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Financial Services Law Insights and Observations

CFPB highlights abuses in military allotment system

Federal Issues CFPB Servicemembers Department of Defense Military Allotment System Consumer Finance

Federal Issues

On June 2, the CFPB posted a blog post highlighting abuses within the military allotment system with respect to servicemembers’ automatic recurring payments. According to the Bureau, the allotment system was established to help servicemembers make payments directly from their paychecks, especially when deployed away from home. However, according to the CFPB some lenders have been abusing the allotment system, with certain lenders using the system “as a means of prioritizing repayment of that lender’s loan over the servicemember’s payments of other expenses.” The Bureau noted that servicemembers have other options for automatic payments that are usually free of charge and provide more legal protections than the allotment system, and reiterated that the Department of Defense (DoD) made significant changes in 2014 that prohibited new allotments to purchase, lease, or rent personal property like cars, furniture, and electronics, and “expanded the allotment prohibition in the Military Lending Act (MLA) to include a wider range of credit products, like installment loans, that cannot be repaid by allotment” (revised MLA regulations covered by InfoBytes here).

Through consumer complaints and the work of the agency’s Office of Servicemember Affairs, the Bureau stated it continues to hear about significant concerns in this space, including that some lenders are requiring servicemembers to repay by allotment (a violation of the MLA), and other lenders are entering into partnerships with allotment processing banks to create “allotment-funded savings accounts” for servicemembers in order to evade DoD protections. The blog post emphasized the Bureau’s commitment to protecting servicemembers from abuses and provided information for servicemembers on filing complaints should they believe they have been unfairly treated by a company through the military allotment system.