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BUSINESS
Consumer Financial Protection Bureau

Servicemembers win $3.1M relief over hidden fees

Kevin McCoy
USA TODAY
Richard Cordray, director of the Consumer Financial Protection Bureau, testifies at a congressional hearing in Washington, D.C., in 2013.

One of the largest U.S. processors of bill payments by military servicemembers will pay nearly $3.1 million in consumer relief after a review found the firm charged millions of dollars in hidden fees.

Kentucky-based Military Assistance Company and its parent firm, Fort Knox National Co., will repay soldiers, sailors, Marines and other servicemembers who were harmed, the Consumer Financial Protection Bureau said Monday.

"Servicemembers paid millions of dollars in fees, probably without knowing it," said CFPB Director Richard Cordray. "Today we are taking action, and others should take note."

Under the terms of a consent order, the companies will pay the settlement to the CFPB, which will contact servicemembers who may be eligible for refunds.

The companies did not immediately respond to a message seeking comment.

The matter focuses on the military allotment system that allows servicemembers to deduct payments directly from their government earnings. The system was created to help active-duty troops send money home to relatives and pay bills at a time when electronic transfers and automatic bank payments were not yet common.

Auto lenders, retail merchants and other creditors in recent years have directed servicemembers to use the allotment system so the companies could collect repayments directly, the CFPB said.

Servicemembers who enrolled with Military Assistance Co. had a portion of their government pay transferred to a pooled bank account controlled by the processing company. The soldiers typically paid the firm a $3 to $5 monthly fee to process payments to creditors.

However, excess funds frequently accumulated in the payment account, CFPB examination found. Often unaware of the surpluses, tens of thousands of servicemembers "had their money slowly drained from their accounts" from 2010 to 2014 because they were unaware of fees charged by the processing firm, the CFPB said.

The consumer agency's review found:

  • The processing firm failed to disclose fees charged against residual balances — such as a $5 charge to send a letter to a servicemember about her or his balance or to send a similar letter to a current or past creditor. The charges also included a recurring $12 to $20 fee if the account remained idle with a positive balance for more than six months.
  • Servicemembers were not told when and how they would be charged service fees on residual balances.
  • Neither Military Assistance Company nor the bank holding residual funds issued monthly financial statements to servicemembers.

Fort Knox began winding down the subsidiary's military allotment system business last year, the CFPB said.

A Department of Defense policy change that took effect Jan. 1 barred troops from allotting their pay to buy, lease or rent personal property, including motor vehicles, major household appliances and electronic equipment such as cellphones or personal computers.

The change was prompted in part by a 2013 CFPB review that resulted in $6.5 million in consumer refunds by a bank and a non-bank partner that failed to disclose fees on auto loans paid through the military allotment system.

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