedom Furniture and Electronics) operated a number of retail locations near military bases across the nation.The company offers credit to buyers but then transfers those contracts to an affiliated company, Freedom Acceptance Corporation.
CFPB Cautions Military Lenders Against Illegal Military Allotment Practices [CFPB]
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