WASHINGTON — Citing enforcement actions brought by the Consumer Financial Protection Bureau (CFPB) in the last two years — one involving an auto finance source — the Department of Defense (DOD) announced last month a new policy change to the service member allotment system.

Starting Jan. 1, active-duty military personnel will be prohibited from using new military allotments to purchase, lease or rent personal property, including vehicles. The change, which was approved on Sept. 29, does not affect existing allotments or prohibit allotments made to savings accounts, to support dependents, pay insurance premiums, pay mortgages, rent or fund investments. It also does not apply to military retirees or DOD civilians.

The military allotment system allows servicemembers to automatically direct a portion of their paycheck to finance institutions or people of their choosing. The new policy, according to the DOD, is designed to prevent military personnel from getting into financial trouble. The change is also designed to ensure active-duty troops retain certain legal protections not afforded by the allotment system.

“This policy change will eliminate that aspect of the allotment system most prone to abuse by unscrupulous lenders that prey on our service members,” read the DOD’s release, in part. “This will significantly improve protections for all servicemembers and their families, while not significantly reducing the flexibility to use allotments for a number of legitimate purposes.”

Secretary of Defense Chuck Hagel, who stepped down from his post today, directed the change in policy following an interagency review kicked off in June 2013 following a major enforcement action announced by the CFPB.

On June 27, 2013, the CFPB ordered U.S. Bank and Dealers’ Financial Services to return $6.5 million in fees to servicemembers who purchased vehicles through their Military Installment Loans and Educational Services (MILES) program. The bureau charged the two firms with failing to properly disclose fees and misrepresenting the cost of add-on products offered through the program.

Then, this past July, the CFPB, working with 13 state attorneys general, obtained approximately $92 million in debt relief from Colfax Capital Corp. and Culver Capital LLC, which collectively operated as Rome Finance, for about 17,000 U.S. servicemembers and other consumers who were allegedly charged improper fees. The companies offered credit to consumers purchasing computers, videogame consoles, TVs and other products.

“I applaud Secretary Hagel’s decision to update the military discretionary allotment system to provide critical new protections to servicemembers,” read a statement from CFPB Assistant Director for Servicemember Affairs Holly Petraeus. “In recent years, the allotment system has been used by unscrupulous companies that prey on servicemembers as a quick and secure way to get paid. Many even required payment by allotment.

“While CFPB enforcement actions have recovered millions of dollars for thousands of servicemembers harmed … today’s announcement will prevent future abuses by addressing the problem at its source.”

Several options were considered during the interagency review, ranging from simply warning military personnel about the dangers of using the allotment system to purchase cars, motorcycles, computers, kitchen appliances and other goods to eliminating the allotment system altogether. But because troops use the system to send money to their families or to handle other financial matters when out of the country, the program was retained.

But with the change, service members will be required to make the following binding certification with each new allotment or change to an allotment in the military’s myPay system: “Under penalty of the Uniform Code of Military Justice, I certify that this allotment is not for the purchase lease, or rental of personal property of or payment toward personal property.”

Originally posted on F&I and Showroom

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