In a recent post, the Consumer Financial Protection Bureau (CFPB) discussed its ongoing efforts to investigate and curtail alleged abuses of the military allotment system by lenders. The military allotment system is a servicemember benefit dating from the Civil War, which allows servicemembers to automatically pay certain expenses directly from their pay. The importance of this benefit has waned, however, as free automatic bill-pay and other payment options from financial institutions have become widespread. As a result, the CFPB has cautioned servicemembers of the risks of making payments by allotments, including additional costs, loss of some legal protections, and a lack of transparency into fees. The Department of Defense has also imposed further restrictions on the use of allotments, including prohibiting their use to purchase, lease, or rent personal property.

CFPB has continued to scrutinize lenders’ use of the allotment system to identify abuses and efforts to circumvent regulations. In this latest post, the CFPB highlights the following practices and its efforts to halt their use by lenders:

• Requiring Payment by Allotment. The Military Lending Act (MLA) prohibits a lender from requiring a borrower to establish an allotment to repay an obligation. CFPB contends that certain lenders nevertheless continue to advise servicemembers that they must repay by allotment, prioritizing that lenders’ payments ahead of the servicemembers’ other obligations.

• Funneling Money to Deposit Accounts to Avoid Prohibitions. As noted above, DOD regulations prohibit the use of allotments to pay for certain obligations, including the purchase of personal property. CFPB asserts that certain lenders create “savings accounts” for servicemembers — to which allotment payments are generally allowed — and use those accounts to make automated payments on prohibited obligations.

While CFPB highlights recent consent orders addressing alleged allotment abuses, CFPB did not announce new regulatory or enforcement initiatives. However, CFPB’s focus on this aspect of military lending emphasizes the importance of confirming the service status of any borrower and ensuring compliance with the MLA and its associated regulations in any transactions with a servicemember.