By Ryan Labriola, Senior Manager

On December 5, the Consumer Financial Protection Bureau (CFPB) and the United States Department of Justice (DOJ) issued a letter to financial services companies to “inform [them] of the interest rate protections afforded to servicemembers, recent veterans, and their spouses under the Servicemembers Civil Relief Act (SCRA).”[1] The SCRA requires that, upon receipt of written notice and receipt of qualifying military orders or other acceptable documentation, financial services companies must forgive (not defer) interest in excess of six percent for the entire period of military service. For mortgages, that interest rate cap is effective for an additional year past the end of the period of military service. While some of the letter is a summary of the law and some of its nuances, key recommendations from the DOJ and CFPB include the following:

• Proactively pull reports from the Defense Manpower Data Center (“DMDC”) to identify SCRA-protected accountholders and apply SCRA benefits without written notice from the servicemember.
• Apply SCRA interest rate relief to all accounts held by the institution rather than only the ones identified by the servicemember in their request.

With respect to the first recommendation, federal regulators are again encouraging institutions to proactively identify active duty servicemembers through the DMDC database and apply SCRA interest rate relief upon identification of a period of military service. Under the SCRA, in lieu of receiving written notice and qualifying documentation from a servicemember, institutions can pull DMDCs on a regular basis to proactively identify periods of military service for borrowers with loans in servicing.[2] The SCRA includes a safe harbor for institutions that do this, stating that they will be considered in compliance with the law if they can present evidence of the DMDC results showing that the borrower, on the date of DMDC retrieval, was not on active duty and they did not receive written notice and documentation from the borrower.[3] This safe harbor is not fool-proof, however, as institutions must have processes in place to:

1. At a minimum, save all DMDC results for the entire servicing portfolio to sufficiently evidence how SCRA interest rate relief was or was not applied;
2. As a best practice, also save input screens so that authorities can determine that the DMDC search was properly executed (i.e., no spelling mistakes, correct dates-of-birth or social security numbers, correct name variations, etc.); and
3. Ensure that procedures and job aids address situations in which borrowers submit written notice and documentation that conflict with the DMDC results, giving reasonable deference to the servicemember’s best interests.

The second recommendation, to apply SCRA interest rate relief to all products held at the institution, is considerably more straightforward. As a best practice, institutions should treat SCRA interest rate relief requests from a borrower to all products the borrower has with the institution. For example, Sergeant John Doe provides written notice and qualifying military orders showing a military service period. His written notice was an email including a credit card statement for one account. However, when the institution reviews the borrower’s profile, they note that he has three credit cards and two personal loans. While the written notice only implies one credit card account, the institution should apply SCRA interest rate relief to all qualifying accounts. First, it is less burdensome for the servicemember to submit written notice and qualifying documentation once. Second, it also eases operational complexity and burdens on financial institutions—rather than having five different servicing agents interacting with the borrower, one can handle the entire request. It also reduces the likelihood of incorrect interpretations of the same documents and potential disparate treatment.

In short, the CFPB and DOJ continue to remind financial institutions about the SCRA’s legal requirements while also encouraging them to take proactive measures to apply all benefits for which the servicemember qualifies. Financial institutions should closely review the CFPB and DOJ’s joint letter and ensure that internal processes are sufficient to manage SCRA risks. As a reminder, Asurity Advisors has included pertinent SCRA interest rate relief requirements below:

• Institutions must reduce interest rates to six percent upon receipt of a written request and qualifying documentation (military orders, letter from a commanding officer, or “other acceptable documentation) from a servicemember or their spouse.
  • The qualifying documentation must be submitted no later than 180 days after the end of the military service period.
• Active duty start dates:
  • For all but reservists and National Guardsmen, the active duty start date is the date on which the period of military service commences.
  • For reservists and National Guardsmen, the active duty start date is the date on which the servicemember was notified of their call to active duty.
  • National Guardsmen only qualify for federal SCRA interest rate relief if they are servicing on federal active duty (e.g., Title 10) or for more than 30 days on 32 USC 502(f) orders.
• Lenders must forgive, not defer, interest in excess of six percent. This includes retroactive forgiveness (e.g., refund checks for excess interest).
• Monthly payments must be reduced by the amount of interest forgiven, and principal payments cannot be accelerated.
• Mortgage obligations have an extra “tail” period, meaning that the six percent interest rate limit remains in effect for an additional year following the end of the period of military service.

[1] Interest Rate Protections for Servicemembers under the Servicemembers Civil Relief Act, pp. 1.

[2] See 50 USC 3937(b)(1)(B)(i).

[3] See 50 USC 3937(b)(1)(B)(ii).