December 7, 2022

CFPB: Research Finds Members of Reserves and National Guard Paying Millions of Dollars in Extra Interest Each Year

Companies can take steps to better respect military borrower rights and ease financial burdens, particularly in higher interest rate environment

Today, the Consumer Financial Protection Bureau (CFPB) released research revealing that Reserve and National Guard members called to active duty are paying an extra $9 million in interest every year because they are not always receiving the benefit of their right to rate reductions under the Servicemembers Civil Relief Act. The Servicemembers Civil Relief Act (SCRA) gives servicemembers on active duty the right to request interest rate reductions on outstanding loans during the time they are activated and for an additional year in the case of mortgages. However, according to the CFPB’s research, only small fractions of activated Guard and Reserve servicemembers receive interest rate reductions. Financial institutions can take steps to ensure these individuals can more easily assert their rights. The SCRA interest rate cap is more salient given rising interest rates on consumer credit.

“Our analysis suggests that members of the Reserves and the National Guard who serve in active-duty status are not receiving interest rate reductions on their loans pursuant to the law,” said CFPB Director Rohit Chopra. “Given rising interest rates, financial companies should take steps to ensure military family financial rights are respected.”

Congress enacted the SCRA to provide legal and financial protections so that servicemembers on active duty can focus on their mission. These protections include the right to a reduced interest rate on any pre-service obligation to a maximum of 6%. The Act also includes protections against repossession of certain property without a court order, protections against default judgments in civil cases, and protections against home foreclosure without a court order. Eligible servicemembers can also terminate certain residential housing and automobile leases early without penalty.

The right to an interest rate reduction represents a significant financial benefit that increases in value in a higher interest rate environment, or in situations where servicemembers took out larger loans or remain on active duty for a substantial period. To put the value of the rate reduction into perspective: for today’s report, the CFPB looked at data from between 2007 and 2018, and found $100 million of foregone interest rate benefits on auto and personal loans. Since that time, interest rates have moved steadily upward.

For a servicemember to benefit from their right to reduced interest rates, many creditors continue to require proactive notifications from the servicemember about a shift to active-duty status. In fact, the servicemember generally must notify each of their creditors in writing with a copy of their orders to active-duty service or any other appropriate indicator of military service, including a certified letter from a commanding officer, that shows the date they began active-duty service. Additionally, some creditors continue to require written requests or supporting documentation be submitted by mail or fax instead of offering a wholly online process. However, creditors could just as easily access a Department of Defense system that checks any borrower for active-duty status. By using the Defense Manpower Data Center SCRA website, creditors would help ensure servicemembers benefit from their right to interest rate reductions.

The challenges servicemembers face in receiving the benefits of their right to an interest rate reduction is negatively affecting the financial strength of military households. Specifically:

To ensure that reserve component servicemembers benefit from their right to an interest rate reduction, the CFPB recommends:

Read the report, Protecting Those Who Protect Us: Evidence of activated Guard and Reserve servicemembers’ usage of credit protections under the Servicemembers Civil Relief Act (SCRA).

The Civil Rights Division of the U.S. Department of Justice (DOJ) enforces the SCRA. The CFPB’s Office of Servicemember Affairs monitors the market and refers SCRA violations to the DOJ. For example, the CFPB worked with the DOJ to reach a $60 million resolution against Sallie Mae and Navient for overcharging servicemembers on student loans.

Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their companies have violated federal consumer financial protection laws are encouraged to send information about what they know to To learn more about reporting potential industry misconduct, visit the CFPB’s website.

This post was originally published here.