Military Times

DoD: Troops can't use allotments to buy items on credit

Active-duty troops will no longer be able to use allotments — direct payments to specific creditors — to purchase, lease or rent consumer items after Jan. 1, defense officials announced Friday.

The new policy will apply to any "tangible and movable" personal property such as cars, boats, motorcycles, washers, dryers, furniture, laptops, tables, televisions and cellphones.

The policy won't apply to any allotments currently in place to pay for these items on credit. Allotments are a portion of a service member's pay and allowances that are designated to be paid to a particular person or institution.

Other allotments won't be affected, such as those going to family members, savings accounts, charities and investments, and to pay insurance premiums, mortgages and rent. The policy change also does not apply to military retirees or DoD civilian employees.

A senior defense official familiar with an interagency team that reviewed DoD's allotment system noted that troops may still buy these items — they just can't use allotments.

Consumer advocates and regulators have documented abuses of the system in which troops were enticed to buy some things using allotments in deals that misrepresented the total cost of the item, the official said.

"Getting service members to buy things using allotments, even though they may not be able to afford them, is attractive to unscrupulous companies because payments made by allotment are virtually guaranteed," states a background paper on the policy decision.

The interagency team's review showed that of the top 10 allotment processors in fiscal 2012, three are flagged by state law enforcement, consumer advocates and financial regulators as suspected abusers. Those institutions received 999,588 allotments totaling $1.4 billion that year.

The new policy will give troops "critical new protections," said Holly Petraeus, assistant director for servicemember affairs for the Consumer Financial Protection Bureau.

In a statement praising Defense Secretary Chuck Hagel's decision to change decades-old the military allotment system, Petraeus noted that in recent years the system "has been used by unscrupulous companies that prey on service members as a quick and secure way to get paid. Many of them have even required payment by allotment."

CFPB's enforcement actions have recovered millions of dollars for thousands of service members harmed by companies using the allotment system, but this move will help prevent future abuses by hitting the problem at its source, she said.

CFPB will work with other regulators and law enforcement partners to help DoD prevent future abuses, she said.

DoD will enforce the prohibition with service members.

When setting up an allotment, service members will have to certify: "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 or payment toward personal property."

Refusal to acknowledge that certification blocks the new allotment. On myPay, a banner will appear with the requirement. The manual form for starting allotments will carry the same certification requirement.

The policy change spins out of recommendations following a review of the allotment system ordered by Hagel in June 2013. That was spurred by a CFPB enforcement action against two companies, alleging they required troops to pay by allotments without properly disclosing all fees charged by third-party processors.

The defense official said no one has asserted that a large proportion of allotments are in fact deceptive, but DoD was alerted by regulators that the current system carries vulnerabilities for troops.

The review considered a range of options, from making no changes to scrapping the entire allotment system. But the needs of deployed service members was the largest consideration in deciding not to do away with allotments altogether, the official said.

Varied opinions were expressed, with some questioning whether there is enough documentation of serious problems with allotments. Others question whether the military's allotment system is an anachronism, especially in an age when anyone can easily arrange for automatic payments from a bank account.

cut for space kj The change doesn't apply to other types of loans. Some online-based lenders have required troops to set up allotments for loans. The official said the interagency team focused on issues brought to them by federal regulators, that weren't covered by the Servicemembers Civil Relief Act or the Military Lending Act.

In testimony in November 2013 before a Senate committee, Deanna R. Nelson, an assistant New York attorney general, said age-old traditions such as payment by allotment must be revisited to review their efficacy in our modern age. What once was efficacious may now be simply a tool of abuse."

She described an investigation of a business called SmartBuy, whose employees allegedly were trained to sell only to soldiers — and to refuse any payment other than by allotment.

cut for space; One employee reportedly bragged to an undercover investigator that after it became apparent from a soldier's pay statement that he couldn't sign up for another allotment, the employee simply canceled one of the soldier's other allotments so he could make the purchase.

In 2013, CFPB announced an enforcement action against the Military Installment Loans and Educational Services auto loan program, alleging MILES used the military allotment system to its advantage. Among other things, when US Bank financed MILES loans, CFPB alleged they charged troops a $3 monthly processing fee for their automatic allotments that was not disclosed up front.

cut for spsace: In July, the Consumer Financial Protection Bureau announced an enforcement action against Colfax Capital Corporation and its subsidiary Culver Capital, LLC, which was formerly known as Rome Finance Co. Inc. The company had previously been sued by attorneys general in Tennessee and New York for its finance contracts that merchants such as SmartBuy used when selling products to service members, allegedly inflating the prices of products to hide the true finance charges that troops would have to pay, typically by military allotment. While the company was being liquidated in bankruptcy, it didn't have enough money to pay back service members or others. But those with the 17,000 outstanding finance agreements – with a total debt of about $92 million – no longer had to pay on that debt, and were advised to stop any allotments.

The interagency team consisted of representatives from legal and financial divisions in DoD, as well as from the Joint Staff. The CFPB, Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and the National Credit Union Administration also participated.

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