Not only student loan servicers, but all companies, particularly those subject to the CFPB’s supervisory authority, face new compliance risk under the Servicemembers Civil Relief Act (the “SCRA”) as a result of the stunning $60 million SCRA settlement announced earlier this week by the Department of Justice (DOJ) and the Department of Education (ED).  That was the message sent by Holly Petraeus, Assistant Director of the CFPB’s Office of Servicemember Affairs, in her comments endorsing the settlement, which resulted from a referral by the CFPB to the DOJ.  According to Mrs. Petraeus, the “action should serve as warning not just to the student loan servicing industry, but to all institutions that provide or service loans to the military.” 

In its action, the DOJ had alleged that a major student loan servicer failed to reduce the interest rates on loans to servicemembers to 6 percent when required to do so by the SCRA.  However, as we observed, it appears that the settlement reflects a decision by the CFPB, DOJ and ED to ignore the SCRA’s text and unilaterally amend the statute’s requirements for servicemembers to obtain rate relief.  In a 2012 report on the servicing of servicemembers’ student loans, the CFPB had acknowledged that, to obtain a rate reduction on a loan originated before the borrower entered military service, SCRA Section 527(b)(1) requires the servicemember to submit 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 Section 527(b)(2)  requires the creditor and servicer to reduce the interest rate to 6 percent.  The ED has also consistently held federal student loan servicers to this exacting standard. 

Nevertheless, despite its inconsistency with the CFPB’s and ED’s prior interpretations, the settlement reflects a reading of the SCRA under which a servicer and creditor must reduce the interest rate to 6 percent even if the servicemember has never submitted any request for such relief.  Instead, any institutional knowledge of military service, whether through a telephone call, written correspondence, or even an email or text communication, would obligate a student loan servicer, and by implication, any creditor, to attempt to obtain the necessary written request and military orders or substitutes therefor through the use of the Defense Manpower Data Center. 

The SCRA applies to any obligation or liability incurred by a servicemember before he or she entered military service, whether for consumer or business purposes.  Going forward, banks and non-banks subject to CFPB supervision should expect the CFPB to assess their SCRA compliance in light of the requirements imposed by the settlement.