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:
- Between 2007 and 2018, data indicate that fewer than 10% of auto loans and 6% of personal loans received a reduced interest rate: While there is evidence that interest rates on some loans are being reduced consistent with the SCRA interest rate cap, its low use means few loans actually receive interest rate reductions.
- In addition to the $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: The CFPB estimates that a mortgage loan with an interest rate between 6.5% and 7.5% could accumulate savings of between $1,890 and $5,670 per activation. By comparison, the per activation numbers for auto and personal loans are $331 and $249, respectively.
- For longer periods of activation, when an interest rate reduction would be most beneficial, the utilization rate continues to be low: While reserve component servicemembers are more likely to obtain a reduced interest rate during longer periods of activation, even among activations of a year or more, the likelihood of an interest rate reduction remains under 16% for auto and personal loans.
To ensure that reserve component servicemembers benefit from their right to an interest rate reduction, the CFPB recommends:
- Creditors apply SCRA interest rate reductions for all accounts held at an institution if a servicemember invokes their rights for a single account: If a servicemember requests an interest rate reduction for one account, the creditor could apply that request to every account held at the respective institution.
- Creditors automatically apply SCRA rights: Beginning in December 2014, the Department of Education required federal student loan servicers to check the Defense Manpower Data Center SCRA website monthly to identify borrowers eligible for the SCRA interest rate cap. When automatic interest rate reductions were applied for federal student loans, utilization increased dramatically. The low utilization rates identified in this report suggest that automatic application of benefits should be pursued where possible, and public and private sector resources should be aligned to increase adoption of an automatic application process.
- Development of comprehensive and periodic indicators of SCRA interest rate reduction utilization: Better and more frequent information on SCRA rate reduction utilization would help inform and evaluate future efforts to expand servicemembers’ financial rights and protections.
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 email@example.com. To learn more about reporting potential industry misconduct, visit the CFPB’s website.