Locke Lord QuickStudy: Don’t Hide Fees — CFPB Takes Action Against Abusive Conduct Aimed at Military Personnel

Introduction
On April 20, 2015, the Consumer Financial Protection Bureau (CFPB) filed a Consent Order against Fort Knox National Company and its subsidiary Military Assistance Company (MAC), for charging servicemembers millions of dollars in undisclosed fees.  The Consent Order provides additional insight into the kinds and types of conduct that the CFPB finds to fit the nebulous definition of “abusive” acts or practices.

In the Matter of Fort Knox National Company and Military Assistance Company, LLC
Fort Knox National Company, through its subsidiary MAC, was engaged in the payment processing business, assisting servicemembers with their allotments.  Allotments allow servicemembers to pay bills, insurance premiums, mortgages, support orders and other recurring obligations directly out of their military pay.  The military allotment process occurs through the Defense Finance and Accounting Service (DFAS), and can provide a benefit, allowing servicemembers to ensure designated amounts of money are automatically distributed on their behalf.

The CFPB alleged that MAC did not disclose various fees charged.  In the core allegation, the CFPB alleged that in approximately one-third of accounts, excess funds accumulated in payment accounts often without servicemembers’ knowledge, even after an obligation had been paid off.  In these “Residual Balance” situations, MAC charged a fee that was never disclosed to the servicemembers.  While MAC sent monthly letters to those who had accumulated Residual Balances, and while accounts could be accessed online, servicemembers were never informed of the amounts or types of Residual-Balance fees to which they would be subject.  In fact, the CFPB alleged that servicemembers could obtain an account history, reflecting fee charges, only upon paying another $25 fee.

The CFPB alleged that these practices were “abusive” as that term of defined in the unfair, deceptive, or abusive act and practices provisions (“UDAAP”) of the Consumer Financial Protection Act, 15 U.S.C. § 5536.  The CFPB defines an act or practice to be “abusive” where it:

(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) Takes unreasonable advantage of either (i) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (ii) the inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or (iii) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

See CFPB Supervision and Examination Manual, Part II Examinations Procedures, C. Statutory- and Regulation-Based Procedures, Unfair, Deceptive or Abusive Acts or Practices (Version 2 October 2012).  The CFPB found that MAC took unreasonable advantage of servicemembers’ lack of understanding of the process by which fees were charged.  Specifically, CFPB alleged that “[s]ervicemembers may not have understood that they would be charged Residual Balance Fees if they accrued a Residual Balance because Respondents did not adequately disclose specific fees and did not notify Servicemembers when they had incurred specific fees.” Consent Order, ¶ 15.

Take Away
While the alleged conduct in this matter is egregious, this Consent Order provides another example of the kinds and types of conduct that the CFPB finds to fit the nebulous definition of “abusive” acts or practices.  The key to dealing with consumers is transparency, and financial services providers should make efforts to ensure that fees and charges are disclosed in a clear and conspicuous manner.

Locke Lord LLP has a dedicated team of compliance and litigation attorneys who have significant experience with the SCRA.  If you have questions about the SCRA or about dealing with servicemembers in general, please contact the authors.