On September 28, 2022, the Department of Justice (”DOJ”) announced a settlement with Westlake Financial Services (“Westlake”), a Los Angeles-based indirect auto finance company specializing in subprime and near-subprime loans, resolving allegations that Westlake failed to fully provide interest rate benefits to eligible servicemembers as required under the Servicemembers Civil Relief Act (“SCRA”). Under the terms of the settlement, Westlake has agreed to pay more than $225,000, including a $40,000 civil money penalty and $185,460 to 250 servicemembers who did not receive interest rate benefits on their loans for the full period required by law. This includes a refund to each impacted servicemember of the excess amount they paid, plus an additional payment of three times the overpayment, or $100, whichever is higher.
The SCRA’s interest rate provision, 50 USC § 3937, is generally triggered by proper written notice from the servicemember. Once triggered, it provides that, an obligation or liability bearing interest at a rate in excess of 6% that is incurred by a servicemember (or by a servicemember and their spouse jointly) before the servicemember enters military service must be capped at 6% interest during the period of military service. (For mortgage loans, the covered period is extended for one year after the period of military service ends.) The interest in excess of 6% must be forgiven and the DOJ has taken the position that the excess amount may not be applied to principal, unless the servicemember consents, after being offered other options, including a refund, as that would improperly accelerate repayment of principal . The interest rate cap must be applied retroactively back to the date on the military orders calling a servicemember to active duty.
DOJ alleges Westlake failed to apply the SCRA interest rate cap retroactively back to the date military orders were issued calling servicemembers to active duty. Additionally, DOJ alleges that Westlake improperly delayed the approval of SCRA benefits for some servicemembers, sometimes for more than 60 days from a servicemember’s benefits request. Servicemembers who had their benefit applications delayed for more than 60 days will receive a $500 payment under the settlement.
These purported violations were discovered in the course of DOJ’s monitoring of a prior settlement of a 2017 SCRA action against Westlake. That 2017 DOJ action, against Westlake and its subsidiary, Wilshire Commercial Capital, alleged illegal repossessions of at least 70 vehicles owned by servicemembers. Under 50 USC § 3952, a contract by a servicemember for the purchase of real or personal property (including motor vehicles) may not be rescinded or terminated for breach of contract (occurring before or during a period of military service) after a servicemember enters military service. Importantly, this provision also states that property may not be repossessed for such a breach without a court order. Westlake had paid nearly $800,000 to resolve the 2017 allegations.
Several aspects of the new settlement are familiar from earlier SCRA settlements. For example, the additional payment to servicemembers of three times the overpayment beyond the refund, which is not a penalty specified within the statute itself, has been used by DOJ and the OCC in other SCRA consent orders, as has the requirement that Westlake review and revise its SCRA policies and procedures and training to ensure compliance with the SCRA going forward. Additionally, the $40,000 civil money penalty is the same amount DOJ assessed against a credit union earlier this year in a consent order settling SCRA interest rate violation allegations.
Substantively, this settlement is a reminder to all creditors and loan servicers to ensure that they are providing SCRA interest rate benefits for the entirety of servicemembers’ eligibility periods. This includes applying the interest rate cap retroactively back to the date of the orders, as Westlake allegedly failed to do. Creditors and servicers also need to make sure they are providing the additional year of benefits past the active duty end date for mortgage loans (as required by 50 USC § 3937(a)(1)(A)), and providing reservists with benefits beginning on the date the reservist receives their military orders (as required by 50 USC § 3917). While not an explicit requirement within the statute itself, the Westlake settlement also is a reminder that requests for SCRA benefits should be timely evaluated and applied, as an unreasonable delay in applying the interest rate cap may be considered a failure to comply with the statute by regulators. Creditors and servicers should also be mindful in implementing the rate cap that the SCRA broadly defines interest to include service charges, renewal charges, fees, or other charges (except bona fide insurance).
The Westlake settlement was announced almost two months after DOJ and the CFPB issued a joint notification letter (the “joint letter”) reminding auto lenders and leasing companies of their obligations under the SCRA. In reaction to the joint letter, we commented that we expect renewed regulatory focus on the SCRA’s interest rate cap as the rate environment changes and interest rates continue to rise. The Westlake settlement is consistent with that expectation, and we can expect to see more actions in the coming year.