In response to media reports of active duty servicemember abuse by predatory lenders, the Department of Defense has announced a new policy designed to minimize the effects of SCRA lender abuse.
This week, the Department of Defense announced that, starting Jan. 1, 2015, it will prohibit servicemembers from using discretionary allotments to pay for the purchase, lease or rent of personal property, according to The Leaf-Chronicle. Secretary of Defense Chuck Hagel made the change following an interagency review in response to a major Consumer Financial Protection Bureau enforcement action.
“This policy change will eliminate that aspect of the allotment system most prone to abuse by unscrupulous lenders that prey on our service members,” Hagel said in a release cited by the news source. “This will significantly improve protections for all service members and their families, while not significantly reducing the flexibility to use allotments for a number of legitimate purposes.”
What are allotments?
According to Military.com, allotments refer to designated amounts of money that can be automatically deducted for an active duty servicemember’s paycheck and distributed to a pre-specified entity or person. There are two kinds of allotment, and each can be used for a number of different purposes.
Servicemembers are permitted to create up to six “discretionary” allotments and any number of “non-discretionary” allotments for a total of 15, the military information source reported. In addition to active duty servicemembers, allotments can be set up by midshipmen, cadets and reservists on EAD. Retirees are permitted to continue existing allotments to help them transition to retired status.
Discretionary allotments are those that are voluntarily set up by a servicemember. They can be started, stopped or adjusted as he or she sees fit provided that the number doesn’t exceed six and the total value of the allotments doesn’t exceed the servicemember’s paycheck. Common uses for discretionary allotments include payment of premiums for life insurance, deposits into financial accounts, voluntary payments to relatives or other dependents and deposits into the Department of Defense Savings Deposit Program. They are also often used for paying off car loans, mortgages, rent or repayment of loans for consumer goods, though many of these uses will be barred after the new year.
Non-discretionary allotments can be either voluntary or involuntary, but cannot be controlled by the servicemember. These allotments are used for things like repayment of certain military loans, the purchase of U.S. savings bonds, government indebtedness, child and spousal support in some situations and payment of delinquent debts.
Why is the DoD halting this use of allotments?
Perhaps one of the most clear-cut examples of the problem that resulted in this recent decision by the Department of Defense to halt the use of allotments for personal property came in the coverage of USA Discounters, according to The Leaf-Chronicle. This chain – now called USA Living in some areas – operates consumer goods stores that were reported to be offering easy credit to servicemembers on their marked up consumer goods. These loans were also reportedly characterized by high fees, including a fee for legal protections that were already owed to servicemembers under the Servicemembers Civil Relief Act.
“These services were characterized as a benefit to servicemembers, but they only helped USA Discounters sue servicemembers,” according to the CFPB as quoted by the news source. “In addition, many of the services were never actually performed. USA Discounters also misrepresented SCRA Specialists as an independent company working on servicemembers’ behalf, when in fact SCRA Specialists’ sole source of revenue was USA Discounters’ customers.”
The new rules put into place by the Department of Defense will ensure that active duty servicemembers cannot use their allotments for the types of goods offered by this and similar retailers. The aim is to reduce or eliminate the inventive for such companies to target servicemembers – a class that is generally recognized to be financially vulnerable because of members’ low familiarity with financial products, youth, steady paycheck and military benefits.
According to the news source, the changes in the allotment system will only apply to servicemembers on active duty and not to Department of Defense civilians or military retirees. Existing allotments will not be affected. Under the new provisions, a servicemember who wishes to start a new allotment will have to certify that it is not for “the purchase, lease or rental of personal property of or payment toward personal property.”
After the USA Discounters scheme came to light several months ago, the Consumer Finance Protection Bureau recovered more than $350,000 in fees paid by servicemembers for benefits that they were already entitled to under the Servicemembers Civil Relief Act, according to the news source. USA Discounters was also forced to pay a civil penalty of $50,000. These penalties and the new Department of Defense policy being enacted should make it clear to businesspeople how important it is to comply with the SCRA. The Servicemembers Civil Relief Act Centralized Verification Service can help to make that process simple and cost-effective.