Call it collateral damage.
Farmers Capital Bank in Frankfort, Ky., said a change in the rules governing allotments by active-duty service members will shave more than $800,000 off its bottom line next year.
Service members are currently allowed to allot portions of their paycheck to any individual or business they choose. Beginning Jan. 1, however, they will be barred from using the military's discretionary allotment system to pay for big-ticket consumer items such as cars, household appliances or electronics.
Farmers Capital processes allotments through a division of its First Citizens Bank in Elizabeth, Ky. Part of its business has been built around marketing its services to businesses that sell products to military personnel, usually in financing deals. Losing that business will result in reduced processing volume and revenue.
Farmers Capital has always carefully screened the companies for which it processed allotments, Lloyd Hillard Jr., the $1.8 billion-asset company's president and chief executive, said Monday. "We've never dealt with payday lenders, currency exchanges or pawn brokers," he said. "We've been very diligent."
Hillard said Farmers "was never asked for input" about the new rules. He said Farmers Capital will continue to process allotments, though it will focus more of its attention on building its civilian client base, which account for roughly 40% of the company's allotment processing business.
The Department of Defense, which announced the new rule on Nov. 21, said they were crafted in response to persistent reports that lenders have failed to properly disclose fees and costs associated with purchases for which service members were paying with allotments.
"The allotment system has been used by unscrupulous companies that prey on service members as a quick and secure way to get paid," Holly Petraeus, assistant director for service member affairs for the Consumer Financial Protection Bureau, said in a statement last month. The new rules "will help prevent future abuses by addressing the problem at its source."
The CFBP was part of an inter-agency working group that helped the Defense Department prepare the revisions to its allotment regulations. The working group also included representatives from the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and National Credit Union Administration.
Farmers Capital's First Citizens unit has been processing allotments for the military and for civilian clients for more than 30 years. According to Farmers Capital's quarterly filing with the Securities and Exchange Commission, its allotment processing business generated $3.8 million in revenue in the first nine months of this year. That amount represented a slight increase from a year earlier.
Farmers Capital said in its 2013 annual report that it was counting on a boost from its allotment processing business after a leading competitor, Military Assistance Co., announced plans to exit the business.