Have the Rules Been Changed Under the Servicemembers Civil Relief Act?
Lenders potentially face new compliance risks under the Servicemembers Civil Relief Act (the “SCRA”) as a result of a recent settlement announced by the Department of Justice (DOJ) and the Department of Education (ED). As a result of a referral from the Consumer Financial Protection Bureau (CFPB) and an examination by the FDIC, the DOJ and ED recently announced a $60 million settlement and consent order involving alleged failures by student loan owners and servicers to provide required interest rate reductions under the SCRA. The settlement and consent order appear to reflect a decision by the CFPB, FDIC, DOJ and ED to unilaterally amend the statute’s requirements for servicemembers to obtain rate relief.
The SCRA applies to business and consumer loans that predate a borrower’s military service and requires lenders and servicers to reduce loan interest rates to 6 percent upon entry to military service. Prior to this consent order, the CFPB had acknowledged that, to obtain a rate reduction on a loan originated before the borrower entered military service, the servicemember must submit both a written request for relief and a copy of the military orders calling the servicemember to military service. It is only upon receipt of written notice and a copy of orders that the creditor is required to reduce the interest rate to 6 percent. Further, the student loan servicing regulations issued by ED track the provisions of the SCRA, requiring both a written request and a copy of military orders before the servicer is required to implement the rate reduction. In fact, ED, in a 2011 written interpretation of the SCRA requirements, noted that the regulations require a “request” for relief from the servicemember, not just “notice” of the orders, stating “it appears clear that the SCRA requires submission of more from the servicemember than just a copy of the servicememember’s orders.”
Despite the inconsistency with the CFPB’s and ED’s prior interpretations, the settlement appears to reflect a position by the CFPB and DOJ that any institutional knowledge of military service, whether through a telephone call, written correspondence, or even an email or text communication, obligates the creditor to attempt to obtain the necessary written request and military orders through the use of the Defense Manpower Data Center, and that the creditor must provide the 6 percent interest rate relief even if the servicemember has never submitted any request for such relief. It is estimated that over two-thirds of the settlement funds are earmarked for military borrowers who did not fully comply with their obligations to notify the lender/servicer or provide copies of their military orders. The consent order also requires the creditors and servicers to create and implement new SCRA policies and procedures, including a new online SCRA form for borrowers to complete and a specialized customer service group for military borrowers.
Based on this settlement, notwithstanding no changes to the law or regulations, lenders are advised to review their SCRA compliance programs and to incorporate processes and procedures to verify the eligibility of a servicemember for the rate relief provided under the SCRA if the lender obtains any knowledge of military service.