On December 7, 2022, the CFPB issued a report recommending that creditors proactively provide Servicemember Civil Relief Act (“SCRA”) interest rate benefits to eligible customers, bypassing the statute’s requirements of a written request from the servicemember and proof of military service. The report, titled “Protecting Those Who Protect Us: Evidence of activated Guard and Reserve servicemembers’ usage of credit protections under the Servicemembers Civil Relief Act,” highlights the underutilization of the SCRA’s interest rate benefit by eligible servicemembers.
The SCRA, 50 USC § 3901 et seq, provides a number of important financial benefits and protections to active duty servicemembers. Although not officially classified as such within the statute, SCRA provisions can generally be categorized as either “protections” or “benefits.” Examples of protections under the SCRA include provisions preventing foreclosure (§ 3953), eviction (§ 3951), and repossession (§ 3952) – these are actions which cannot be taken against an active duty servicemember and the onus is on the creditor to ensure it identifies servicemembers entitled to those protections in order to comply with the law. Benefits, on the other hand, are available to eligible servicemembers on request but are not automatically required, such as the 6% interest rate cap on credit originated before active duty commences (§ 3937) and early lease termination rights (§ 3955). The SCRA explicitly requires a servicemember to provide a written notice to the creditor, along with a copy of the military orders calling them to military service (or other acceptable proof of service) in order to implement the interest rate limitation. 50 USC § 3937(b)(1). As a result, not every servicemember eligible for the SCRA’s interest rate cap requests or receives it.
Examining a data set of more than 23,000 individuals in the CFPB’s Consumer Credit Panel who were activated as Guard or Reservists between 2007 and 2018, the CFPB researchers performed a statistical analysis on automobile and personal loan data and also reviewed credit card and mortgages loan data during periods of military activation, as verified through the Defense Manpower Data Center (“DMDC”) database. The CFPB analysis concludes that:
- Between 2007 and 2018, data indicate that fewer than 10% of auto loans and 6% of personal loans received a reduced interest rate,
- In addition to an estimated $100 million of foregone benefits on auto and personal loans, members of the reserve component also infrequently benefit from interest rate reductions for credit cards and mortgage loans,
- For longer periods of activation, when an interest rate reduction would be most beneficial, the utilization rate continues to be low.
Underutilization of the SCRA interest rate cap has been an issue for years. In 2012, the Honoring America’s Veterans and Caring for Camp Lejeune Families Act included a mandate that the Government Accountability Office (“GAO”), among other things, assess the partnerships established by the Secretary of Defense to provide servicemembers with financial education and counseling. Pub. L. No. 112-154, § 710(e). The resulting GAO Report examined data from three mortgage servicers and concluded that many eligible borrowers did not take advantage of the benefit. At one servicer, 82% of those who could benefit were not receiving interest rate relief under the SCRA. The report concluded that DOD’s SCRA education efforts could be improved.
Perhaps recognizing that low SCRA utilization is generally not the result of compliance failures, the focus subsequent to this GAO Report shifted away from DOD’s education efforts to ways that creditors could increase utilization amongst their servicemember customers. In that regard, the report is just the latest in a long line of efforts by federal agencies to push creditors to go beyond the statutory requirements. In August 2014, the Department of Education (“ED”) issued a Dear Colleague Letter (GEN-14-16) directed its federal student loan servicers to check the DMDC database in order to provide similar outreach. In the same month, President Obama announced a voluntary partnership in which several national banks and mortgage servicers committed to proactively identify SCRA eligible servicemembers through quarterly checks of the DMDC database, proactive outreach to customers identified through those searches to notify them that they were eligible for benefits, and a simplified application process in place of the SCRA’s written notice requirement. In 2016, ED required commercial FFEL loan servicers to perform a proactive eligibility check. In November 2016, the GAO issued another report, this time focused on student loans, which found utilization markedly increased as a result of ED’s requirements to conduct proactive checks instead of requiring a written request and military orders. While the increase in SCRA utilization is a laudable goal, none of this is required under the SCRA.
In 2018, the SCRA was amended to allow – but not require – a creditor to check the DMDC database in order to obtain information that a customer is on active duty in lieu of requiring written notice and orders. This allowed (but did not require) servicers of certain loans to proactively apply benefits in situations where, for example, an investor’s servicing guidelines (e.g. on a mortgage loan) require compliance with the law and would not previously allow the rate cap without an actual request as outlined in the statute.
The other recommendation from the report is for creditors to apply the SCRA rate cap to all accounts a customer may have with them when the rate cap is requested on a single account. For example, if a servicemember calls their bank to request the interest rate cap on their mortgage loan, the bank should also apply the rate cap to that customer’s credit card or auto loan if they also have those account relationships. While some creditors have been doing this for years, this recommendation also goes beyond what is actually required by the SCRA, where a request for the interest rate cap is specific to an “obligation or liability” of a servicemember. Beyond the requirement of a request, the same customer may not be eligible for the interest rate cap on all of their products with the same institution. For example, a customer who originates a mortgage loan, is then called to active duty, and then finances a car purchase while on active duty would be entitled to the interest rate cap on their mortgage loan but not their car loan since the interest rate cap only applies to credit originated prior to active duty.
While increased SCRA utilization is a laudable goal, the CFPB report further widens the gap between regulatory rhetoric and actual legal requirements.