Protecting servicemembers from abuses of the military allotment system

  • Source: consumerfinance.gov

Treliant Takeaway:

Treliant has significant expertise in servicemembers’ benefits and rights and knows how to operationalize key laws, regulations, and best practices into your company’s business processes.

Highlights:

On June 2, 2022 the Consumer Financial Protection Bureau (CFPB) put lenders on notice that they are paying attention to potential abuse of the military allotment system as a means of repayment for servicemembers. Citing several examples of past lawsuits levied against lenders, the CFPB made clear that while the allotment system may have historically “help[ed] military personnel make automatic recurring payments…especially when they were deployed away from home,” the plethora of free and more legally advantageous methods of automatic repayment available today must be made available to the servicemember. The CFPB went further, arguing that some lenders “treat the allotment system as a means of prioritizing repayment of that lender’s loan over the servicemember’s payments of other expenses.”

The CFPB called out two “troubling practices” that are on their radar:

  1. Requiring borrowers to set up allotments; and
  2. Lenders partnering with allotment processing banks creating savings accounts from which loan payments are drawn, thereby avoiding the Department of Defense’s rule regarding allotments.

As it relates to requiring an allotment, this is a direct violation of the Military Lending Act (MLA). Under the DoD’s revised rule in 2014, it is unlawful to extend credit to a covered borrower (as defined by the MLA) if the creditor requires, as a condition of the obligation, that the covered borrower establish an allotment. See 32 CFR 232.8(g).

With respect to the use of savings accounts, the CFPB strongly argues that although it is not a violation of the DoD’s rule to use a savings account for allotments, they do not agree with the practice. Specific examples are cited of income earned by institutions that are “suspected abuser[s]” of allotments, and raised concerns about their review of complaints indicating that servicemembers were unaware of opening these accounts.

The CFPB emphasizes its statement by making it clear that abuse of the allotment system is on their radar in the near term. Given the CFPB’s letter to mortgage servicers in December 2021 regarding the rights of servicemembers under the Servicemembers Civil Relief Act (SCRA) and the newly-enhanced unfair, deceptive, and abusive acts and practices (UDAAP) examination manual, lenders should remain diligent in ensuring that they remain compliant with the CFPB’s expectations regarding allotments.

Author

Ryan Labriola

Ryan Labriola is a Manager in Treliant’s Regulatory Compliance & Risk Management service area, where he has worked on major projects involving some of the top banks and law firms in the country. Among those projects, Ryan recently assisted a Top 40 U.S. bank with a large-scale Servicemember Civil Relief…